Allen Benedict is thinking of buying an apartment complex th

Allen Benedict is thinking of buying an apartment complex that is offered for sale by the firm of Getz and Fowler. The price, $2.25 million, equals the property\'s market value. The following statement of income and expense is presented for Benedict\'s consideration:

The St. George Apartments Prior Year\'s Operating Results, Presented by Gertz and Fowler, Brokers

By checking the electric meters during an inspection tour of the property, Benedict determines the occupancy rate to be about 80%. He learns, by talking to tenants, that most have been offered inducements such as a month\'s free rent or special decorating allowances. A check with competing apartment houses reveals that similar apartment units rent for about $895 per month and that vacancies average about 5%. Morevoer, these toher apartments have pools and recreation areas that make their units worth about $20 per month more than those of the St. George, which has neither. The tax assessor states that the apartments were reassessed 12 months ago adn that the current taxes are $71,400.

Benedict learns that the resident manager at St. George, in addition to a $10,000 salary, gets a free apartment for her services. He also discovers other expenses: insurance will cost $6.50 per $1,000 coverage, based on estimated replacement cost of about $1.8 million; workers\' compensation ($140 per annum) must be paid to the state; utilities, incurred to light hallways and other common areas, cost about $95 per month for similar properties; supplies and miscellaneous expenses typically run about 0.25% of effective gross rent. Professional property management fees in the market area typically are about 5% of the effective gross income.

1) Develop a 7-year forecast of net operating income for the St. George Apartments, incorporating the following assumptions:

a. Potential gross rent and miscellaneous other income will grow at 2.5% per annum over the forecast period.

b. Vacancies in the market area will remain constant over the forecast period.

c. Operating expenses other than management fees and property taxes will grow at 2.5% per annum over the forecast period.

d. Management fees as a percent of effective gross income will remain constant over the forecast period.

e. Property taxes are expected to increase to $76,048 in the third year of the forecast and to $85,039 in the seventh year.

Answer should follow this model:

quantity

Less: COE

Do not subtract after-tax cash flow from EGI.

Solution

Answer

Formula

Effective Gross Income = Potential Gross Rent + Allowances for Vacancy (negative) + Other Income

Net Operating Income = Effective Gross Income - Sum of All Expenses