The subject is a small, multitenant office building with six tenants and one vacant suite. Leases in this market are typically written for five years at a flat rate with the tenant paying the increases in expenses over a base year. The base year is established within the first year of the lease based on a percentage of total expenses divided by the tenant's percentage of space. These are all full- service leases. The market rents are increasing by $0.25 annually. So, market rents start at $ 18.40 per square foot and increase each year by $0.25 psf. For example, if the market rate for Year 1 is $15.00 psf, leases would be structured for $15.00 flat for the term of the lease. The following year, leases would be structured at $15.25 flat for the term, and so on. Suite 100, comprising 3,900 square feet, is leased to a computer hardware distributor on a five-year lease with three years left. The lease rate is $ 17.90 per square foot per year. There is a high likelihood of a renewal for another five years. Assume renewal at then current market rate with $ 3.00 psf improvement allowance. Suite 101, comprising 4,600 square feet, is leased to an electronic reproduction firm on a seven-year lease at a flat rate of $ 18.40 per square foot per year. This lease has seven years left to run. Suite 112 has 4,000 square feet and is vacant. It has been leased effective the first of the year at the projected market rate of $ 18.40 per square foot per year with standard finishing. This space is assumed to be of average finish at that rate. Tenant Improvements with average finish cost of $ 20.00, all things considered. A new lease can be assumed to be for five years, and it will roll over at the market rate. Note: This lease will expire in the Year 5, You will assume a renewal of this lease at typical renewal tenant improvements. Suite 114, comprising 5,000 square feet, is leased to a consumer products manufacturer on a five-year lease with only two years left to run. The lease rate is $ 17.90 per square foot per year. Assume renewal at then current market rate with $ 3 psf improvement allowance. Suite 205, comprising 5,000 square feet on the second floor, is leased to an auto manufacturer on a five- year lease with three years remaining at a flat rate of $ 17.90 per square foot per year. Assume renewal at then current market rate with $ 3 psf improvement allowance. Suite 210, comprising 5,000 square feet on the second floor, is leased to a real estate investment company for five years with two years left. The lease rate is $ 17.90 per square foot per year. Assume renewal at then current market rate with $ 3.00 psf improvement allowance. Suite 215 comprises 2,500 square feet on the second floor, and it is leased to a soft drink distributor for five years with only two years left. The lease rate is $ 18.65 per square foot per year. Assume renewal at then current market rate with $ O psf improvement allowance. Since the leases are flat rate for several years, there is a fairly large amount of pass-through income. The first year it should equal about 46,000 and increase by about 2% compounded each year. The market occupancy rate is currently 90% and estimated to remain stable throughout the hold period of 5 years. The collection loss is estimated at only 2% per year because of the quality of the tenants. Expenses are listed in the grid. Most are increasing by 3% per year. Tenant improvement assumptions are listed above. Leasing commissions are 5% on new leases and 2% on renewals. No other capital costs are required other than Tenant Improvements and Leasing Commissions. Assignment: Complete the attached Reconstructed Operating Statement through year 6. Assume a 9.5% Cap Rate for purposes of calculating Year 5 Sale Price and selling expenses of 5% of sale price. Using a required rate of return of 12%, calculate the price you should pay for the property in Year 0. SQ FT Leased Rate Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Tenant Market Rate by Year Suite 100 Suite 101 Suite 112 Suite 114 Suite 205 Suite 210 Suite 215 Totals 30,000 0 Other pass throughs Potential Gross Income Vacancy Loss Collection Loss Total vacancy and Collection Loss Effective Gross Income OPERATING EXPENSES: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 1 Unit Costs 1.5/occ sf 5% of EGI $0.50 $1.25 $0.75 1.25/0cc sf $0.38 All utilities Mangement Expense Maintenance Salary Taxes, Insurance, and licenses Maintenance Contract Cleaning Supplies Total expenses from Operations Operating Expenses psf Build Out and Leasing Expenses Tenant Improvements Leasing Commissions Capital Replacements Total Capital Capital PSF Total All Expenses All expenses PSF Income Overall (NOI) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Reversion assuming Terminal Cap Rate provided less selling expenses Cashflows including Reversion NPV at Rate provided (Purchase Price) The subject is a small, multitenant office building with six tenants and one vacant suite. Leases in this market are typically written for five years at a flat rate with the tenant paying the increases in expenses over a base year. The base year is established within the first year of the lease based on a percentage of total expenses divided by the tenant's percentage of space. These are all full- service leases. The market rents are increasing by $0.25 annually. So, market rents start at $ 18.40 per square foot and increase each year by $0.25 psf. For example, if the market rate for Year 1 is $15.00 psf, leases would be structured for $15.00 flat for the term of the lease. The following year, leases would be structured at $15.25 flat for the term, and so on. Suite 100, comprising 3,900 square feet, is leased to a computer hardware distributor on a five-year lease with three years left. The lease rate is $ 17.90 per square foot per year. There is a high likelihood of a renewal for another five years. Assume renewal at then current market rate with $ 3.00 psf improvement allowance. Suite 101, comprising 4,600 square feet, is leased to an electronic reproduction firm on a seven-year lease at a flat rate of $ 18.40 per square foot per year. This lease has seven years left to run. Suite 112 has 4,000 square feet and is vacant. It has been leased effective the first of the year at the projected market rate of $ 18.40 per square foot per year with standard finishing. This space is assumed to be of average finish at that rate. Tenant Improvements with average finish cost of $ 20.00, all things considered. A new lease can be assumed to be for five years, and it will roll over at the market rate. Note: This lease will expire in the Year 5, You will assume a renewal of this lease at typical renewal tenant improvements. Suite 114, comprising 5,000 square feet, is leased to a consumer products manufacturer on a five-year lease with only two years left to run. The lease rate is $ 17.90 per square foot per year. Assume renewal at then current market rate with $ 3 psf improvement allowance. Suite 205, comprising 5,000 square feet on the second floor, is leased to an auto manufacturer on a five- year lease with three years remaining at a flat rate of $ 17.90 per square foot per year. Assume renewal at then current market rate with $ 3 psf improvement allowance. Suite 210, comprising 5,000 square feet on the second floor, is leased to a real estate investment company for five years with two years left. The lease rate is $ 17.90 per square foot per year. Assume renewal at then current market rate with $ 3.00 psf improvement allowance. Suite 215 comprises 2,500 square feet on the second floor, and it is leased to a soft drink distributor for five years with only two years left. The lease rate is $ 18.65 per square foot per year. Assume renewal at then current market rate with $ O psf improvement allowance. Since the leases are flat rate for several years, there is a fairly large amount of pass-through income. The first year it should equal about 46,000 and increase by about 2% compounded each year. The market occupancy rate is currently 90% and estimated to remain stable throughout the hold period of 5 years. The collection loss is estimated at only 2% per year because of the quality of the tenants. Expenses are listed in the grid. Most are increasing by 3% per year. Tenant improvement assumptions are listed above. Leasing commissions are 5% on new leases and 2% on renewals. No other capital costs are required other than Tenant Improvements and Leasing Commissions. Assignment: Complete the attached Reconstructed Operating Statement through year 6. Assume a 9.5% Cap Rate for purposes of calculating Year 5 Sale Price and selling expenses of 5% of sale price. Using a required rate of return of 12%, calculate the price you should pay for the property in Year 0. SQ FT Leased Rate Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Tenant Market Rate by Year Suite 100 Suite 101 Suite 112 Suite 114 Suite 205 Suite 210 Suite 215 Totals 30,000 0 Other pass throughs Potential Gross Income Vacancy Loss Collection Loss Total vacancy and Collection Loss Effective Gross Income OPERATING EXPENSES: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 1 Unit Costs 1.5/occ sf 5% of EGI $0.50 $1.25 $0.75 1.25/0cc sf $0.38 All utilities Mangement Expense Maintenance Salary Taxes, Insurance, and licenses Maintenance Contract Cleaning Supplies Total expenses from Operations Operating Expenses psf Build Out and Leasing Expenses Tenant Improvements Leasing Commissions Capital Replacements Total Capital Capital PSF Total All Expenses All expenses PSF Income Overall (NOI) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Reversion assuming Terminal Cap Rate provided less selling expenses Cashflows including Reversion NPV at Rate provided (Purchase Price)