1. Real Estate
Build a model to buy a piece of commercial real estate with the following parameters:
Square Footage: 38,738
|Lease Year||Annual Base Rent||PSF|
|7/1/13 – 6/30/18||$582,890.00||$15.07|
|7/1/18 – 6/30/23 (Option #1)||$641,180.00||$16.57|
|7/1/23 – 6/30/28 (Option #2)||$705,289.00||$18.23|
|7/1/28 – 6/30/33 (Option #3)||$775,828.00||$20.05|
|7/1/33 – 6/30/38 (Option #4)||$853,411.00||$22.06|
|7/1/38 – 6/30/43 (Option #5)||$938,752.00||$24.26|
Operating Costs: The rent is triple net, which means that the tenant is on the hook for the expenses of the building. The building owner will pay the expenses, however the tenant will reimburse the landlord. The definition of gross revenue, however, should include $2.55 per square foot of cost reimbursement from the tenant to landlord.
Operating Cost Escalators – This $2.55 per foot is an annual expense that will grow at 2.5% per year, each year.
Vacancy Rate: 0%
Operating Expenses are Real Estate Taxes and Property Management Fees
Real Estate Taxes are the $2.55/ft described above, escalating at the same rate.
Property Management Fees: 3% of gross rents.
Net Operating Income (“NOI”) is Gross Revenue minus Operating Expenses
Non-operating expenses – These will be 19.36 cents per square foot and are also thought to grow at 2.5% per year.
Project out the cashflows over the next 10 years.
The property is for sale at a 7.4% cap rate, which is a current yield based on Net Operating Income. Additionally, closing costs are projected to be $2.77 per square foot. What is the price implied by the $7.4% cap rate?
What amounts would we have to pay, to buy it at a yield of 4%, 6%, 8%, 10%, and 12%? Plot these yields and dollar amounts on a scatter chart.
In ten years, you forsee selling the property for $9,243,303.
What is the IRR that this future selling price implies? What would the IRR be if we sold it for our cost?