question archive A Northern California real estate company is considering diversifying its real estate portfolio and buying a 5-year old office building in Upland
A Northern California real estate company is considering diversifying its real estate portfolio and buying a 5-year old office building in Upland
Subject:FinancePrice: Bought3
A Northern California real estate company is considering diversifying its real estate portfolio and buying a 5-year old office building in Upland. It did a thorough study of the market and the leases that are in place. The company estimates that next year’s net operating income will be $100,000. Its projections allow it to estimate that after the first year the annual net operating income will be rising by $8,000 each year for the following 5 years, after which it is expected to grow by 8 percent per year for a few years in the foreseeable future. It plans to own the property for 8 years and then sell it at a price determined using information on all applicable (How many from the list below?? That’s something you need to figure out!!) comparable properties’ terminal cap rates. The chosen comps will all be considered equally important in determining the subject property’s expected terminal value. The company requires a 15% return on this investment. Below is the information on seven office buildings with similar features and amenities that recently sold in Upland and surrounding area.
First, under each of the below seven recently sold buildings' information put YES if it should be treated as a comp, and NO otherwise.
| Bldg #1 | Bldg #2 | Bldg #3 | Bldg #4 | Bldg #5 | Bldg #6 | Bldg #7 | |
| Recent sale price | #1,300,000 | $1,000,000 | $1,200,000 | $900,000 | $1,200,000 | $1,100,000 | $1,000,000 |
| Arm's length transaction? | no | yes | yes | yes | yes | yes | no |
| NOI in the coming year | $80,000 | $110,000 | $120,000 | $100,000 | $90,000 | $120,000 | $110,000 |
| Other info | 5 years old | 13 years old | Previously sold three years ago to its second owner as a 10-year old building | 8 years old | Built in October 2008 | Will be a 13-year old building in a couple weeks | Twice as old as the subject property |
| Comp? |
If you can, do the math in Excel with correct referencing to cells with intermediate results. This will allow you to avoid rounding errors. Otherwise, increase decimal places - the more the better! Say, 6 or even higher.
Calculate the company's estimated future net operating incomes for the entire holding period. Round to whole dollar. Don't use the "$" sign.
| Year | estimated NOI |
| Year 1 | $ |
| Year 2 | $ |
| Year 3 | $ |
| Year 4 | $ |
| Year 5 | $ |
| Year 6 | $ |
| Year 7 | $ |
| Year 8 | $ |
Estimated reversion value of the subject property equals $ . Don't use the "$" sign, and round to whole dollar & the NEAREST THOUSAND (e.g., if you got 1,234,567 then type 1,235,000).
Estimated current value of the subject property is $ . Don't use the "$" sign, and round to whole dollar & the NEAREST THOUSAND (e.g., if you got 1,234,567 then type 1,235,000).
Estimated going-in cap rate for the subject property is %, assuming it is purchased for exactly what it's worth. Don't use the "%" sign, and round to 2 decimal places: e.g., type 1.23 if you got "1.23 percent".
Estimated going-out cap rate for the subject property is %. Don't use the "%" sign, and round to 2 decimal places: e.g., type 1.23 if you got "1.23 percent".
