Daniella Neman Homework #2 Apartment Property 1-bedroom units 2-bedroom units # Units 50 25 Year 1 Rent 1-bedroom (month/unit) Rent 2-bedroom (month/unit) Vacancy Rate Other Income Rent concessions Collection loss (rental income only) Variable operating expenses 1-bedroom (unit/month) Variable operating expenses 2-bedroom (unit/month) Fixed Operating Expenses ($/year) Annual CAPEX allowance (% of NOI) Investment Horizon Exit cap rate at end of Year 10 (NCF) Broker commission Current Cap rate – beginning year 1 (NOI) Development costs $1,500 $2,000 5.00% 0 2.50% 2.00% $320 $420 $135,000 10% 10 years 5.50% 1.75% 6.50% $12,750,000 Questions 1. Develop 10-year operating cash flows. (30 points) 2. What will be in the net cash flow from the sale of property at the end of Year 10? (10 points) 3. What will be the value of the completed project at the beginning of year 1 of stabilized operation? (15 points) 4. If an investor purchases the building from the developer at the beginning of year 1 for the price found in question 3, what w 5. What annual return on NCF will the developer earn if she decides to keep the property for 10 years after completion? (15 6. Explain the difference between the investor’s and the developer’s annual returns found above? (10 points) 7. What will the vacancy rate above which the developer will no longer be able to pursue the project? Explain your answer. (1 1. Develop 10-year operating cash flows. (30 points) Year Rent 1 -bedroom (PGI) Rent 2-bedroom (PGI) Today Vacancy Rent concessions Other income (net) Collection loss (rental income only) EGI Variable operating expenses 1-bedroom (unit/month) Variable operating expenses 2-bedroom (unit/month) Fixed Operating Expenses ($/year) Total operating Expenses NOI CAPEX Development cost NCF (Adjusted NOI) ($12,750,000) ($12,750,000) 2. What will be in the net cash flow from the sale of property at the end of Year 10? (10 points) 3. What will be the value of the completed project at the beginning of year 1 of stabilized operation? (15 points) property value at beginninf of year 1 $14,222,885 4. If an investor purchases the building from the developer at the beginning of year 1 for the price found in question investor's average return on NCF over 10 years 0 ($14,222,885) 8.87% 5. What annual return on NCF will the developer earn if she decides to keep the property for 10 years after complet Total development cost $12,750,000 Develop return on NCF 0 ($12,750,000) 10.39% 6. Explain the difference between the investor’s and the developer’s annual returns found above? (10 points) Because of their lower beginning costs, the developer receives an additional 1.52% return. Over the course of the ten years, the developer and investor got the same cash flows; however, the developer's lower expenses resulted in a larger annual return. This demonstrates how the developer's cost-management plan has improved profitability. 7. What will the vacancy rate above which the developer will no longer be able to pursue the project? Explain your a NPV Goal Seek $1,468,840.83 13.60% The developer will be unable to continue with the project owing to high vacancy rates once the NPV goes negative. The developer in this case won't be profitable if the NPV is higher than 13.60%. Growth Rate 2.50% 3.00% 0 3.00% 2.75% 2.50% ? (10 points) bilized operation? (15 points) 1 for the price found in question 3, what will be the investor’s average return on NCF over the next 10 years? (10 points) operty for 10 years after completion? (15 points) s found above? (10 points) pursue the project? Explain your answer. (10 pints) 1 2 3 4 5 6 $900,000 $600,000 $922,500 $618,000 $945,563 $636,540 $969,202 $655,636 $993,432 $675,305 $1,018,267 $695,564 ($75,000) ($35,625) $0 ($27,788) $1,361,588 ($77,025) ($36,587) $0 ($28,538) $1,398,350 ($79,105) ($37,575) $0 ($29,308) $1,436,114 ($81,242) ($38,590) $0 ($30,100) $1,474,906 ($83,437) ($39,633) $0 ($30,913) $1,514,754 ($85,692) ($40,704) $0 ($31,749) $1,555,688 ($182,400) ($119,700) ($135,000) ($437,100) $924,488 ($187,872) ($122,992) ($138,375) ($449,239) $949,112 ($193,508) ($126,374) ($141,834) ($461,717) $974,397 ($199,313) ($129,849) ($145,380) ($474,543) $1,000,363 ($205,293) ($133,420) ($149,015) ($487,728) $1,027,026 ($211,452) ($137,089) ($152,740) ($501,281) $1,054,407 ($92,449) ($94,911) ($97,440) ($100,036) ($102,703) ($105,441) $832,039 $854,200 $876,958 $900,327 $924,324 $948,966 ar 10? (10 points) of stabilized operation? (15 points) of year 1 for the price found in question 3, what will be the investor’s average return on NCF over the next 10 years? (10 points) 1 $832,039 2 $854,200 3 $876,958 4 $900,327 5 $924,324 6 $948,966 4 5 6 the property for 10 years after completion? (15 points) 1 2 3 $832,039 $854,200 $876,958 returns found above? (10 points) eturn. Over the course of the er's lower expenses resulted in an has improved profitability. ble to pursue the project? Explain your answer. (10 pints) $900,327 $924,324 $948,966 ears? (10 points) 7 8 9 10 11 $1,043,724 $716,431 $1,069,817 $737,924 $1,096,563 $760,062 $1,123,977 $782,864 $1,152,076 $806,350 ($88,008) ($41,804) $0 ($32,607) $1,597,737 ($90,387) ($42,934) $0 ($33,488) $1,640,932 ($92,831) ($44,095) $0 ($34,394) $1,685,305 ($95,342) ($45,287) $0 ($35,324) $1,730,887 ($97,921) ($46,513) $0 ($36,280) $1,777,712 ($217,795) ($140,859) ($156,559) ($515,213) $1,082,524 ($224,329) ($144,733) ($160,473) ($529,534) $1,111,398 ($231,059) ($148,713) ($164,484) ($544,256) $1,141,048 ($237,991) ($152,803) ($168,597) ($559,390) $1,171,497 ($245,130) ($157,005) ($172,811) ($574,946) $1,202,766 ($108,252) ($111,140) ($114,105) ($117,150) ($120,277) $974,272 $1,000,258 $1,026,944 $20,391,541 $1,082,489 Sale price Broker fee Net sale price $19,681,622 ($344,428) $19,337,193 the next 10 years? (10 points) 7 $974,272 8 $1,000,258 9 $1,026,944 10 $20,391,541 7 8 9 10 $974,272 $1,000,258 $1,026,944 $20,391,541 Homework 2 Due Date: March 1 This residen al development project consists of 20 one-bedroom units, 30 two-bedroom units, and 80 parking spaces. The table below shows market rents, vacancy rate, rent loss rate, opera ng expenses, CAPEX allowance for the rst year of opera on, and expected rent and expense growth rates for the next 7 years, along with the applicable cap rate and discount rate, and total development costs. Property Characteris cs # Units 1-Bedroom Units 20 2-Bedroom Units 30 Parking spaces 80 Assump ons Year 1 Growth Rate Rent 1-bedroom units ($/month/unit) $2,500 2.00% Rent 2-bedroom units ($/month/Unit $3,000 3.00% Parking ($/month/unit) $150 1.00% Vacancy rate 5.00% Collec on loss (rent, parking, expense recoveries) 2.50% Variable expenses 1-bedroom ($/unit/month) $650 Variable expense stop for 1-bedroom ($/unit/month) $700 Variable expenses 2-bedroom ($/unit/month) $850 Variable expense stop for 2-bedroom ($/unit/month) $900 2.50% 2.50% Total xed expenses ($/year) $350,000 2.75% CAPEX reserves ($/year) $95,000 2.75% Holding Period (years) 7 Expected before-CAPEX exit cap rate at end of year 7 8.00% Broker commission 2.75% A er-CAPEX discount rate at the beginning of year 1 7.75% Total Development Cost $11,550,000 ti ti ti fl ti ti ft ft fi ti fl ti ti fi ti ti ft Ques ons 1. Develop a 7-year before- and a er-CAPEX opera ng cash ow projec on. (40 points) 2. What is the cash ow from the sale of the property at the end of year 7 (10 points) 3. Find the value of the property at the beginning of year 1. (10 points) 4. What is the going-in cap rate a er CAPEX associated with the value found in ques on 3. (10 points) 5. If the developer decides to keep and operate the property for 7 years a er comple on, what will be her unlevered a er-CAPEX return assuming that the en re investment takes place at the beginning of year 1? (10 points) 6. If an investor buys the property for $13.25 million a er comple on, what levered return a er CAPEX would he earn if he can borrow 70% of the purchase price at an annual interest rate of 5.5%? How much leverage should he take if his required a er-CAPEX levered return is 16%? (15 + 5 points) ft ti ft ti ti ft ft ft 2 
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