Homework Sourse3 For the following situation assuming that the capitalizati
3) For the following situation, assuming that the capitalization rate will remain constant, develop an estimate of the property\'s market value at the end of the projected holding period.
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.
PLEASE SHOW ALL WORK INCLUDING THE FORMULAS YOU USED
Answer should follow this model:
quantity
Less: COE
Do not subtract after-tax cash flow from EGI.
| 30units, all 2-bedroom apartments, $975/month | $351,000 | |
| water & dryer rentals | 10,000 | |
| gross annual income | $361,000 | |
| Less operating expenses: | ||
| Manager\'s salary | $10,000 | |
| Maintenance staff (1 person, part-time) | 7,800 | |
| Seedy landscapers | 1,300 | |
| Property taxes | 13,500 | 32,600 |
| Net operating income | $328,400 |
Solution
Answer
Capitalization rate = net operating income/ building value
= $179,059.38/$2.25 millions
=7.96%
| The St. George Apartments Reconstructed Operating Statement | |
| Potential Gross Rent (30 Unitsx $895 -$20 per month | $315,000 |
| Less: Allowance for Vacancies (5 % x $322,200) | -$15,750 |
| Other Income (Laundry and vending Machines) | $10,000 |
| Effective Gross Income | $309,250 |
| Less: COE | |
| Operating Expenses Management Fee (5% of effective gross income) | -$15,462.5 |
| Resident Manager (Salary Plus Free Rent) $10,000 + ($875 x 12 months) | -$20,500 |
| Utilities $95 x 12 months | -$1,140 |
| Property Insurance | -$11,700 |
| Workers’ Compensation Insurance | -$140 |
| Supplies and Miscellaneous (.25% x effective gross rent);(.25% x $299,250) | -$748.13 |
| Landscaping and Grounds Maintenance | -$1,300 |
| Maintenance and Repairs | -7800 |
| Property Tax | -71400 |
| Net Operating Income (Annual) | $179,059.38 |
