Ajax Investment Company is considering the purchase of land that could be developed into a class A office project. At the present time, Ajax believes that the site could support a 300,000 rentable square foot project with average rents of $20 per square foot and operating expenses equal to 40 percent of that amount. It also expects rents to grow at 3 percent indefinitely and believes that Ajax should earn a 12 percent return (r) on investment. The building would cost $100 per square foot to build:
a. What would the estimated property value and land value be under the above assumptions?
b. If rents are suddenly expected to grow at 4 percent indefinitely, what would the property value and land value be now? What percentage change in land value would this be relative to the land value in (a)?