Valuing Commercial Real Estate BuildingOne Properties is a limited partnership formed with the express purpose of investing in commercial real estate. The firm is currently considering the acquisition of an office building that we refer to simply as building B. Building B is very similar to building A, which recently sold for $36,960,000. BuildingOne has gathered general information about the two buildings, including valuation information for building A A B Per Square Foot Total Square Footage A B Building size (sq. ft.) 80,000 90,000 Rent $100/sq. 11. $120/sq. ft. $8,000,000 $10,800,000 Maintenance (fixed cost) (23)/sq. ft. (30)/sq. ft. (1.840,000) (2,700,000) Net operating income $ 77/sq. ft. $ 90/sq. ft. $6,160,000 $ 8,100,000 Buildings A and B are similar in size (80,000 and 90,000 square feet, respectively). However, the two buildings differ both in maintenance costs ($23 and $30 per square foot) and rental rates ($100 versus $120 per square foot). At this point, we do not know why these differences exist Nonetheless, the differences are real and should somehow be accounted for in the analysis of the value of building B using data based on the sale of building A Building A sold for $462 per square foot, or $36,960,000. This reflects a sales multiple of six times the building's net operating income (NOI) of $6,160,000 per year and a capitalization rate of 16 67% a. Using the multiple of operating income, determine what value BuildingOne should place on building B. b. If the risk-free rate of interest is 5,5% and the building maintenance costs are known with a high degree of certainty, what value should BuildingOne place on building B's maintenance costs? How much value should Building one place on building B's revenues and consequently, on the firm? 3 Given Per Square Foot B Total Square Footage B 80.000 90,000 8,000,000 $ 10,800,000 (1 840,000) 2,700 000) 6.160,000 $ 8,100,000 = Value Formula Qualitat Goal Se - Crystal = Crystal $ 100 $ (23) 77 $ 120 $ (309 90 $ $ 4 5 6 7 Bulding size (SI) B Rent 9 Maintenance (med cost) 10 Net Operating Income 11 12 % Change in NOI 13 Selling Price Information 14 Sales multiple for NO ft 15 Catalization rate (t/Sales multiple) 10 Estimated property value 17 B B 2 2 5 1057 42 ? 2 2 6 10 67 36.000.000 ? Solution 11 19 a Wb Per Square Foot B Total Square Footage 55 55% 5.5% 5.5% 22 23 Alternative Valuation Procedure 24 Rick free rate 25 Implied value of maintenance costs 20 pled revenue Value 27 Impled revenue multiple 20 Impled revenue caprate 2a Property van 30 Implied multiple 31 Impled caprate 32 33 34 Change in Revenues 35 Reven 36 Mainterunced cost) 37 Net Operating Income 38 30 Change in Revenues 0 Change in NOI 41 Building B Building A 0% 20% 20% 0 20% 2099 (1 840 000) (1.840.000) (1.840,000) 12,700 000) (2.700.000) (2700 000) 000" 2000 200 20 00 0.00% 20.00% Valuing Commercial Real Estate BuildingOne Properties is a limited partnership formed with the express purpose of investing in commercial real estate. The firm is currently considering the acquisition of an office building that we refer to simply as building B. Building B is very similar to building A, which recently sold for $36,960,000. BuildingOne has gathered general information about the two buildings, including valuation information for building A A B Per Square Foot Total Square Footage A B Building size (sq. ft.) 80,000 90,000 Rent $100/sq. 11. $120/sq. ft. $8,000,000 $10,800,000 Maintenance (fixed cost) (23)/sq. ft. (30)/sq. ft. (1.840,000) (2,700,000) Net operating income $ 77/sq. ft. $ 90/sq. ft. $6,160,000 $ 8,100,000 Buildings A and B are similar in size (80,000 and 90,000 square feet, respectively). However, the two buildings differ both in maintenance costs ($23 and $30 per square foot) and rental rates ($100 versus $120 per square foot). At this point, we do not know why these differences exist Nonetheless, the differences are real and should somehow be accounted for in the analysis of the value of building B using data based on the sale of building A Building A sold for $462 per square foot, or $36,960,000. This reflects a sales multiple of six times the building's net operating income (NOI) of $6,160,000 per year and a capitalization rate of 16 67% a. Using the multiple of operating income, determine what value BuildingOne should place on building B. b. If the risk-free rate of interest is 5,5% and the building maintenance costs are known with a high degree of certainty, what value should BuildingOne place on building B's maintenance costs? How much value should Building one place on building B's revenues and consequently, on the firm? 3 Given Per Square Foot B Total Square Footage B 80.000 90,000 8,000,000 $ 10,800,000 (1 840,000) 2,700 000) 6.160,000 $ 8,100,000 = Value Formula Qualitat Goal Se - Crystal = Crystal $ 100 $ (23) 77 $ 120 $ (309 90 $ $ 4 5 6 7 Bulding size (SI) B Rent 9 Maintenance (med cost) 10 Net Operating Income 11 12 % Change in NOI 13 Selling Price Information 14 Sales multiple for NO ft 15 Catalization rate (t/Sales multiple) 10 Estimated property value 17 B B 2 2 5 1057 42 ? 2 2 6 10 67 36.000.000 ? Solution 11 19 a Wb Per Square Foot B Total Square Footage 55 55% 5.5% 5.5% 22 23 Alternative Valuation Procedure 24 Rick free rate 25 Implied value of maintenance costs 20 pled revenue Value 27 Impled revenue multiple 20 Impled revenue caprate 2a Property van 30 Implied multiple 31 Impled caprate 32 33 34 Change in Revenues 35 Reven 36 Mainterunced cost) 37 Net Operating Income 38 30 Change in Revenues 0 Change in NOI 41 Building B Building A 0% 20% 20% 0 20% 2099 (1 840 000) (1.840.000) (1.840,000) 12,700 000) (2.700.000) (2700 000) 000" 2000 200 20 00 0.00% 20.00%