You have been given the task of estimating the market value of an office building, and you have been given the following information.

The building contains 150,000 square feet of rentable space, and the current market rent is $15 per square foot per year. The current vacancy rate is 10%.

– Annual fixed expenses include property taxes of $350,000 and insurance of

$250,000.

– Annual operating expenses include repairs and maintenance of $100,000, utilities of $200,000, and a management fee of 5% of effective gross income. There are no tenant concessions.
– The current capitalization rate for this type of building is 10%.

a. Estimate the potential gross income and the effective gross income. What assumptions are you making?

b. Compute the net operating income.

c. Estimate the market value of the building. What happens to value if the capitalization rate increases to 11%?