You are an analyst with Perception Partners and have been asked to make pricing recommendations regarding the acquisition of Rose Garden Apartments. This project was built five years ago and contains 250 units in a suburban market area. The broker that brought the project to your attention indicates that the asking price will be $27,000,000. She has also provided the attached information based on a market survey showing data from three sales of comparable apartment properties that have occurred in a one-mile radius of Rose Garden during the past six months (see table below).

	Rose Garden	Comparable 1	Comparable 2	Comparable 3
Age	5	6	7	10
Acres	14	10	8.75	12.5
Number of Units	250	200	175	250
Units per acre	17.9	20.0	20.0	20.0
Price		$ 20,000,000	$ 16,625,000	$ 21,000,000
Bedroom / Bathroom:	$ Rent / Number of Units / SF:	$ Rent / Number of Units / SF:	$ Rent / Number of Units / SF:	$ Rent / Number of Units / SF:
1 / 1	830 / 75 / 780	820 / 60 / 770	791 / 53 / 740	775 / 75 / 750
1 / 1.5	850 / 50 / 810	835 / 40 / 800	810 / 35 / 780	795 / 50 / 775
2 / 2	1,040 / 100 / 960	1,030 / 80 / 950	1,000 / 70 / 920	970 / 110 / 900
3 / 2	1,270 / 25 / 1,180	1,250 / 20 / 1,170	1,200 / 18 / 1,130	1,170 / 15 / 1,100
Weighted average	962 / / 898	950 / / 888	925 / / 864	888.5 / / 842
Rentable area (SF)	224,500	177,600	150,130	210,500
Vacancy	5%	5%	5%	5%
Operating expense	40%	40%	40%	45%
Gross rent	$ 2,886,000	$ 2,280,000	$ 1,928,076	$ 2,665,500
GIM		8.77	8.62	7.88
Net income	$ 1,654,000	$ 1,300,000	$ 1,099,000	$ 1,393,000
Cap rate		0.0650	0.0661	0.0663
Weighted Average monthly rent/unit	$ 962	$ 950	$ 918	$ 889
Rent per square feet	$12.855	$12.838	$12.843	$12.663
Price per unit		$ 100,000	$ 95,000	$ 84,000
Price per square feet		$ 112.61	$ 110.74	$ 99.76
Quality	Excellent	Very good	Average	Average
Location	Excellent	Desirable	Desirable	Slightly less desirable
Parking spaces per unit	2.00	1.75	1.60	1.50
Security gate	Yes	Yes	Yes	No
Washer/dryer	Yes	Yes	Yes	Not in 1 / 1
A/C	Yes	Yes	Yes	Yes
Built-ins	Yes	Yes	Yes	Yes
Covered parking	Yes	Yes	No	No
Free cable TV	No	No	Yes	Yes
Fireplaces	No	No	Yes	No
Exercise room	No	No	No	Yes
Swimming pool/BBQ	Yes	Yes	Yes	Yes

Perception believes that market returns (IRR) should be in a range of 8 percent (compounded annually) for this type of investment. Perception (1) plans to own the property for five years and then sell it and (2) believes that rents will grow at 3 percent per year.

Required:

a. Should Rose Garden have a lower going-in cap rate than all other comparables?

b. If Rose Garden is acquired for $27,000,000, what would be the going-in cap rate at that price? How does this compare to cap rates for the comparables? What do you think may account for any differences?

c. Perception believes that the sale price that it hopes to achieve at the end of year 5 should be based on the going-out, or terminal, cap rate that will be 0.005 greater than the going-in cap rate. If Rose Garden is acquired for $27,000,000, would the 8 percent required return be achieved over the five-year period of ownership?