Katie Scarlett is analyzing an apartment building for a client for possible purchase. The gross rents are $$250,000$ in Year $1$ and are expected to grow $5\%$ for through Year $3$ and then by $3\%$ starting in Year $4$ as new supply comes on line. There is currently no vacancy, but is expected to increase to $3\mathrm{.}0\%$ as the new supply comes into the market. Katie assumes a more typical vacancy and credit risk of $5\%$ for all periods. Expenses are in line with other properties of the same vintage and run about $50\%$ of gross receipts of Year $1$ and will grow independently at the inflation rate $3\%$ per year. The discount rate of return is assumed to be $8\%$ and the reversion cap rate is estimated to be $7\%.$ You recommend to Katie and help her to complete a discounted cash flow analysis on the property and recommend a $5-$year DCF to get an accurate valuation estimate. What is the current valuation estimate for the apartment building? $(10$ pts$).$ Hint: the reversion value is based off of Year $6$ NOI.

$\backslash$table$[[$Period$,$Year $1,$Year $2,$Year $3,,$Year $4,],[\backslash$table$[[$Potential$],[$Gross$],[$Revenue$]],250000,,,,,],[\backslash$table$[[$Vacancy$],[$and Credit$],[$Loss$]],,,,,,],[\backslash$table$[[$Effective$],[$Gross$],[$Revenue$]],,,,,,],[$Operating$,,,,,,],[$Expenses$,,,,,,],[$NOI$,,,,,,],[$Cap Rate,,,,,,$],[$Reversion$,,,,,,],[$Value$,,,,,,]]$

$ Year $\frac{1}{1\mathrm{.}08}=$

$ Year $2(1\mathrm{.}08{)}_{?}={?}^2$

$ Year $34(1\mathrm{.}08{)}^3=$

$ Year $4{|}_{{?}_{?}}(1\mathrm{.}08{)}^4|=$

Year $5+$ Reversion