Allen Benedict is thinking of buying an apartment complex that is offered for sale by the firm of Getz and Fowler. The price, $2.25 million, equals the property's market value. The following statement of income and expense is presented for Benedict's consideration: By checking the electric meters during an inspection tour of the property, Benedict determines the occupancy rate to be about 80%. He learns, by talking to tenants, that most have been offered inducements such as a month's free rent or special By checking the electric meters during an inspection tour of the property, Benedict determines the occupancy rate to be about 80%. He learns, by talking to tenants, that most have been offered inducements such as a month's free rent or special decorating allowances. A check with competing apartment houses reveals that similar apartment units rent for about $895 per month and that vacancies average about 5%. Moreover, these other apartments have pools and recreation areas that make their units worth about $20 per month more than those of the St. George, which has neither. The tax assessor states that the apartments were reassessed 12 months ago and that the current taxes are $71,400. Benedict learns that the resident manager at St. George, in addition to a $10,000 salary, gets a free apartment for her services. He also discovers other expenses: insurance will cost $6.50 per $1,000 of coverage, based on estimated replacement cost of about $1.8 million; workers' compensation $140 per annum) must be paid to the state; utilities, incurred to light hallways and other common areas, cost about $95 per month for similar properties; supplies and miscellaneous expenses typically run about 0.25% of effective gross rent. Professional property management fees in the market area typically are per monu allo uat vacaucies average about 270 , ivivicuver, these other apartments have pools and recreation areas that make their units worth about $20 per month more than those of the St. George, which has neither. The tax assessor states that the apartments were reassessed 12 months ago and that the current taxes are $71,400. Benedict learns that the resident manager at St. George, in addition to a $10,000 salary, gets a free apartment for her services. He also discovers other expenses: insurance will cost $6.50 per $1,000 of coverage, based on estimated replacement cost of about $1.8 million; workers' compensation $140 per annum) must be paid to the state; utilities, incurred to light hallways and other common areas, cost about $95 per month for similar properties; - supplies and miscellaneous expenses typically run about 0.25% of effective gross rent. Professional property management fees in the market area typically are about 5% of effective gross income. 1. Develop a prior year's reconstructed operating statement, assuming typically competent, professional management. 4. Suggest some reasons why the capitalization rate might not remain constant. Why might it become larger or smaller that the currently prevailing rate
