Kuehner estimates that it can lease Parker Road Plaza for $19.00 per square foot (GLA) base rent with a 3 percent overage on gross sales in excess of $200 per square foot (GLA). The company expects rents to increase by 5 percent per year during the lease period and tenant reimbursements to run $8 per square foot (GLA) and to increase at the same rate as rents. Kuehner expects to have the shopping center 70 percent leased during the first year of operation After that, vacancies should average about 5 percent per year. The vacancy losses should be cal-culated on the entire gross potential income, which includes minimum rents, percentage rents and tenant reimbursements. Sales, which are expected to average $220 per square foot (GLA) for the first year of operation, should grow at 6 percent per year. The operating expenses are expected to average $14 per square foot of GLA for the first year and will increase at the same rate as the rents. Kuehner will collect an additional 5 percent of EGI as an annual management fee. The final sales price is expected to be $19.9 million and Kuehner will incur sales expenses of 2 percent. Two schedules provide necessary information about this phase of the project:

1. What cash flows would Kuehner Development Co. earn before and after taxes for Parker Road Plaza if it were operated for five years (assuming the marginal tax rate to be 35% for ordinary income, 20% capital gains, and 25% for depreciation recapture)?

2. What cash flows will Kuehner realize before and after taxes from the sale of the project after five years?

3. Assuming that Kuehner's before-tax required rate of return is 16 percent, should the company develop Parker Road Plaza? Also determine BTNPV and BTIRR.

 

 

1. You are an employee of University Investment Consultants, Ltd. and have been given
the following assignment. You are to present an investment analysis 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 70 percent loan can be obtained at 11 percent interest for 30 years. 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.

. 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

2. (Extension of problem 2) You are still an employee of University Consultants, Ltd. The investor tells you that she would also like to know how tax considerations affect your investment analysis. You determined that the building represents 90 percent of value and would be depreciated over 39 years (use 1/39 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 loans from this activity would not be subject to any passive activity loss limitations. Capital gains from price appreciation will be taxed at 20 percent and depreciation recapture will be taxed at 25 percent.

a. What is the investor’s expected after tax internal rate of return on equity invested (ATIRR)? How does this compare with the before tax IRR (BTIRR) calculated earlier?

b. What is the effective tax rate and before-tax equivalent yield?

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

d. Recalculate the ATIRR in part (a) under the assumption that the investor cannot deduct any of the passive losses (they all become suspended) until the property is sold after five

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?

As an owner of Bawasil Investment Company, you are considering the purchase of land that could be developed into an office project. At the present time, you believe that the site could support a 150,000 rentable square foot project with average rents of OMR25 per square foot and operating expenses of OMR13 per square foot. You also expect rents to grow at 5% indefinitely and believe that you should earn a 14% return (r) on investment. The building would cost OMR100 per square foot to build.

1- What would the estimated property value and land value be under the above assumptions?

2) Suppose you are also considering using the site as a retail building instead of an office building. The building costs will remain the same, i.e. OMR100 per square foot. However, given the different use of the site, you believe that the 150,000 rentable square foot site will have average rents of OMR27 per square foot and operating expenses of OMR18 per square foot. In this case, you expect the rents on the retail building to grow at 8% indefinitely and you still believe that you should earn a 14% return (r) on investment. What would the estimated property value and land value be under the above assumptions?

3) Given the highest and best use of the land in parts (a) and (b), what type of property will you consider: i.e. office or retail? Why?

4) Suppose the land owner is asking OMR8,000,000 for the land. Under the assumptions in part (a), would this project be feasible? Why?

5) If the land owner insists and the land must be acquired for OMR8,000,000, returning to the assumptions in part (a), how much of a change in the following would have to occur to make the project feasible? (Consider each item below one at a time and hold all other variables constant).

a) Expected return on investment (r). What does this imply?

b) Expected growth (g) in cash flows. What does this imply?

c) Building cost. What does this imply?

d) Rents. What does this imply?