Homework Sourse1 For the following situation develop a sevenyear forecast o
1) For the following situation, develop a seven-year forecast of net operating income for the St. George Apartments, incporating the following assumptions:
a) Potential gross rent and misc. 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 growt 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
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 FOR EACH STEP 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
Income Forecast for next 7 year Particulars Year 1 2 3 4 5 6 7 Quantity 30 30 30 30 30 30 30 Rent 875 897 919 942 966 990 1,015 GPI 3,15,000 3,22,875 3,30,947 3,39,221 3,47,701 3,56,394 3,65,303 Vacancies And Collection Losses @ 5% 15,750 16,144 16,547 16,961 17,385 17,820 18,265 Free Rent And Concessions (Manager House) 10,500 10,763 11,032 11,307 11,590 11,880 12,177 Other Income 10,000 10,250 10,506 10,769 11,038 11,314 11,597 EGI 2,98,750 3,06,219 3,13,874 3,21,721 3,29,764 3,38,008 3,46,458 Less: COE Utilities 1,140 1,169 1,198 1,228 1,258 1,290 1,322 Supplies and Miscellaneous Expenses 747 766 785 804 824 845 866 Management Fees 14,938 15,311 15,694 16,086 16,488 16,900 17,323 Manager Salary 10,205 10,460 10,722 10,990 11,264 11,546 11,835 Maintenance Staff 7,800 7,995 8,195 8,400 8,610 8,825 9,046 Seedy Landscapers 1,300 1,333 1,366 1,400 1,435 1,471 1,508 Property Taxes 71,400 71,400 76,048 76,048 76,048 76,048 85,039 NOI 1,91,221 1,97,786 1,99,868 2,06,766 2,13,836 2,21,083 2,19,520
