A mixed-use building in Edmonton is currently offered for sale at a price of $2,000,000. The building consists of six residential units and one street level retail unit. Two of the residential suites are being rented on a long-term lease to a major oil and gas company as temporary accommodation for new managerial employees. They each have 2 years remaining on a 4-year lease, at a rent of $1,400 per month. Two other suites have 2-year leases, one with 6 months remaining, another with 8 months remaining, both at a rent of $1,300 per month. All leased units will revert to month-to-month tenancies at market rents when the lease term expires. The remaining two apartments are rented on a month-to-month basis, both at $1,375 per month. Both apartments have just had their rent raised and in accordance with Residential Tenancy legislation, rent can only be raised once per year. All the residential leases are fully gross, with the landlord responsible for all operating costs. Marie is considering purchasing the property. The current market level rents for similar apartments is $1,375 per month and as any prudent investor would, she intends to raise the rents to market level as soon as possible, thus increasing the net operating income and the value of the building. She considers this strategy reasonable and in line with the allowable annual residential legislation increase. The market rents are expected to rise 3% per year into the foreseeable future. Operating costs for the apartment units have consistently been 26% of effective gross income and this proportion should remain stable in the future. The retail unit is leased for 5 years, with 3 years remaining at a rent of $3,000 per month. This lease is fully net to the landlord, with the tenant paying an additional amount of $1,000 per month for operating expenses and their share of property taxes, increasing by 2% per annum. The tenant has a renewal option for an additional 5-year term at a rent of $3,200 per month, and it is assumed that this option will be exercised. A vacancy and collection loss of 5% would be appropriate for this type of property in Edmonton. Marie intends to hold the building for four years and sell it at the end of the fourth year. The resale value at that time will be determined by the capitalized value of Year 5 net operating income, using a market capitalization rate of 6.5%. Selling costs are expected to be 3%. 6. Calculate the net sale price (after closing costs) at the end of Year 4 using the capitalization model? Round your answer to the nearest $100,000. (1) $1.8 million (2) $1.7 million (3) $2.3 million (4) $2.4 million 7. Assume NOI for Years 1-4 and the net sale price at the end of Year 4 are as follows: Year Sale Price 1 2 NOI $95,000 $99,000 $106,000 $111,000 3 4 $2.2 million
