FIN704 Real Estates & Property Analysis

Your company is considering the acquisition of the newly constructed 28-storey building in McGregor Road, Suva. The company aims to take possession of the property on 01/01/2021. You have been given the responsible to carry out a feasibility analysis and report your findings to the Board in form of a report. The purchase price of the property is $100 million. The current rent roll is provided in Exhibit 1. In addition to rental income, the property produces $80/month for each of 250 garage spaces and $40/month for each of 250 car park spaces. The laundry facility on the property produces $25/unit/month. Themarket vacancy rate is 8% and the property loses 1.5% in collection losses annually. The property's current expenses related to the apartment units are provided in Exhibit 2. The Property also has three commercial tenants, details provided in Exhibit 3.

Assume that income and expenses will increase at the expected rate of inflation, 3.5% per year, for the duration of a six-year holding period. The acquisition will be financed with a 75 percent loan to value ratio, 9% annual interest rate, 25 year, fixed monthly payment mortgage. The loan has a 3% fee and a 5% prepayment penalty.

You estimate future selling price by capitalizing future NOI at 12%. In addition, the owner will have to pay a 1.5% sales commission when the property is sold in six years. For tax purposes, assume land value is 20 percent of the purchase price. The property will be depreciated using straight line-depreciation over 50 years. The investor's ordinary income is taxed at 25% and capital gains are taxed at the prevailingrate.

Exhibit 1

Rent Roll for McGregor Road Apartments

Unit Description# UnitsSquare FeetMonthly Rent

1 Bed / 1 Bath 80 650 $800.00

1 Bed / 1 Bath / Den 60 800 $950.00

2 Bed / 1 Bath 70 950 $1,500.00

2 Bed / 2 Bath 50 1,100 $2,000.00

2 Bed / 2 Bath / Den 40 1,200 $2,200.00

3 Bed / 2 Bath 30 1,353 $3,000.00

Totals3306,053

Exhibit 2

Annual Expenses for McGregor Road Apartments

ExpenseFor PropertyPer UnitPer Square Foot

Property Taxes $300,00.00 - -

Hazard Insurance 65,00.00 - -

Security & Surveillance 35,00.00 - -

Valuation Services 8,000.00 - -

Administration - - $0.10

Repairs/Maintenance - - $0.30

Marketing - - $0.16

Salaries - - $0.22

Utilities - - $0.20

Management 4% of EGI - -

Reserves for Replacements$1,000,000 -

Exhibit 3

Commercial Tenant Details

Tenant 1Countdown Supermarket

Lease commencement 1/1/2020

Lease term (years) 8

Area in ft22500

Current rental rate/ft2/annum $1000.00

Review frequency 3 Yearly

Review basis CPI

Service charge rate/ ft2/annum $2.90

Tenant 2K Mart

Lease commencement 1/1/2020

Lease term (years) 10

Area in ft22680

Current rental rate/ ft2/annum $1000.00

Review frequency 3 Yearly

Review basis (upward only) CPI

Service charge rate/ ft2/annum $2.90

Tenant 3The Warehouse

Lease commencement 1/1/2020

Lease term (years) 5

Area in ft23380

Current rental rate/ ft2$1000.00

Next frequency 3 Yearly

Review basis (predetermined) CPI

Service charge rate/ ft2/annum $2.90

NB:

i.Leasesare "Gross lease" with service charge for common areas (recoverable from tenants) being the same for next 10 years

ii.Estimated Annual CPI Rates:2021(3%), 2022 (2.5%), 2023 (3.50%) 2024(2.75%)

2025(2.15%) 2026(3.15%) 2027(4.00%)

iii.Tax: Assess balancing charge/deduction at year of disposition. For capital gains use Fiji rate.

Based on the information provided:

a)Prepare the full DCF for the 6 year term.

b)Calculate the property's value using the DCF approach assuming discount rate at property levelis 20%.

c) Calculate the after-tax net-present value (NPV) and internal rate of return (IRR).

d) Draft feasibility analysis report and your findings to the Board in form of a report.

For capital gains use Fiji rate 10%.