ACTIVITY: DERIVING THE CAPITALIZATION RATE

Your client is considering selling a property which has the following financials: NOI = $185,000 Current Loan Balance = $700,000 ADS = $85,000 Investors are requiring a cash-on-cash rate of return of 6%. Loans are currently available with a 25 year amortization, eight year due date at a rate of 9.5% for an 80% LTV% ratio. Three sales of comparable buildings have occurred in the past month: Sale 1:Sale Price = $1,515,000 NOI = $144,226 Sale 2: Sale Price = $1,402,500 NOI = $137,163 Sale 3: Sale Price = $1,561,000 NOI = $154,660

13. Calculate the average capitalization rate from comparable sales (multiply by 100 to arrive at a capitalization rate to two decimal places).

14. Use the capitalization rate to find the market value of the property.

15. Your client also requires a 6% cash-on-cash rate of return. Use the equity capitalization model to determine your clients investment value.

16. Based on your calculations, would you recommend that your client sell City Tower I at this time? Why or why not?