In Class Activities Valuation Approaches

1. Build the Proforma. The property has a 5 year holding period.

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 $1.00 Sf/Yr paid at the end of the year. Common area utilities are $1.50 Sf/Yr. Repairs and Maintenance is $0.75 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 $2.00 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 1.5% of total revenue/EGI. Assume an above the line approach for Capex and LCs.

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2. Valuation Direct Capitalization

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

Property Sale Price NOI₁

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?

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3. Valuation DCF

You will need to find the sale price at the end of year 5. Compute the value of the property using DCF analysis using an expected NOI growth rate of 3% and a discount rate of 9.5%.