Diablo Valley College

Business Division

Real Estate and Urban Economics -- RE 165

Practice Case Study Suggested Answers

1.  Using the contract rents the estimated PGI for the first year into the future is:

FSOB Rents / # Units / Contract rents per unit per month / Monthly rent / Annualized rents
First floor / 8 / $900 / $7,200 / $86,400
Second floor / 4 / $900 / $3,600 / $43,200
6 / $700 / $4,200 / $50,400
PGI / $180,000

2.  Given the data on the three comparables, the subject property's average rent per month is $1,089.33, which leads to:

PGI @ market rents, annualized + 16 units / $209,152.00

This PGI @ market rents is substantially greater than (ann.) 3% than the PGI at current PGI. I infer from this difference that the bargaining power of tenants may not be substantial in relation to that of landlords locally, and that a 3% upward trend in rents may be (if anything) quite moderate.

3.  EGI = PGI - (VACANCY + COLL. DIFF.) = $180,000 - $18,000 = $162,000

4.  NOI = EGI - OE = $162,000 - $72,900 = $89,100

5.  If values are projected to increase at 3% per year, the projected selling price of the building will be equal to the future value of $885,000 at 3% per year. FV(885,000;@3%, for 5 years) = $1,025,957.56

6.  The Net Selling Price will be expected to be = $1,025,957.56 (1 - 5%) = $974,659.68

7.  The NPV at the three different discount rate scenarios is:

At 11% / At 12% / At 13%
PDVNOI / $ 347,520.36 / $ 338,774.79 / $ 330,376.10
PDVNSP / $ 578,413.08 / $ 553,048.08 / $ 529,006.22
PDVAP / $ (885,000.00) / $ (885,000.00) / $ (885,000.00)
NPV / $ 40,933.44 / $ 6,822.87 / $ (25,617.68)

Which means that the IRR, or breakeven rate of return must be somewhat above 12%.

(Answer above came from sums of discounted cash flows below:

Year 1 / Year 2 / Year 3 / Year 4 / Year 5
PGI / $180,000.00 / $185,400.00 / $190,962.00 / $196,690.86 / $202,591.59
VAC / -$ 18,000.00 / - $ 18,540.00 / - $ 19,096.20 / - $ 19,669.09 / - $ 20,259.16
EGI / $162,000.00 / $166,860.00 / $171,865.80 / $177,021.77 / $182,332.43
OE / -$ 72,900.00 / - $ 75,087.00 / - $ 77,339.61 / - $ 79,659.80 / - $ 82,049.59
NOI / $ 89,100.00 / $ 91,773.00 / $ 94,526.19 / $ 97,361.98 / $100,282.83
PDV (y=11%) / $ 80,270.27 / $ 74,485.03 / $ 69,116.74 / $ 64,135.35 / $ 59,512.98
PDV (y=12%) / $ 79,553.57 / $ 73,160.87 / $ 67,281.87 / $ 61,875.30 / $ 56,903.17
PDV (y=13%) / $ 78,849.56 / $ 71,871.72 / $ 65,511.39 / $ 59,713.92 / $ 54,429.51

). Also, see attached spreadsheet.