Problem 21-2

Robust Properties is planning to go public by creating a REIT that will offer 1,640,000 million shares of stock. It is currently trying to develop a pro forma set of financial statements. Robust is faced with a number of questions about its handling of some accounting and financial disclosure issues.

Robust Properties
I. Major Financial Information:
a. Assetsproperties (actual cost)	$ 100,600,000
b. Depreciable basisbuildings only	$ 80,480,000
c. Useful life	40	years
d. Operating expenses	38	% of rents
e. Management expensesthird parties	5	% of rents
f. General and administrative expenses	3	% of rents
g. Mortgage at 8% interest only, 10 years	$ 30,060,000
h. Financing fees	$ 906,000
II. Lease Information:
a. Average lease term	5	years
b. Leasable space	1,000,000	square feet
c. Base rents (year 1)	$ 27	pounds per square feet
d. Escalation factorrents per year	5	%
e. Lease commissions	4	% of year 1 rent
f. Tenant improvements	$ 13.00	pounds per square feet

The management of Robust Properties has asked you to prepare preliminary pro forma financials for the next three years. Specifically, you should have (1) a beginning balance sheet, (2) operating statements for each of the next three years, and (3) all relevant financial ratios for year 1 results only. Robust will pay all financing fees, tenant improvements, and lease commissions upon commencing operations. It would like to pay a minimum dividend of $6.00 per share.

In preparing your pro forma operating statements, Robust wants you to consider the effects of reporting in the following two ways:

a. What would EPS, FFO, and ROC be under both approaches? (Round your intermediate calculations and final answers to 2 decimal places.)

	Approach 1	Approach 2
Lease commissions	Amortize, 5 years	Expense in year 1
Finance fees	Amortize, 10 years	Expense in year 1
Tenant improvements	Depreciate, 40 years	Depreciate over 5-year lease term
Buildings	Depreciate, 40 years	Depreciate, 40 years

	Approach 1	Approach 2
EPS
FFO
ROC