A joint venture formed by Speedy Logistics and Transportation Company (SLTC) and Overseas Investment Limited (OIL) is going to bid for a site that could be developed into a warehouse, providing a rentable area of 100,000 square foot. According to some forecasts on the warehouse market, there is a 60% chance to receive a rent of $90 per square foot and a 40% chance to receive $60 per square foot. It takes about a year to finish the construction and the construction cost is estimated to be $400 per square foot. Assume operating expenses of the warehouse are always equal to 30 percent of the rent received. The joint venture expects the rental will grow at 2% per year indefinitely and it requires a 13% return on the investment.

(a) Find the expected net operating income (NOI) from the warehouse and the capitalization rate. (5 marks)

(b) Based on the Traditional Approach on land valuation, what are the expected values of the warehouse and the land under the above assumptions? (6 marks)

(c) Suppose the land price asked by the government is $6,000,000. Based on your answer in part (b), would the joint venture bid for the site? (2 marks)

(d) Based on parts (b) and (c) above, find the net present value of this warehouse project given that the construction cost is to be paid when the construction is completed. (3 marks)

(e) Discuss one advantage of forming a joint venture. (2 marks)

(f) Find the land value by using the Real Option Approach. (5 marks)

8 (g) Since the warehouse value would be affected by the NOI, discuss and explain two factors that may lead to a lower NOI.