An acre (43,560 SF) of land in the Central Business District (CBD) is being used as an open parking lot. The land currently brings an operating cashflow of $28/SF/year, paid in arrears, which is expected to increase by 2% annually. The discount rate for the parking lot rents is 8%. An investment project that is being considered is building a 100,000 SF office building on the land. The construction will cost $2,000,000 and the building will have a 30 year productive life after it is built (after 30 years, it is assumed that the building can be demolished and the land can be converted to a parking lot identical to the one we currently own, without additional cost). The construction will take one year. The resulting office space is expected to produce operating cashflows of $22/SF/year (in arrears) starting next year, and the rent is expected to increase by 1% annually. The required rate of return on office buildings is 11%. Is this a good investment project? Question 3 Consider a 100,000 sqf office building with the following cash flows: The gross rent in year 1 is $30/sqf/year and the rents are expected to grow at 2% per year. The operating expenses in the first year are $5/sqf/year and are expected to increase at 3% per year. There are no capital expenditures. All cash flows are in arrears. The discount rate for the property is 9%. a. What is the value of the building if the building will be held and rented indefinitely? What is the implied cap rate at time 0? b. What is the value of the building if the building is sold at the end of 10 years at a 8% cap rate? What is the implied cap rate at time 07 Question 4 Consider the following projected cash flows (including reversion) for Property A and Property B for the following 10 years. Assume that operating cash flows (excluding reversion) = NOI, there are no capital expenditures. Annual net cash flow projections for two properties ($ millions) 3 4 6 8 5 1 2 7 9 10. A $1.0000 $1.0050 $1.0100 $1.0151 $1.0202 $1.0253 $1.0304 $1.0355 $1.0407 $12.7252 B $1.0000 $1.0200 $1.0404 $1.0612 $1.0824 $1.1041 $1.1262 $1.1487 $1.1717 $14.7395 a. What is the annual growth rate in operating cash flows for each building during the first nine years? b. If both properties sell at cap rates (initial and terminal cash yields) of 9%, what is the expected annual return on a 10-year investment in each property?