Question

I need help answering these two questions by Friday this week please!

Use the information provided below to estimate the market value of the office building that has been described.

Type of Property: Office Building

Leasable Space: 75,000 square feet

Average Rent: $20 per square foot

per year Expected Rent Growth: 3%

per year Vacancy and Collection Losses: 10% of potential gross income

Other Income: $1.25 per square foot

per year Expected Growth in Other Income: 3%

per year Operating Expenses: 45% of effective gross income

Capital Expenditures: 3% of effective gross income

Going-In Cap Rate: 7%

Going-Out Cap Rate: 7.25%

Selling Expenses: 5% of future selling price

Discount Rate: 8%

a. What is the market value of this property according to the direct capitalization approach?

b. What is the market value of this property according to the discounted cash flow approach? Assume that you are going to sell the property at the end of the 5th year of ownership.

Answer 1

Please see the excel model below. The linkage column should explain the mathematics. Wherever the mathematics is complex, I have highlighted the excel formula used to calculate in the blue colored cell adjacent to the main cell. The yellow colored cells contain your answers.

B G H Linkage - Annual Year 1 Values growth rate 75,000 20 3% 1,500,000 150,000 93,750 1,443,750 649,688 794,063 7% 11,343,750 2 Leasable Space 3 Average rent 4 Potential Gross income C = AXB 5 Vaccany & credit losses D=CX 10% 6 Other income IE 7 Effective gross income F = C-DUE 8 Operating expenses G = F x 45% 9 Net operating income H=F-G 10 Going in cap rate 11 Part (a) the market value of this property according to the direct capitalization) = H/1 12 approach 13 14 Part (b) 15 Potential Gross income 16 Vaccany & credit losses 17 Other income 18 Effective gross income F = C-D+E 19 Operating expenses G = F x 45% 20 Net operating income H= F-G 21 Going out cap rate 22 Sale Value 23 Selling expenses K = 5% x J 24 Capital expenditure L = 3% x F 25 Net cash flows M= H + J-K-L 26 Discount rate Hence, the market value of this property according to the 27 discounted cash flow approach 1,500,000 150,000 93,750 1,443,750 649,688 794,063 2 3 4 5 6 1,545,000 1,591,350 1,639,091 1,688,263 1,738,911 154,500 159,135 163,909 168,826 173,891 96,563 99,459 102,443 105,516 108,682 1,487,063 1,531,674 1,577,625 1,624,953 1,673,702 669,178 689,253 709,931 731,229 753,166 817,884 842,421 867,694 893,724 920,536 7.25% 12,697,049 =H20/621 634,852 44,612 45,950 47,329 48,749 773,273 | 796,471 820,365 | 12,907,173 43,313 | 750,750 8% $11,377,757 '=NPV(C26,C25:G25)