Zenith Investment Company is considering the purchase of an office property. It has done an extensive market analysis and has estimated that based on current market supply/demand relationship, rent, and its estimate of operating expenses, annual NOI will be as follows

year NOI

1- $1,000,000

2- $1,000,000

3- $1,000,000

4- $1,200,000

5- $1,250,000

6- $1,300,000

7- $1,339,000

8- $1,379,170

A market that is currently oversupplied is expected to result in cash flows remaining flat for the next three years at $1,000,000. During years 4, 5, 6, market rents are expected to be higher. It is further expected that beginning in year 7 and every year thereafter, NOI will tent to reflect a stable, balanced market and should grow at 3 percent per year indefinitely. Zenith believes that investors should earn a 12 percent return (r) on an investment of this kind.

a. Assuming that the investment is expected to produce NOI in years 1-8 and is expected to be owned for seven years and then sold, what would be the value for this property today? (Hint: begun by estimating the reversion value at then end kf year 7. Recall the expected IRP =12% and the growth (g) in year 8 and beyond is estimated to remain level at 3%.)

b. What would be the terminal capitalization rate (RT) be at the end of year 7?

c What would the going-in capitalization rate (R) be based on year 1 NOI?

d. What explains the difference between the going-in and terminal cap rates?

1. Zenith Investment Company is considering the purchase of an office property. It has done an extensive market analysis and has estimated that based on current market supply/demand relationships, rents, and its estimate of operating expenses, annual NOI will be as follows: Year NOI 1 $1,000,000 2 1,000,000 3 1,000,000 4 1.200,000 5 1,250,000 6 1,300,000 7 1,339,000 8 1,379,170 A market that is currently oversupplied is expected to result in cash flows remaining flat for the next three years at $1,000,000 During years 4, 5, and 6, market rents are expected to be higher. It is further expected that boginning in year 7 and every year thereafter, Nol will tend to reflect a stable, balanced market and should grow at 3 percent per year indefinitely, Zenith believes that investors should earn a 12 percent retum () on an investment of this kind a. Assuming that the investment is expected to produce NO in years 1-8 and is expected to be owned for seven years and then sold, what would be the value for this property today? (Hint: Begin by estimating the reversion value at the end of year 7. Recall that the expected IRP = 12% and the growth rate C) in year 8 and beyond is estimated to remain level at 3) b. What would the terminal capitalization rate (R) be at the end of year 79 b. What would the terminal capitalization rate (Rt) be at the end of year 7? c. What would the going-in capitalization rate (R) be based on year 1 NOI? d. What explains the difference between the going-in and terminal cap rates? Arme proiect