Case Problem Allen Benedict is thinking of buying an apartment complex that i value. The following statement of income and expense is presentedt consideration: by the firm of Getz and Fowler. The price, $2.25 million, equals th The St. George Apartments Prior Year's Operating Results, Presente and Fowler, Brokers by Get 30 units, all two-bedroom apartments, $975 per month Washer and dryer rentals Gross annual income Less operating expenses: $351,000 Managers salary Maintenance staff (one person, part-time) Seedy landscapers Property taxes $10,000 7,800 1,300 13.500 3280 Net operating income By checking the electric meters during an inspection tour of the property, Besodic determines the occupancy rate to be about 80 percent. He learns, by talking to tenants that most have been offered inducements such as a month's free rent or special decors ing allowances. A check with competing apartment houses reveals that similar apar ment units rent for about $895 per month and that vacancies average about 5 perce Moreover, these other apartments have pools and recreation areas that make their unis worth about S20 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 br the current taxes are $71,400. Benedict learns that the resident manager at St. George, in addition to as salary, gets a free apartment for her services. He also discovers other expenses. ance will cost $6.50 per $1,000 of coverage, based on estimated replacement e about S1.8 million; workers compensation ($140 per annum) must be parg utilities, incurred to light hallways and other common areas, cost for similar properties; supplies and miscellaneous expenses typicaly in the marh percent of effective gross rent. Professional property management ices area typically are about 5 percent of effective gross income. num) must be paid to the sak y run about 02 2. Develop a seven-year forecast of net operating income for the St. George Apartments, incorporating the following assumptions: a. Potential gross rent and miscellaneous other income will grow at 2.5 per- cent per annum over the forecast period. b. Vacancies in the market area will remain constant over the forecast period. c. Operating expenses other than management fees and property taxes will d. Management fees as a percent of effective gross income will remain con- e. Property taxes are expected to increase to $76,048 in the third year of the grow at 2.5 percent per annum over the forecast period. stant over the forecast period. forecast and to $85,039 in the seventh year
