Courtesy of Prof Michael Morris

University of North Florida

You have the opportunity to invest in an office building in downtown Jacksonville, in which you would purchase as a $5-$year holding investment with a $7\%$ required rate of return. The building offers a total rentable area of $20,000$ square feet, and $100$ garage$-$parking spaces. You are provided the following information on the property from the current owner:

The owner is asking $$3,500,000$ for the building.

The owner has annual contracts from tenants on the building for $18,000$ square feet of the total space at $$20\mathrm{.}00$ psf$,$ gross. Additionally, $90$ parking spaces are leased by annual contract for $$120\mathrm{.}00$ per month, per space. These lease terms are found to be in line with the downtown office market.

Current annual operating expenses for the building follow:

Management Fees: $5\%$ of EGI

Annual Real Estate Taxes: $$9,000$

Hazard Insurance: $$3,000$

Maintenance$/$Repairs: $$11,000$

Supplies $$4,000$

Administrative Costs: $$4,500$

Operating Costs of the Garage: $$6,500$

Your mortgage lender has committed to you a loan to purchase the office building $($should you decide to partake in the investment$),$ which would offer the following terms:

Loan$-$to$-$Value: $60\%$ maximum, $6\mathrm{.}25\%$ interest rate, $25$ year amortization

What is the maximum loan amount you$$d qualify for?

What is the required equity contribution?

Based on the above information, prepare a year$-$one income and expense statement.

What is the current vacancy rate?

What is the Annual NOI?

What is the debt service payment?

You have decided to use the income$-$capitalization approach to derive the estimated value at the end of the investment period. Market research indicates an appropriate capitalization rate for the office building to be $10\%.$

What is the derived value?