Jamie Horn is thinking of buying an apartment complex that is offered for sale by Shelly Realty, an investment brokerage firm. The listing price of $3,550,000 equals the propertys market value. The following statement of income and expense is presented for the buyer's consideration:
The Dolphin Apartments Prior Year's Operating Results, Presented by Shelly Realty
30 units, all two-bedroom apartments, $1400 per month		$504,000
Washer and dryer rentals		11,000
Gross annual income		$515,000
Less operating expenses:
Super's salary	$36,000
Maintenance staff (part time)	12,000
Landscaping and snow removal	3,900
Property taxes	23,000	74,900
Net Operating Income		$440,100
By checking the electric meters during an inspection tour of the property, the buyer determines the occupancy rate to be about 80%. He learns, by talking to tenants, that most have been offered inducements such as a months' free rent or special decorating allowances. A check with competing apartment houses reveals that similar apartment units rent for about $1350 per month and that vacancies average about 6%. Moreover, these other apartments have pools and other amenities that make their units worth about $20 more than those of The Dolphin Apartments, which have neither.
The tax assessor states that the apartments were reassessed 12 months ago and that the current taxes are $87,500.
Horn learns that the super at the apartment complex, in addition to the $36,000 salary, get a free apartment for her services. He also discovers other expenses: insurance will cost $7.00 per $1,000 of coverage, based on an estimated replacement cost of about $2.4 million; workers' compensation ($150 per annum) must be paid to the state; utilities, incurred to light hallways and other common areas, cost about $170 per month for similar properties; supplies and miscellaneous expenses typically run about 0.30% of effective gross income. Professional property management fees in the market area typically are about 6.0% of effective gross income.
1. Develop a prior years' reconstructed operating statement, assuming typically competent, professional management. Based on the reconstructed NOI and current market value, determine the property's capitalization rate.

Hint:

For Question #1, the rent and several expenses in the operating statement provided by the seller needs to be "reconstructed" (recalculated) based on the current market analysis that is provided in the case description. Read the description CAREFULLY. If the question provides figures about the property but ALSO provides "peer-group" property figures, you should use the information from the peer-group, they are more reliable indicators.