CASE WRITE-UP INFORMATION/DELIVERY Case Write-Up Information Cost Approach - Provide a calculation summary chart Sales Comparison Approach - Provide a calculation summary grid o Show calculations for each adjustment utilized o Provide a value conclusion for the sales comparison approach Income Approach o Provide a calculation summary for the direct income capitalization method show a capitalization rate summary chart for the comparable sales and the capitalization rate conclusion based on this method show calculations for the capitalization rate conclusion via the debt coverage formula o Provide a calculation summary for the yield capitalization method Reconciliation o Provide a recommendation Case Delivery Deliver (to the location provided) ONE case write-up for the entire group in a pdf format that includes all information Include the following: o The Case Study Cover Page o The Case Study Name/Grading Sheet o The Case Write-Up information detailed above SKYHIGH OFFICE BUILDING - CASE STUDY Your client was recently willed a large sum of money after his Uncle Rich passed away. He is interested in buying real estate. He recently came across a property called the Skyhigh Office Building and he would like your advice. Your client would like you to make a recommendation as to a reasonable price he should pay for the Skyhigh Office Building (including the land and building). Assume the current date is your analysis date. You have researched and assembled pertinent subject and market data which will be used to analyze this project. Your client is unfamiliar with the real estate market and valuation methods. You have explained to him the premise on which each of the three valuation approaches is based. Your discussion and his understanding is summarized below. Cost Approach. Your client basically understands the methods in order to arrive at the indicated value by the cost approach. He would like you to show the calculations derived. A summary sheet showing your final calculations is requested. Sales Comparison Approach. Your client understands the methods in order to arrive at the indicated value by the sales comparison approach. He would like you to show the calculations derived. An adjustment grid showing adjusted values, mainly determined through a paired sales analysis, is requested. He has asked that you use percentage adjustments, with the price per rentable square foot being your unit of comparison. Income Approach. Your client understands the methods in order to arrive at the indicated value by the income approach. He would like you to show the calculations derived. A summary sheet is requested, detailing your determination of market rents, a vacancy factor, operating expenses, and an overall capitalization rate. He has asked that you use both the direct income capitalization method and the discounted cash flow analysis. Recommendation. After estimating a value indication by each of these approaches, your client would like your recommendation as to how much to pay for the project. Available Subject Data The subjects total land area contains 0.80 acres, is level and graded, and is ready for development. The subject building improvements include an average quality Class D structure (with an elevator). It is divided into three spaces as follows: Space Size (gross sq. ft.) Size (rentable sq. ft.) Floor Large Space 5,000 4,800 1 Small Space 2,600 2,500 2 Small Space 2,400 2,300 2 The subject contains an estimated $25,000 cost to cure deferred maintenance. Available Market Data Market data for the project is summarized in the following pages. COST APPROACH Building Improvements. Cost data published by Marshall Valuation Service is the only data source available to estimate the building improvements cost. Site Improvements. Costs are estimated at $5.00 per square foot. Many developers have been contacted and it was determined that a 10% entrepreneurial profit in the market is standard. According to published sources, typical economic life for similar buildings to the subject is 50 years. Land value in the area has been estimated to be $12.25 per square foot. SALES COMPARISON APPROACH You have recently compiled an improved sales comparable summary chart showing data for four comparable improved sales as well as information on the subject building. In the data collection process, you discovered that there have been consistent market trends over the past two years. The available data is summarized below. SKYHIGH OFFICE BUILDING SALES COMPARISON SUMMARY Sale No. 1 2 3 4 Subject Project Low Point Crossbow Riddler Charger Skyhigh Sale Date 18 Months Ago Current Current Current N/A Sale Price $1,000,125 $1,629,991 $1,438,102 $945,900 N/A Rentable Sq.Ft. 7,500 9,480 9,510 7,500 9,600 Price/Rentable Sq.Ft. $133.35 $171.94 $151.22 $126.12 N/A Potential Gross Income*** $129,132 $181,950 $180,260 $124,885 N/A Effective Gross Income $117,510 $165,574 $164,036 $113,645 N/A Operating Expenses $37,500 $47,400 $47,550 $37,500 N/A NOI $80,010 $118,174 $116,486 $76,145 N/A OAR 8.00% 7.25% 8.10% 8.05% N/A GIM 7.74 8.96 7.98 7.57 N/A Property Rights Conveyed Fee simple Fee simple Fee simple Fee simple Fee simple Financing Terms Cash Seller Financed** Cash Cash N/A Location Average Good Average Average Good Physical Characteristics Effective Age (Years) 5 5 5 5 5 Quality Average Average Average Average Average Rentable Sq.Ft. 7,500 9,480 9,510 7.500 9,600 Economic Characteristics Average Average Average Average Average Use Office Office Office Office Office Non-Realty Components None None None None None **Seller financed with 20% down, 4.00% interest rate, 30 year amortization (monthly) with a five year due (balloon). ***Rent is calculated on a full service basis INCOME APPROACH You have recently surveyed six tenants and discovered the following information. RENT COMPARABLES SUMMARY Rent No. Tenant Lease Date Tenant Size (Rentable Sq.Ft.) Annual Rent/SF (Rentable Sq.Ft.) Rental Basis Effective Age (Yrs.) 1 USA Network Current 4,900 $17.25 Full Service 3 2 Job Security Current 4,700 $16.75 Full Service 7 3 Lifeless Current 4,800 $17.00 Full Service 5 4 Pardon Me Current 2,425 $17.75 Modified Gross* 7 5 Great Eastern Current 2,295 $18.00 Modified Gross* 5 6 Help Yourself Current 2,520 $18.25 Modified Gross* 3 *Landlord does not pay utilities and janitorial. Contract Rent. The subject has no leases which encumber the property. Market Rent Lease Basis.: Establish Market Rent on a Full Service Basis. Vacancy & Operating Expenses: Historic vacancy and expense figures were not available for the subject. However, the improved sales provide market information which should be utilized. o The only small tenant comparables discovered were leased on a modified gross basis. In performing data research, you discovered that typical annual operating expenses for utilities were $1.50 per rentable square foot and $0.50 per rentable square foot for janitorial services. Capitalization Rates: You feel that the improved sales comparables provide support for a market capitalization rate. Your client has asked you to summarize the comparable sales capitalization rates in a chart and show your capitalization rate recommendation via the sales comparison approach. You feel that the debt coverage formula method provides support for a market capitalization rate. Your client would like you to show your calculations to estimate an indicated capitalization rate by using the debt coverage formula. He would also like you to show your recommendation using this method. Debt coverage Formula. Market interest rates were researched. It was recently learned that a loan could be achieved at an 80% loan-to-value ratio, a 6.75% interest rate, a 30 year monthly amortization and a five year due. In addition, a 1.25 debt coverage ratio was quoted. Finally, he would like you to conclude a reconciled capitalization rate after considering both methods. He would like you to place most weight on the improved comparable sales method, when considering your final capitalization rate recommendation. Income Approach Methodology: He would like you to show a value recommendation via the direct income capitalization analysis in a summary format. In addition, he has asked that a discounted cash flow analysis be performed and provided in a summary format. The following information should be utilized. o Holding period: 3 years o Market conditions: The market indicates a projected 3.0% annual increase in rents. However, operating expenses are anticipated to annually increase at 4.0% during the holding period. o Terminal capitalization rate: Terminal capitalization rates are currently 0.25% above going-in capitalization rates. o Sales costs: 3% of the terminal market value estimate o Discount rate: An annual 10% discount rate is prevalent in the market. Additional Skyhigh Office Building Case Information SAMPLE FORMATS Cost Approach Plus: Equals: Less: Equals: Plus: Equals: Replacement/Reproduction Cost Entrepreneurial Profit Total Cost Depreciation Depreciated Value of Improvements Land Value Total Value By the Cost Approach Sales Comparison Approach IMPROVED SALES ADJUSTMENT GRID Sale #1 Sale #2 Sale #3 Sale #4 Sale #5 Unadjusted Price/Rentable Sq.Ft. $0.00 $0.00 $0.00 $0.00 $0.00 Property Rights 0% 0% 0% 0% 0% Sub Total 0.00 0.00 0.00 0.00 0.00 Financing Terms 0% 0% 0% 0% 0% Sub Total 0.00 0.00 0.00 0.00 0.00 Conditions of Sale 0% 0% 0% 0% 0% Sub Total 0.00 0.00 0.00 0.00 0.00 Expenditures Made After Sale 0.00 0.00 0.00 0.00 0.00 Sub Total 0% 0% 0% 0% 0% Market Conditions (Date) 0% 0% 0% 0% 0% Sub Total 0.00 0.00 0.00 0.00 0.00 OTHER ADJUSTMENTS Location 0% 0% 0% 0% 0% Physical Characteristics 0% 0% 0% 0% 0% Use 0% 0% 0% 0% 0% Economic Characteristics 0% 0% 0% 0% 0% Non-realty Components 0% 0% 0% 0% 0% Total Other Adjustments 0% 0% 0% 0% 0% Value Indication for Subject $0.00 $0.00 $0.00 $0.00 $0.00 AVERAGE $0.00 SAMPLE FORMATS, CONTINUED Income Approach DIRECT INCOME CAPITALIZATION ANALYSIS (Sample Format) GROSS INCOME Sq.Ft. LARGE TENANT SMALL TENANT SMALL TENANT 4,800 2,500 2,300 $0 0 0 GROSS POTENTIAL INCOME $0 LESS: VACANCY & COLLECTION LOSS (0%) EFFECTIVE GROSS INCOME $0 OPERATING EXPENSES GENERAL EXPENSES ($0) ($0) TOTAL OPERATING EXPENSES ($0) NET OPERATING INCOME $0 CAPITALIZATION RATE 0.00% VALUE INDICATION $0 LESS: DEFERRED MAINTENANCE $0 VALUE INDICATION $0 ROUNDED TO $0 SAMPLE FORMATS, CONTINUED DISCOUNTED CASH FLOW ANALYSIS (Sample Format) Year 1 Year 2 Year 3 Year 4 Gross Income Sq. Ft. Large Space 4,800 $0 $0 $0 $0 Small Space 2,500 $0 $0 $0 $0 Small Space 2,300 $0 $0 $0 $0 Gross Potential Income $0 $0 $0 $0 Vacancy & Collection Loss 0.00% ($0) ($0) ($0) ($0) Effective Gross Income $0 $0 $0 $0 Operating Expenses General Expenses ($0) ($0) ($0) ($0) Total Operating Expenses ($0) ($0) ($0) ($0) Net Operating Income $0 $0 $0 $0 Terminal Capitalization Rate 0.00% Reversion Value $0 Less: Sales Costs 0.00% ($0) Total Reversion Value $0 Net Cash Flow $0 $0 $0 Net Present Value $0 Less: Deferred Maintenance ($0) Indicated Value $0