1. Ms. Ross is considering investing in an office building. If she buys the building, the price will be $800,000 of which $120,000 represents the value of the land. Acquisition costs are estimated to be 5% of the purchase price. The building will be depreciated over 39 years. Ms. Ross will purchase the property with a $650,000, 20-year, 8% interest-only loan with a 1% origination fee and 2 points. At the end of the expected holding period of 5 years, the selling price of the building is expected to be $950,000. Selling expenses are expected to be 3.5% of the expected selling price. Ms. Ross is in the 33% tax bracket and her required after-tax rate of return is 7%. The depreciation recapture tax rate is 25% and the capital gains tax rate is 15%.

a) What is the equity investment?

b) Suppose the after-tax cash flows from operations for years 1-5 are: Year	1	2	3	4	5
ATCFoperations	$10,900	11,370	11,855	12,235	12,617
ATCFsale	$0	0	0	0	$232,352

8. Consider the following facts about a residential real estate investment:

First year Potential Gross Income	$ 945,000
Operating Expense Ratio	38%
Vacancy Ratio	5%
Asking price	$5,434,000
Land value	$1,086,800
Overall capitalization rate	11%
Financing	FRM 12%, 20 years, 3 points

The lender is willing to finance up to 75% of the asking price and uses the following criteria: Vacancy Ratio= 5%; Operating Expense Ratio=35 to 40%; Debt Coverage Ratio = 1.15 to 1.25 and Break Even Ratio = 0.80 to 0.9. The investor is in the 28% tax bracket and owns other income producing properties; thus, she could use passive losses generated by this project.

a) Calculate net operating income and the before-tax cash flows from operations in the first year.

b) Calculate four relevant financial ratios: Capitalization Ratio (cap rate), Debt Coverage Ratio, Breakeven Ratio, and Equity Dividend Rate.

c) Is the value about right? Why or why not?

d) How might the financing be adjusted?

3. Based on the following data relating to recently sold, comparable properties, estimate the value of the subject property using the direct sales comparison method. The only adjustments that appear warranted are for differences in building size and changes in the market (comparable land buildings have been increasing in value at about 6 percent per year in recent years).

Property	Sales Price	Date of Sale	Building Size (sq. ft)		Current Land Value
A	$750,000	6 months ago	5,000		$150,000
B	980,000	4 months ago	6,500		190,000
C	1,080,000	1 week ago	7,000		220,000
Subject				6,000	195,000