You are an employee f University Consultants, Ltd., and have been given the following assignment. You are to present an investment of a new small residential income-producing property for sale to a potential Investor. The asking price for the property is $1,250,000; rents are estimated at $200,000 during the first year and are expected to grow at 3 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A fully amortizing 70 percent loan can be obtained at 11 percent interest for 30 years (total annual payments will be monthly payments 12). The property is expected to appreciate in value at 3 percent per year and is expected to be owned for five years and then sold

Task 1: Concepts and techniques important in the analysis of real estate income property

(a) What is the first year debt coverage ratio?

(b) What is the terminal capitalization rate?

(c) What is the investor's expected before tax internal rate of return on equity invested (BTIRR)?

RRR -14-1

id) What is the NPV using a 14 percent discount rate? What does this mean? (e) What is the profitability index using a 14 percent discount rate? What does this mean?

Task 2: How taxes affect the value of real estate versus other investments

You are still an employee of University Consultants, Ltd. The investor tells you she would like to know how tax considerations affect your investment analysis. You determine that the building represents 90 percent of value and would be depreciated over 27.5 years-fuse 1/27.5 per year). The potential investor indicates that she is in the 36 percent tax bracket and has enough passive income from other activities so that any passive losses from this activity would not be subject to passive activity loss limitations Capital gains from price appreciation will be taxed at 20 percent and depreciation recapture will be taxed at 25 percent. fullered te all

(a) What is the investor's expected after-tax internal rate of return on equity invested (ATIRR)?142

(b) How does (a) above compare with the before-tax IRR (STIRR) calculated in Task 17

(c) How would you evaluate the tax benefits of this investment?

Elena Martinez is thinking about investing in some residential income producing property that she can purchase for $200,000. Elena can either pay cash for the full amount of the property or put up $50,000 of her own money and borrow the remaining $150,000 at 8 percent interest. The property is expected to generate $30,000 per year after all expences but before interest and income taxes. Assume Elena is in the 28% tax bracket. Calculate her annual profit and return on investment assuming that she (a) pays the full $200,000 from her own funds or (b) borrows $150,000 at 8 percent. then discuss, if any, of leverage on her rate of return.

A Local 20,000 square foot retail building is 100% occupied by a single tenant. The lease started last week and continues for 10 years. The rent is $7.00 per square foot per year. The landlord pays all the expenses associated with the building. The expenses total $2.00 per square foot per year, and we have determined that they are market-oriented. From a market survey, it is our opinion that 5% is a reasonable vacancy allowance and 2% is a reasonable allowance for collection loss. The market expects a 9% return on investment (overall rate) for investments like this.

1. The potential gross income of the property?

2. The effective gross income of the property?

3. The total expenses are:

4. The net operating income of the property?

5. What is the value of the property using the direct capitalization method of the income capitalization approach?

You have been asked to evaluate the following two schools of thought in real estate. One school argues that the value of real estate is based on “location, location, location”; the other school argues that the value of real in today’s economy must be geared in terms of cash flows. Discuss these two arguments thoroughly!! (Length: no limit

; 15%)

A property produces a PGI of $200,000. Market vacancy rate is estimated at 5%.

The OER is 40% which is also indicative of the market. For this type of property, lenders observe a strict adherence to a coverage ratio (DCR) of 1.20.

Financing is available at 5% with monthly payments for 30 years. The anticipated growth in NOI is 3% per year, compounded: and property value appreciation rate is 4% per year, compounded over 5 year holding period. Assuming a before-tax equity yield requirement of 12%, price (or value) this property on BTCF basis utilizing the Discounted Cash Flow (mortgage equity) framework.(20%)

An investor is considering an investment that has a Market Value of $2.5millions. The following information can be obtained:

Rent = $1,200 per unit per month. Rental Growth Rate = 3% per year compounded.

Number of units = 20

Vacancy rate is 12%.

Operating expenses = $125,000. Operating Expense Growth Rate = 3% per year compounded.

Loan-to-value ratio is 80%.

Interest rate on mortgage is 6%.

Maturity of mortgage = 15 years (with monthly payments).

Financing Costs = $30,000 amortized over life of the mortgage.

Depreciable basis = 75 percent of total cost

Depreciable life = 27.5 years (use 25% max for DEPR tax and 15% for CG tax)

Expected appreciation rate = 3% per year, compounded.

Anticipated Holding period = 5 years

The marginal tax rate of investor is 34%.

Expected Selling Expenses = 6%.

Required after-tax Return on Equity = 8%.

Calculate the NPV and IRR for the project on after-tax basis. (40%)

Calculate the following rules of thumb: Potential Gross Income Multiplier (PGIM); Capitalization Rate(R), Operating Expense Ratio (OER), Equity Dividend Rate (EDR); and Debt Coverage Ratio (DCR); and Brokers’ Rate of

Return for the project. (15%)

Based on the results on (a) and (b), above, will you recommend this project to the equity investor (your client)? Why? How about if your client were to be a mortgage lender, will you still recommend this project to your lender client? Why? (7%)

How are property managers potentially able to enhance value? (3%)