An office property with 60,000 square feet of rentable space is expected to rent
ID: 2644489 • Letter: A
Question
An office property with 60,000 square feet of rentable space is expected to rent for $40 per square foot in the coming year. Rent is expected to decline 3 percent per year over a projected holding period of seven years. Vacancy will be at 7.5 percent, and the operating expense ratio (based on effective gross income) will be at 35 percent. The property is expected to appreciate at the rate of 2 percent per year. It will be financed using 75 percent debt at an interest rate of 8 percent, amortized over 15 years with monthly payments. Equity investors expect an 15 percent before tax yield. What is the value of this property? HINT: Use the Finance-Explicit Model.?
Explanation / Answer
Total area = 60,000 sq. ft.
Vacancy = 7.5% of 60,000 = 4,500. Thus, office space that is actually put on rent = 60,000- 4,500 = 55,500
Rent per sq. ft. = 40. Total rent = 40*55,500 = 2,220,000
The above table shows the rent earnings for each year with 3% decline.
Operating expense ratio = 35% of income
So, operating exp. and operating cash flow are (year wise)
1,201,979
Assuming, no debt the value is $5,581,599
Year Total Rent 1 2,220,000 2 2,153,400 3 2,088,798 4 2,026,134 5 1,965,350 6 1,906,390 7 1,849,198