Muneeba is considering investing in an apartment complex located in Sunninghill.The complex has 120 units, broken down as follows:

Bedrooms Number Monthly Rent

1 20 R850

2 75 R1,050

3 25 R1,200

Currently, the market vacancy rate for similar apartment complexes is 7.5 percent.The prior owner's records show the following expenses annually:

Salaries for on-site staff R85,000

Utilities R142,000

Maintenance & lawn care R128,000

Property management 10% of EGI

Property taxes R230,000

Interest Payments ?

Depreciation ?

The asking price for this property is R6.7 million. Muneeba intends to hold the property for 3 years andsell it at the market value at the end of year 3.The exit cap rate is 11 per cent. Depreciation is straight line over 30 years. The required rate of return is 12%. Rent is increasing 3% yearly while expenses are set to rise 2% yearly for 5 years. Muneeba is able to secure financing for this property at a 70% LTV ratio from DBN mortgage bank at 7.25%, 25 year, fully amortized loan. *NOI should be used for estimating future values. Selling expenses is at 4%. Muneeba is in the 28 percent marginal tax bracket for ordinary income and capital gains will be taxed at 15 percent.

(i) Write out the pro forma operating statement for this property to before tax cash flow.

(ii) What is the before tax cash flow from operations for Year 1?

(iii) What is the before tax reversion of the property at end of year 3?

(iv) At what cap rate is the seller offering this property?

(v) Provide two specific reasons why the cap rate may be a misleading indicator of a property's intrinsic value as an investment.That is, what factors might cause you to change your answer in part (iv) above?

(vi) What is the NPV and IRR of equity of this investment for the 3 years holding period? assume before tax cash flow for year 2 is R200,000 and year 3 is R250,000 respectively.