Assignment Details:

To facilitate an understanding of the budgeting process, Display in a grid or spreadsheet format that includes the annual totals. This should be done separately for questions 1-4 and 5-7 below.

Budget Scenario

You manage a 10-year-old, 24-unit apartment building with 10 one-bedroom units renting at $900 per month and 14 two-bedroom units renting at $1400 per month.

• The average vacancy rate is 5%
• You collect approximately $250 per month from the laundry room.
• Heating expenses from October through March average $ /month, cooling expenses from June through August average $/month.
• In addition, real estate taxes of $7,200 are divided and paid twice a year, in April and October, and property insurance premiums totaling $ 2,400 are paid once a year in February.

Average monthly operating expenses are:

• Payroll - $ 2250
• Utilities $ 2400
• Painting and decorating/ Unit turnover $ 200
• Maintenance $ 1250
• Administrative/Management (8% of rental income) $
• Telephone/supplies $275
• Heating Expense $750
• Cooling Expense
• Real estate taxes $
• Property Insurance $

Budget Questions:

1. What is the annual gross operating income?
2. What is the annual effective gross income?
3. What is the annual total for operating expenses?
4. What is the net operating income for the year?
5. Suppose the winter months early in the year were extremely mild, and heating expenses turn out to be $ 1000 in January, $850 in February, and $750 in March. The mild winter presaged an extremely hot summer, and actual cooling expenses are $350 in May, $ 750 in June, $ 1200 in July, $ 1400 in August, and $450 in September. What is the impact of these variances on the annual NOI?
6. You switch telephone services in July to get a cheaper rate. The result is a short service period with the old carrier in July ($75 less), a longer service period billed for August by the new carrier ($150 more), and then a savings of $50 per month through the end of the year. How does the change in phone service affect the monthly budget for telephone and office supplies (variances favorable or unfavorable)? How does it impact the annual NOI? How should telephone and office supplies be budgeted in the following year?
7. Suppose six of the one-bedroom apartment leases are renewed at a new rent of $950/month (two in March, two in June, and two in September) and one is leased to a new tenant at $975 in August. In addition, 8 of the two-bedroom apartment leases are renewed at $1475/month (three in February, two in May, and three in October), and two are leased to new tenants at $1500 in September and November, respectively. However, the latter apartment was vacant for three months before the new lease was signed. (This vacancy was not included in the 5% annual rate.) How do these rent increases and new leases (including the 3-month vacancy) affect the annual gross potential rental income? What is their impact on annual NOI?

What is the Cap Rate for the initial calculations, and how do the concerns outlined in questions 5-7 impact the Cap Rate?