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Assignment 1
Professor Tobias Mühlhofer
University of Miami Business School
FIN344: Real Estate Investments
Fall 2018
This assignment is due via Blackboard, by Thursday, September 6, 11:50PM. Collaboration
is allowed, and you may work on this assignment in groups of up to three students. I will leave group
formation to be worked out among you. Please hand in a single solution for your group with all members’
names on it. Submit this solution under the names of only one of your team members. All
team members whose name appears on the assignment will receive credit. Please submit a typed solution,
or a high-quality scan of a neatly hand-written solution.
You may use a calculator or a spreadsheet as a tool. Remember, though, in your writing to show
all your work and explain what you are doing. For steps that you solve on your financial calculator or
spreadsheet, indicate what inputs you make and what you solve for. Your submissions can be handwritten or typed. Please submit in hard copy.
I am including a few true/false,why? questions and a few multi-part problems, so that you can see the
types of questions you will encounter on the quiz. You should be able to envision how true/false, why?
questions are easily convertible to multiple-choice. You should also be able to envision each sub-section
of the multi-part questions as a multiple-choice. Should you want further practice, the end-of-chapter
questions in GMCE are excellent.
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True/False, Why?
For each statement, indicate whether the statement is true or false and briefly explain why. If the
statement is false, simply stating the statement’s negation is not enough. One or two sentences will be
enough. Do not write more than three sentences.
1. In a world of uncertainty, the cap rate has three ingredients.
2. Tenant improvements are, in principle, landlord’s responsibility. However, as a concession in lease
negotiations, tenants may take over some of these expenses.
3. Assume all tenants in a building have triple-net (NNN) leases. If vacancy occurs in this building, expense reimbursements from remaining tenants are increased to make up for the missing
reimbursements that would otherwise come from the empty units.
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Multi-Part Short-Answer Questions/ Problems
1. Consider a Property with expected future NOI of $25,000 per year for the next 5 years (starting one
year from now). After that, the operating cashflow will step up 20% to $30,000 for the following 5
years. Assume no capital- and leasing expenses.
(a) If you expect to sell the property 10 years from now at a going-out cap rate of 10%, what is
the value of the property if the required return is 12%?
(b) Now suppose the seller of the building wants $260,000. Should you do the deal? Why or why
not?
(c) Suppose now that the required return on the property is 11%. What is the value of the
property? By what percentage has this value changed from part 1a as a result of this 100
basis point change in the required rate of return?
(d) Go back to the original 12% required return. Suppose now that after five years, the cashflow
steps up by 25% to $31,250, instead of the original assumption. By what percentage has this
[roughly 1% per year] change in rental growth altered the value of the property?
(e) Assuming this is a representative example, what conclusions can you draw about the sensitivity
of property value to changes in expected cash flow growth compared to discount rate? One
sentence is sufficient as an answer.
2. The projected net cashflows for two properties (A and B) are shown in the following table:
Year
A
B
1
1
1
Annual Net Cashflow Projections for two properties ($ millions)
2
3
4
5
6
7
8
9
1.01
1.0201
1.0303
1.0406
1.0510
1.0615
1.0721
1.0829
.9900
.9801
.9703
.9606
.9510
.9415
.9321
.9227
10
12.0305
10.0487
Assume a purchase price of $10 Million for both properties.
(a) What is the expected total return (IRR) on a 10-year investment in each property? Use a
financial calculator or equation solver for this.
(b) If the 10% cap rate represents a fair market value for each property, then which property must
be the more risky investment, so that no mispricing has occurred?
(c) What is the approximate annual growth rate in operating cash flows for each building during
the first nine years? This is simply the percentage-change in cash flows.
(d) How is the growth rate related to the cap rate and the investor’s IRR in each property?
Assuming each property is priced at its required rate of return (i.e. making it NPV=0), what
general economic relationship discussed in class does this show?
3. You are thinking of acquiring a 300,000 rentable-square-foot office building. The building is leased
at 95% and tenants pay an average rent of $20 per square-foot per year, plus pro-rata shares of all
operating expenses. Operating expenses for this year are $5,000,000.
Construct a cash flow proforma before debt and taxes for this year. Only go up to NOI.
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