Question

Real Estate Investment Trust is considering the purchase of an office building. The general rental market and the leases that are currently in place have been reviewed and the REIT estimates next year’s cash flow (Time 1) at $100,000 with a rise in the yearly cash flow of $5,200 per year for the foreseeable future. The REIT plans to own the property for 10 years. Based on a review of the property sales of properties that are now 10 years older than the subject property, the terminal cap rate is 10%. The REIT also believes that the discount rate is 11%.

Calculate the following:

Estimated Current Value of Property (assume a 10% terminal cap rate)

Going-in Cap Rate

Answer 1

Year Rental cash flow Terminal PVF @11% Present value $100,000 0.900901 $ 90,090 $ 105,200 0.811622 $ 85,383 $110,400 0.731191 $ 80,724 $115,600 0.658731 $ 76,149 $120,800 0.593451 $ 71,689 $ 126,000 0.534641 $ 67,365 $ 131,200 0.481658 $ 63,194 $ 136,400 0.433926 $ 59,188 $ 141,600 0.390925 $ 55,355 146,800 1,520,000 $1,666,800 0.352184 $ 587,021 value Total 1 100,000 105,200 110,400 115,600 120,800 126,000 131,200 136,400 141,600 2 4 6 10 $ Estimated Current Value of Property Going in Cap rate- Cash flow year1/ current value of property $ 1,236,156 8.09% Terminal value- cash flow year 11/capitalization rate cash flow for vear 11- Terminal value-152000/10% $152,000 $ 1,520,000