1. Income Valuation Problem (25 points); Boston Investment Group (BIG) is considering investing in a commercial office building in Waltham. Your firm has been engaged to provide an estimate of value. You will us the Income Approach to determine value which will require that you: A) Construct a Five Year Cash Flow Statement (CAPX "below the line") for the property beginning calendar year 2019 through 2023. B) Determine Value (i.e. the price BIG should pay) which will require that you calculate terminal value and net sale proceeds. BIG wants a 8.5% Total return on the Waltham investment. Facts: Waltham Building- 3 stories, 150,000 RSF. The Waltham Building Rent Roll-eight(8) tenants and two(2) vacant spaces as of January 1, 2019: Floor 1 1. Good credit tenant, 20,000 RSF, 10-year lease paying $25 per RSF per years 2. Vacant space, 5,000 RSF 3. Holdover tenant 5,000 RSF 4. Good credit tenant, 20,000 RSF, 2-year lease paying $55 per RSF per year Floor 2 5. Good credit tenant, 32,000 RSF, 10 year lease paying $15 per RSF per year 6. Good credit tenant, 18,000 RSF, 4 year lease paying $20 per RSF per year Floor 3 7. Good credit tenant, 15,000 RSF, 3 year lease paying $30 per RSF per year 8. Tenant at Sufferance, 17,500 RSF, paying $25 per RSF per year 9. Month-to-month tenant, 2,500 RSF, paying $40 per RSF per year 10. Vacant space, 15,000 RSF -Expense recovery revenue(escalation): Year 1 - $76,000; 2-$69,000; 3- $84,000; 4- $57,000; 5-$70,000; 6-$62,000. -Miscellaneous Inc.: The property is also projected to generate $250,000 in 2019 from the building's parking garage, overtime heating/cooling for tenant spaces and special maintenance services. These revenues will grow at a rate of 4% per year. Estimated Operating Expenses for 2019 are as follows: Fixed expenses $770,000 Variable expenses $845,000 Estimated Capital Expenditures are: . Building Capital: $500,000 for 2019, 2020 and $350,000 thereafter Leasing Capital: Tenant Improvement Allowance-$90,000 per tenant; Brokerage Commission-$50,000 per tenant. (Note: leasing capital required for all new leases effective January 1, 2019) Market Assumptions: 1. 2019 market rent rate: $35 per RSF per year 2. Market rent annual growth rate 5% 3. Gen. Vac./Collection loss factor: 3% 4. Operating Expense annual growth rate: Fixed 3%; Variable 4% 5. Vacancy: Downtime- 3 months; Build-out-2 months 6. Free Rent concession - 2 months, due to competitive leasing market. 7. Market standard lease term is 10 years 8. "Exit cap" rates are 75 basis points (bps) over "Going-in" cap rates. Market comparables show that going-in cap rates are at 6% 9. Cost of sale expenses for the transaction equal $528,000 -Miscellaneous Inc.: The property is also projected to generate $250,000 in 2019 from the building's parking garage, overtime heating/cooling for tenant spaces and special maintenance services. These revenues will grow at a rate of 4% per year. Estimated Operating Expenses for 2019 are as follows: Fixed expenses $770,000 Variable expenses $845,000 Estimated Capital Expenditures are: . Building Capital: $500,000 for 2019, 2020 and $350,000 thereafter Leasing Capital: Tenant Improvement Allowance-$90,000 per tenant; Brokerage Commission-$50,000 per tenant. (Note: leasing capital required for all new leases effective January 1, 2019) Market Assumptions: 1. 2019 market rent rate: $35 per RSF per year 2. Market rent annual growth rate 5% 3. Gen. Vac./Collection loss factor: 3% 4. Operating Expense annual growth rate: Fixed 3%; Variable 4% 5. Vacancy: Downtime- 3 months; Build-out- 2 months 6. Free Rent concession - 2 months, due to competitive leasing market. 7. Market standard lease term is 10 years 8. "Exit cap" rates are 75 basis points (bps) over "Going-in" cap rates. Market comparables show that going-in cap rates are at 6% 9. Cost of sale expenses for the transaction equal $528,000