Question

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Your investment firm is considering acquiring a 76-unit, 43,548 rentable-square-foot multifamily property in Phoenix, Arizona (“Arcadia Gardens”). The Asking Price is $9.775 million, which equates to $128,618 per apartment unit and $225 per rentable square foot. Comparable properties have sold for median figures of $120,000 per unit and $157 per rentable square foot. The previous owner of Arcadia Gardens spent $3.5 million on a renovation, during which the entire property was closed. It began leasing again in early 2017 upon completion of the renovation, but the previous owner offered below-market rents to achieve 100% occupancy within six months. Your firm believes that it can raise rents to close to market rates, reduce bad debts and tenant concessions, and boost utility reimbursements, all of which will result in annual Effective Gross Income (EGI) growth of 5-6% rather than 2-3% over a 4-year period. Your firm will spend a modest amount on CapEx in Years 1, 2, 3, and 4, spend more on sales & marketing, and accept an eventual Occupancy Rate of 97%, down from 100% currently.

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Answer 1

Joyce Morphy
Requirement 1
Selling Price per mile	$          0.50
Less : Variable cost per mile	$        (0.20)
Contribution margin per mile	$    0.30
Break Even = Fixed Cost / Contribution margin
$215 / $0.30	717	Miles
Working Note :
Calculation of Variable cost per mile using High low method :
	No of Miles	Total operating costs
High	4400	$                    1,095.00
Low	3300	$                       875.00
Variable cost per mile = (1095-875)/(4400-3300)	$    0.20	per Mile
At 4400 Miles, Total operating costs = $1095
Fixed cost + 4400*$0.20 = $1095
Fixed cost = 1095 - 4400*0.2
$                                                                    215.00
Requirement 2
At 4200 Miles,
Revenue	$   2,100.00
Less : Variable cost	$   (840.00)
Contribution margin	$   1,260.00
Less : Fixed cost	$    (215.00)
Net Operating income	$   1,045.00
Degree of Operating Leverage = Contribution Margin / Net Operating Income
$1260 / $1045	1.2057
Requirement 3
Degree of Operating Leverage = % change in Net income / % change in sales
1.2057 = % change in net income / (25%)
% change in net income = -25%*1.2057	-30.1425%