Question

Lynn Investment Company (LIC) is considering the purchase of land that could be developed into a class A residential project. At the present time. The site can support a 1,500,000 rentable sq. ft. building with rent of $30 / sq. ft. and opex equal to 60% of that amount. Rents are expected to grow at 5% and LIC requires a 12% IRR. Building costs are $100 / sq.ft.

Based on this information what is property value?
A. $107,142,857
B. $87,500,000
C. $75,000,000

Answer 1

A. $107,142,857

Step-by-step explanation:

We assume the benefits from property would be accrued indefinitely.

Annual Cash benefits from land = Rent - Operating benefit (Opex)

= Rent - Rent*0.60

= Rent * 0.40

= 1500000*30*0.40

= $18,000,000

Value of property would be = Present value of cash benefits - Cost of making property

= Annual Cash Benefits / (IRR - Growth rate) - Cost of making property

= 18000000/(0.12 - 0.05) - 1500000*100

= 18000000/0.07 - 150000000

= 257142857.1428571 - 150000000

= 107142857.1428571

= $107,142,857