1.) Recreate the following Back of the Envelope (BOE) setup in XLS. Submit the XLS file and Word doc.
Answer the following questions by responding below.
• What are the financial and non-financial risks exhibited by this investment?
• What two KEY variables would you adjust in this model and why?
2.) What does an expense stop do and provide a simple example?
3.) What is meant by useable versus rentable space?
4.) Explain by way of an example the differences between a) pass through expense (b)recoverable expense and (c) common area expense.
5.) Using XLS…Your leasing broker presents the following options for a space for your building for a 5 year term:
• NET LEASE WITH STEPS: Rent is $15 PSF for year 1 and increases by $1.50 PSF each year. Assume tenant pays for OPEX.
• NET LEASE WITH CPI Adjustments: Rent is $16 PSF in year 1.After year 1, rent will increase by the CPI. CPI is forecasted at 3% per year.
• GROSS LEASE: Rent is $30 PSF with the lessor paying OPEX. OPEX is $9 in year 1 and will increase by $1 per year thereafter.
• GROSS LEASE WITH expense stop and CPI adjustment: Rent will be $22 in year 1 and increase by the full amount of any change in the CPI after year 1 with an expense stop at $9 PSF. The CPI and OPEX are assumed to change by the same amount as above.
REQUIRED: Calculate the effective rent to the owner after expenses for each lease alternative using a 10% discount rate. How do you rank these alternatives?
Use XLS and paste the results in your submission.
6.) Using XLS…A 3-floor office building features the following leases (each floor has a single tenant):
a. 1st FL: 20,000 RSF at $15 PSF with 3 years remaining on the lease with an expense stop of $4 PSF.
b. 2nd FL: 15,000 RSF and leasing for $15.50 PSF and has four years remaining on the lease with an expense stop of $4.50 PSF.
c. 3rd FL: 15,000 RSF with a new lease of $17 PSF for five years (market rate). The expense stop is $5.00 PSF which is what expenses are expected to be during the next year.
d. Management expenses = 5% of Effective Gross Income (EGI) and not included in expense stop.
e. Each lease has a CPI adjustment that provides for base rent to increase by half the rate of increase of CPI. CPI is projected at 3% increase per year.
f. Estimated OPEX for next year:
i. Property Taxes $100,000
ii. Insurance $10,000
iii. Utilities $75,000
iv. Janitorial $25,000
v. Maintenance $40,000
g. All expenses are projected to increase at 3% per year.
h. Market Rental rate at which leases are expected to be renewed is also projected to increase by 3% per year. When a lease is renewed, it will have an expense stop equal to OPEX PSF in the first year of the lease.
i. Vacancy is estimated to be 10% of EGI in years 4 and 5.
Instructions to complete this question…
Project EGI, expense reimbursements and NOI for the next 5 years.
What is the going in cap rate if the purchase price is $5 Million?
WEEK FOUR
INDIVIDUAL ASSIGNMENTS
Intended Learning Outcomes for these individual exercises
• Understand the relationship between Finance and Valuation Principals in the context of real estate investing.
• Understand differences in the three valuation techniques used to arrive at market value.
• Develop understanding of the limitations of a 3rd party appraisal.
• Understand the differences between Market Value and Investment Value and Cost Basis.
• Reinforce XLS modeling skills.
1.) What is the economic rationale for the cost approach? Under what conditions would the cost approach tend to give the most reliable value estimate?
2.) What is the economic rationale for the sales comparison approach? What information is necessary to use this approach? What does it mean for a property to be comparable?
3.) What are some of the potential problems with using a “going-in” cap rate that is obtained from previous property sales transactions to value a property being offered for sale today?
4.) A 320,000 SF industrial property is under consideration for purchase. It currently rents for $4 PSF. Two nearby properties have recently sold and are comparable in size, design and age. One property is 350,000 SF and rents for $3.90 PSF annually and the other 300,000 SF facility is being leased for $4.10 PSF. Market data indicates that vacancy and OPEX represent about 50% of gross income. The first comparable property sold for $9.4 million and the second sold for $7.9 million.
Required: Using a “going in” or direct capitalization rate approach to value, how would you estimate value for the property? Show all math when responding via XLS.
5.) Relative to FO…what is the most reliable valuation approach from an investor perspective? From an appraisal perspective?
6.) Aside from selling an asset what other methods could we employ to Harvest the profit from an investment and why?