Question
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
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 |
|
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