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 $56710$

Acres $14108\mathrm{.}7512\mathrm{.}5$

Number of Units $250200175250$

Units per acre $17\mathrm{.}920\mathrm{.}020\mathrm{.}020\mathrm{.}0$

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:

$1/1830/75/780820/60/770791/53/740775/75/750$

$1/1\mathrm{.}5850/50/810835/40/800810/35/780795/50/775$

$2/21,040/100/9601,030/80/9501,000/70/920970/110/900$

$3/21,270/25/1,1801,250/20/1,1701,200/18/1,1301,170/15/1,100$

Weighted average $962/\backslash$times $/898950/\backslash$times $/888925/\backslash$times $/864888\mathrm{.}5/\backslash$times $/842$

Rentable area $($SF$)224,500177,600150,130210,500$

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 $8\mathrm{.}778\mathrm{.}627\mathrm{.}88$

Net income $ $1,645,000$ $ $1,300,000$ $ $1,099,000$ $ $1,393,000$

Cap rate $0\mathrm{.}06500\mathrm{.}06610\mathrm{.}0663$

Weighted Average monthly rent$/$unit $ $962$ $ $950$ $ $918$ $ $889$

Rent per square feet $$12\mathrm{.}855$ $$12\mathrm{.}838$ $$12\mathrm{.}843$ $$12\mathrm{.}663$

Price per unit $ $100,000$ $ $95,000$ $ $84,000$

Price per square feet $ $112\mathrm{.}61$ $ $110\mathrm{.}74$ $ $99\mathrm{.}76$

Quality Excellent Very good Average Average

Location Excellent Desirable Desirable Slightly less desirable

Parking spaces per unit $2\mathrm{.}001\mathrm{.}751\mathrm{.}601\mathrm{.}50$

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 $0\mathrm{.}005$ 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?