1 For the following situation develop a prioryears reconstru

1) For the following situation, develop a prior-year\'s reconstructed operating statement, assuming typically competent, professional management. Based on the reconstructed net operating income and the current market value, determine the capitalization rate.

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.

Solution

Potential Gross Rent (30 Units, at $875 per month) $ 315,000
Less: Allowance for Vacancies (5 percent) 15,750
Plus: Other Income (Laundry and vending Machines) 10,000
Effective Gross Income $ 309,250
Less: Operating Expenses:
Management Fee (5% of effective gross income) $ 15,463
Resident Manager (Salary Plus Free Rent) 20,500
Utilities 1,140
Property Insurance 11,700
Workers\' Compensation Insurance 140
Supplies and Miscellaneous (.0025 X $299,250) 748
Landscaping and Grounds Maintenance 1,300
Maintenance and Repairs 7,800
Property Tax 71,400 130,191
Net Operating Income (Annual) $ 179,059