Tutorial 6

FIJI NATIONAL UNIVERSITY
DEPARTMENT OF BANKING AND FINANCE

FIN704 REAL ESTATE AND PROPERTY ANALYSIS
TRIMESTER III 2018
TUTORIAL 6
1. Data for five comparable income properties that sold recently are shown below:
Property NOI Sale Price Overall Rate
A $ 57,800 $ 566,600 0.1020
B 49,200 496,900 0.0990
C 63,000 630,000 0.1000
D 56,000 538,500 0.1040
E 58,500 600,000 0.0975
What is the indicated overall rate (RO)?
2. Why is the market value of real estate determined partly by the lender’s requirements and partly
by the requirements of equity investors?
3. You are asked to appraise a vacant parcel of land. Your analysis shows that if apartments were
constructed, the portion of the NOI attributable to the land would be $30,000 per year. If offices
were constructed, the portion attributable to land would be $25,000, and the portion contributed
by a small neighborhood shopping center would be $27,500. All of these uses would be legal. If
the appropriate RL is 0.105 (10.5%), what is the value of the site?
4. Given the following owner’s income and

expense estimates for an apartment property,
formulate a reconstructed operating
statement. The building consists of 10 units
that could rent for $550 per month each.
Estimating vacancy and collection losses at 5

percent of potential gross income, reconstruct the
operating statement to obtain an estimate of NOI.
Remember, there may be items in the owner’s
statement that should not be included in the
reconstructed operating statement.
Using the NOI and a Ro of 11.0 percent, calculate the property’s indicated market value. Round your
answer to the nearest $500.
5. You have been asked to estimate the market value of an apartment complex that is producing
annual net operating income of $44,500. Four highly similar and competitive apartment properties
within two blocks of the subject property have sold in the past three months. All four offer
essentially the same amenities and services as the subject. All were open-market transactions with
similar terms of sale. All were financed with 30-year fixed-rate mortgages using 70 percent debt and
30 percent equity. The sale prices and estimated first-year net operating incomes were as follows:
Comparable 1: Sale price $500,000; NOI $55,000

What is the indicated value of the property using direct capitalization?
6. You are estimating the value of a small office building. Suppose the estimated NOI for the first year
of operations is $100,000.
a. If you expect that NOI will remain constant at $100,000 over the next 50 years and that the
office building will have no value at the end of 50 years, what is the present value of the building
assuming a 12.2% discount rate? If you pay this amount, what is the indicated initial cap rate?
b. If you expect that NOI will remain constant at $100,000 forever, what is the value of the building
assuming a 12.2% discount rate? If you pay this amount, what is the indicated initial cap rate?
c. If you expect the initial $100,000 NOI will grow forever at a 3% annual rate, what is the value of
the building assuming a 12.2% discount rate? If you pay this amount, what is the indicated initial
cap rate?
7. Describe the conditions under which the use of gross income multipliers to value the subject
property is appropriate.
8. In what situations or for which types of properties might discounted cash flow analysis be preferred
to direct capitalization?
9. What is the difference between contract rent and market rent? Why is this distinction more
important for investors purchasing existing office buildings than for investors purchasing existing
apartment complexes?
10. Estimate the market value of the following small office building. The property has 10,500 square
feet of leasable space that was leased to a single tenant on January 1, four years ago. Terms of the
lease call for rent payments of $9,525 per month for the first five years, and rent payments of
$11,325 per month for the next five years. The tenant must pay all operating expenses.
During the remaining term of the lease, there will be no vacancy and collection losses; however,
upon termination of the lease it is expected that the property will be vacant for three months. When
the property is released under short-term leases, with tenants paying all operating expenses, a
vacancy and collection loss allowance of 8 percent per year is anticipated.
The current market rental for properties of this type under triple net leases is $11 per square foot,
and this rate has been increasing at a rate of 3 percent per year. The market discount rate for similar
properties is about 11 percent, the "going-in" cap rate is about 9 percent, and terminal cap rates
are typically 1 percentage point above going-in cap rates.
Prepare a spreadsheet showing the rental income, expense reimbursements, NOIs, and the net
proceeds from the sale of the property at the end of an 8-year holding period. Then use the
information provided to estimate the market value of the property.
11. A 50 unit apartment building and lot are being appraised. The 30 two-bedroom units rent for $600
and the 20 one-bedroom units rent for $475 monthly, which rent is comparable to market rent in
the area. Vacancy and collection losses are estimated to be 5% of potential gross income. The
parking structure and laundry facility contribute an additional estimated $1,200 income per month.
What is the property’s (land and building) total estimated annual effective gross income?
The owner’s operating statement shows the following annual expenses:

FIXED EXPENSES
Real Property Taxes 31,500
Insurance 2,200
License 200
Capital Improvements 22,000
Depreciation 10,000 65,900
VARIABLE EXPENSES
Water 9,000
Gas and Electricity 6,000
Pool Service 4,800
Gardening Maintenance 1,200
Entertainment Expenses 750
Building Maintenance 10,000
Resident Manager Salary 12,000
Refuse Service 1,200 44,950
RESERVES FOR REPLACEMENTS
Appliances, carpets, drapes 6,000
Building components 4,000 10,000
TOTAL EXPENSES 120,850
After reconstructing owner’s statement (determining proper allowable expense items), what is
property’s annual estimated net income?
The appraiser determined a proper overall capitalization rate for the above property is 9.5%. What
is the estimated property value?
Question 12
Question 13

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FIJI NATIONAL UNIVERSITY

DEPARTMENT OF BANKING AND FINANCE

4. Given the following owner’s income and

Estimating vacancy and collection losses at 5

Comparable 1: Sale price $500,000; NOI $55,000

What is the indicated value of the property using direct capitalization?

The owner’s operating statement shows the following annual expenses:

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