P$8.$ Estimate the market value of the following office building. The property has

$10,500$ square feet of leasable space, and was leased to a single tenant four years

ago on January $1.$ Terms of the lease call for rent payments of $$9,525$ per month

for the first five years, and rent payments of $$11,325$ per month for the next five

years. The tenant pays all operating expenses. During the remaining term of the

lease, there will be no vacancy and collection losses; however, upon termination of

the lease it is expected that the property will be vacant for three months. A vacancy

and collection loss allowance of $8$ percent per year is then anticipated, with the new

tenants paying all operating expenses under short$-$term leases. The current market

rent for similar properties when tenants pay all operating expenses is $$11$ per square

foot, and this rate has been increasing at a rate of $3$ percent per year. The market

discount rate for similar properties is about $11$ percent, the going$-$in cap rate is

about $9$ percent, and terminal cap rates in this market are typically $1$ percentage

point above going$-$in cap rates.

$($a$)$ Prepare a pro forma showing the annual rental income, NOIs, and net proceeds

from the sale of the property at the end of an eight$-$year holding period.

$($b$)$ Estimate the market value of the property.

$($c$)$ Would you buy the property for $$1,300,000?$ Why or why not?