In Class Activities $$ Valuation Approaches

$1.$ Build the Proforma $$ recall that a proforma is a set of projected data. Here we are trying to find the projected NOIs for the $5$ year holding period.

Note: he data begins with the data used in last week$$s assignment, but goes further by including Tenant Improvements $($TI$),$ Capex, and Leasing Commissions $($LC$)$ an example of these are outlined in slide $38$ of Web lecture #$1.$ Just like last week, you are looking to find the NOIs for each of the $5$ years.

You are considering purchasing an investment property. There are $3$ tenants, each occupying $100,000$ SF$.$ Each tenant pays rent of $$20$ Sf$/$Yr$.$ Rents will increase by $3\%$ per year. Tenant #$1$ is a retail tenant and pays percentage rent $(2\%)$ beyond $$100,000$ in Sales. Tenant #$1$ Sales are $$75,000$ in year $1$ and are growing by $10\%$ per year. Assume $10\%$ Vacancy. There is a parking lot that generates $$10,000$ per year. Costs increase $1\%$ per year and are as follows: Insurance costs are $$1\mathrm{.}00$ Sf$/$Yr paid at the end of the year. Common area utilities are $$1\mathrm{.}50$ Sf$/$Yr$.$ Repairs and Maintenance is $$0\mathrm{.}75$ SF$/$Yr$.$ There is also a management fee equal to $2\%$ of total revenue$/$effective gross income $($EGI$).$ Insurance, Common Area Utilities, Repairs & Maintenance are reimbursable. Each tenant is given $$2\mathrm{.}00$ SF for Tenant Improvements. They use $50\%$ of it in year $1$ and divide the remaining over the remainder of the lease. The roof will need to be replaced in year $3$ and will cost $$75,000.$ To secure the $3$ tenants, you hire a broker who charges $1\mathrm{.}5\%$ of total revenue$/$EGI$.$ Assume an $$above the line$$ approach for Capex, TIs and LCs$.$ The property has a $5$ year holding period.

$2.$ Valuation $$ Direct Capitalization

In slides #$13-16$ of the web lecture, we learned how to find the value of a property using the Direct Capitalization method $($slide $15$ discusses the process to extract the cap rate$).$ With the NOIs found above, we can use these techniques to find the value of the property.

Extract the going in cap rate from the following market data on $3$ comparable properties.

Property Sale Price NOI$1$

A $$2,450,000$ $$171,500$

B $$2,975,000$ $$214,200$

C $$2,156,000$ $$153,076$

What is the value of the property using the extracted cap rate?

$3.$ Valuation $$ DCF

Slides $20-22$ of the web lecture outlines the process for finding the value of a property using the DCF approach.

To find the value of the property using DCF$,$ you will need to find the sale price at the end of year $5.$ This is analogous to the work we did last week in computing the TV$,$ here the TV and the Sales price in year $5$ are the same thing! To find NOI$6,$ assume that NOI$5$ grows by $3\%$ to get NOI$6.$ Compute the value of the property using DCF analysis. A discount rate of $9\mathrm{.}5\%$ will be used to find the PV of all of the cash flows.