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 $$0\mathrm{.}25$ annually. So$,$ market rents start at $ $18\mathrm{.}10$ per square foot and increase each year by $$0\mathrm{.}25$ psf$.$ For example, if the market rate for Year $1$ is $$15\mathrm{.}00$ psf$,$ leases would be structured for $$15\mathrm{.}00$ flat for the term of the lease. The following year, leases would be structured at $$15\mathrm{.}25$ flat for the term, and so on$.$

Suite $100,$ comprising $4,600$ square feet, is leased to a computer hardware distributor on a five$-$year lease with three years left. The lease rate is $ $17\mathrm{.}60$ 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 $ $3\mathrm{.}00$ psf improvement allowance.

Suite $101,$ comprising $4,000$ square feet, is leased to an electronic reproduction firm on a seven$-$year lease at a flat rate of $ $18\mathrm{.}10$ per square foot per year. This lease has seven years left to run.

Suite $112$ has $5,000$ square feet and is vacant. It has been leased effective the first of the year at the projected market rate of $ $18\mathrm{.}10$ 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 $ $20\mathrm{.}00,$ all things considered. A new lease can be assumed to be for five years, and it will roll over at the market rate.

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 $ $17\mathrm{.}60$ 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 $ $17\mathrm{.}60$ per square foot per year. Assume renewal at then current market rate with $ $3$ psf improvement allowance.

Suite $210,$ comprising $2,500$ 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 $ $17\mathrm{.}60$ per square foot per year. Assume renewal at then current market rate with $ $3\mathrm{.}00$ psf improvement allowance.

Suite $215$ comprises $3,900$ 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 $ $18\mathrm{.}35$ per square foot per year. Assume renewal at then current market rate with $ $0$ 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 $40,000$ 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 $6.$ Use the attached picture as a reference $($don$\text{'}$t think I have the right answers$).$

Assume a $9\mathrm{.}5\%$ 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 $0.$