Robert Douglas owns 112 Acorn Street, an industrial building in south-western Canada. Located on 8.05 acres of land, 112 Acorn Street is a two-story single-tenant building built in 2004. The building features a total gross floor area of 173,446 square feet, including approximately 3,500 square feet of office space.

Mr. Douglas only has one tenant, Evermore Logistics, who pay an annual base rent of $6.75 per square foot, and expense reimbursements of $2.95 per square foot. Evermore Logistics lease expires September 1, 2020, with one remaining renewal option for an additional five years. The renewal probability for Evermore Logistics is estimated to be 75%, given that the rental rate charged is below market. If the tenant decides to renew their lease the rental rate will increase to $7.25 for a five-year term. If Evermore decides to terminate their tenancy, the rent will be changed to the market rate at $7.50. Assume all other income statement categories remain unaffected if tenancy changes. Operating expenses and real estate taxes for the building are $0.80 and $2.10 per square foot, respectively.

Market information indicates that operating expenses will increase 3% annually (as will their reimbursement), that the Management Fee for this type of asset is 2% of EGI, and that an appropriate replacement reserve is 1% of EGI. The building was purchased for $21,000,000 in September 2013, and the purchase was financed at that time with a mortgage of $14,000,000 amortized over 30 years at a rate of 4.8% compounded semi-annually. At the time of purchase, approximately 40% of the fair market value was associated with the land, and the land value has remained the same since that time. Because of maintenance completed on the building, the effective age is estimated to be 10 years, and the average life for this type of property is assumed to be 60 years.

The only maintenance that has been deferred is a $200,000 expense for a new roof. However, given the age of the property, the I.T. capacity is not competitive with newer buildings. The cost to upgrade the technology capabilities is $100,000. The average cost to building this space new is $110/SF. Each additional year of age is estimated to decrease value by 1%.

Please Complete a Cost approach to value, using excel when necessary. Thank You!