Arnold Benedict is thinking of buying an apartment complex that is offered for sale by the firm of Getabinder and Flee. The price, $2.25 million, equals the propertys market value. The following statement of income and expense is presented for Benedicts consideration:

The Sated Satyr Apartments Prior Years Operating Results Presented by Getabinder and Flee, Brokers ----------------------------------------------------------------------------------------------------------- 30 Units, All Two-Bedroom Apartments, $975 per Month $351,000 Washer and Dryer Rentals 10,000 Gross Annual Income $361,000 Less Operating Expenses: Managers Salary $10,000 Maintenance Staff (one person, part time) 7,800 Seedy Landscapers 1,300 Property Taxes 13,000 32,600 Net Operating Income $328,400 ----------------------------------------------------------------------------------------------------------- By checking the electric meters during an inspection tour of the property, Benedict determines the occupancy rate to be about 80 percent. He learns, by talking to tenants, that most have been offered inducements such as a months 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 7 percent. Moreover, these other apartments have pools and recreation areas that make their units worth about $35 per month more than those of the Sated Satyr, which has neither. The tax assessor states that the apartments were reassessed 12 months ago, and that current taxes are $76,374. Benedict learns that the resident manager at Sated Satyr, 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 .25 percent of effective gross rent. Professional property management fees in the market area typically are about 5 percent of effective gross income. Based on this information that Benedict obtained and assuming typically competent, professional management, Benedict arrived at the following reconstructed operating statement as shown below:

The Sated Satyr Apartments Reconstructed Operating Statement ----------------------------------------------------------------------------------------------------------- Potential Gross Rent (30 Units, at $860 per month) $ 309,600 Less: Allowance for Vacancies (7 percent) 21,672 Plus: Other Income (Laundry and vending Machines) 7,500 Effective Gross Income $ 295,428 Less: Operating Expenses: Management Fee (5% of effective gross income) $ 14,771 Resident Manager (Salary Plus Free Rent) 20,320 Utilities 1,140 Property Insurance 11,700 Workers' Compensation Insurance 140 Supplies and Miscellaneous (.0025 X $299,250) 748 Landscaping and Grounds Maintenance 3,300 Maintenance and Repairs 7,800 Property Tax 76,374 136,293 Net Operating Income (Annual) $ 159,135 ----------------------------------------------------------------------------------------------------------- Given the reconstructed operating statement, you need to do the following (please use the format I have in my online presentations): a. Based on the reconstructed net operating income and the current market value, determine the capitalization rate. b. Develop a five-year forecast of net operating income for the Sated Satyr Apartments2 , incorporating the following assumptions: 1) Potential gross rent and miscellaneous other income will grow at 2.25 percent per annum over the forecast period. 2) Vacancies in the market area will remain constant over the forecast period. 3) Operating expenses other than management fees and property taxes will grow at 2.25 percent per annum over the forecast period.3 4) Management fees as a percent of effective gross income will remain constant over the forecast period. 5) Property taxes are expected to increase to $80,048 in the third year of the forecast.