The Sated Satyr Apartments Reconstructed Operating Statement

Potential Gross Rent (30 Units, at $860 per month) $ 309,600

Less: Allowance for Vacancies (7 percent) 21,672

Plus: Other Income (Laundry and vending Machines) 7,500

Effective Gross Income $ 295,428

Less: Operating Expenses: Management Fee (5% of effective gross income) $ 14,771

Resident Manager (Salary Plus Free Rent) 20,320

Utilities 1,140

Property Insurance 11,700

Workers' Compensation Insurance 140

Supplies and Miscellaneous (.0025 X $299,250) 748

Landscaping and Grounds Maintenance 3,300

Maintenance and Repairs 7,800

Property Tax 76,374 136,293

Net Operating Income (Annual) $ 159,135

a. Based on the reconstructed net operating income and the current market value, determine the capitalization rate.

b. Develop a five-year forecast of net operating income for the Sated Satyr Apartments, incorporating the following assumptions: 1) Potential gross rent and miscellaneous other income will grow at 2.25 percent per annum over the forecast period. 2) Vacancies in the market area will remain constant over the forecast period. 3) Operating expenses other than management fees and property taxes will grow at 2.25 percent per annum over the forecast period. 4) Management fees as a percent of effective gross income will remain constant over the forecast period. 5) Property taxes are expected to increase to $80,048 in the third year of the forecast.

c. Develop a 5-year amortization schedule for Sated Satyr Apartments assuming that Benedict can obtain a $1,500,000 loan with terms of interest at 8.5 percent per annum and level annual payments to amortize the loan over 20 years.4 There are no points or loan amortization fees anticipated.

d. With information from (b) and (c) above, calculate the BTCFs for each of the 5 year holding period.

e. Using the capitalization rate arrived at in (a), assuming that it will remain constant over the holding period, estimate the propertys market value at the end of the 5 year holding period. Assuming that transaction costs (brokerage, legal and accounting fees, and so forth) equal 8 percent of the sales price, determine the BTER from the sale of the property.

f. Using the information from (d) and (e) and the following assumptions, we next need to arrive at the ATCFs (from operation) and the ATER (from reversion). We can assume: 1) Eighty percent of the purchase price is attributed to the buildings 2) The taxpayer is in the 40 percent marginal income tax bracket and will incur no liability for the alternative minimum tax during the projected holding period. 3) It is assumed that the property is put into service on January 1st and sold on December 31st 4) Assume the client is "active" in the property management. 5) It is assumed that the client has an adjusted gross income of $95,000 and has no other passive income not offset by other passive losses (for each year of the anticipated holding period).