Question 4 and Question 5 are based on the following case. You work in a property management company. You are assigned to develop financial reports for a rental property, Spring Heights, which is a 50-unit apartment building in the city of Melbourne. The building has 50 three-bedroom apartment units with current monthly rent of $2,500. Leases with tenants are made for 12-month periods. The following table shows the lease structure and status of all the units as of 30 June 2021.

Type

Status # of Units Lease Start Date Lease Expiry Date Monthly Rent

Type I Units Occupied 45 1 July 21 30 June 22 $2,500

Type II Units Vacant 5 -- -- --

When these leases (Type I) rollover near end of June 2022, a certain percentage are expected to be renewed at market rents for an additional 12 months. The rest would remain vacant for a month on average. On the other hand, vacant units (Type II) will be leased out at the market rent throughout the year. Some units are vacated due to non-payment of rent, early termination, etc. In terms of additional income, Spring Lake expects to earn a total of $40,000 from laundry facilities, renting of tennis courts, parking, and others in a year.

You find that operating expense per unit is approximately $300 per month in the first 6 months in 2021, including utilities, real estate taxes, security, landscaping, insurance, and repairs. Your company is paid $20,000 annually for managing this property. The recurring expense, primarily make-ready expense (carpet, paint, drywall repairs, ...), is currently $50,000 per annum. The property has no mortgage. The owner has an income tax bracket of 25%. The property is subject to an annual depreciation allowance of 2.5%. The purchase price (in 2010) of this property was $15 million. Its building component was recorded as $8 million.

The owner feels that the rental apartment sector may not recover soon. She is considering selling the property at the end of 2021 because she has several other investment opportunities. She could also hold it for another two years and wait for the market to rebound. Additionally, she wonders if she should invest in remodeling of the kitchens and bathrooms and make other investments to increase the selling price if she must sell it in two years.