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Operating Expense has two components, fixed expenses and variable expenses. The fixed expenses are ongoing expenses that do not vary based on occupancy levels
Operating Expense has two components, fixed expenses and variable expenses. The fixed expenses are ongoing expenses that do not vary based on occupancy levels of the property (e.g. Real estate taxes and insurance). Variable expenses are operating expenses necessary to the property, but dependent on the property's occupancy level (e.g. Utilities). Operating Expense = (Expense Amount x Fixed % ) + (Expense Amount x Variable % x Occupancy %) Utilities cost $15 per square foot per year but will fluctuate with occupancy. Only 25% of the expenses is fixed. The building is 35,000 SF and is currently 80% occupied. a. What is the total cost for utilities if the building was 100% occupied? b. What will be the expense amount on the property cash flow for utilities? 1. Use the following assumptions to calculate the Percentage Rent: Tenant Size: 1,250 SF Building Size 200,000 SF Base Rent: $20/SF/Year Annual Sales Amount: $ 2,000,000 Sales Percentage: 3% a) Breakpoint: Natural b) Breakpoint: Zero 2. You have the opportunity to purchase an office building. You have a tenant lined up that will generate $16,000 per year in cash flows for three years. At the end of three years, you anticipate selling the building for $450,000. How much would you be willing to pay for the building? Assume the owner's required return is 7%. If the building is being offered for sale at a price of $350,000, would you buy the building and what is the added value generated by your purchase?
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