Question

g consider an office building that has 50,000 square feet. the rental rate is $1 per square foot per month. operating expenses are 40% of revenue (a standard assumption). the current cap rate on office buildings in orange county is 6%. what is the expected sale price for this building? if office rents are expected to remain flat, what is the expected rate of return on this investment? i if office rents are expected to grow by 1% per year over the next few years, what is the expected rate of return? you could, after buying this building, put in $2,000,000 worth of improvements that would allow you to raise the rent by 10% (with zero growth). what would the sale price be, after these improvements? (note that i am not asking you if this is a good idea.)

Answer 1

To calculate the expected sale price of the office building, we need to determine the net operating income (NOI), which is the revenue from the rental minus the operating expenses. The NOI is then divided by the cap rate to determine the expected sale price. The expected rate of return on the investment can be calculated by dividing the NOI by the purchase price. If office rents grow by 1% per year, the expected rate of return is adjusted according to the growth rate. If improvements worth $2,000,000 are made to raise the rent by 10%, the new NOI is calculated to determine the new sale price.

Step-by-step explanation:

To calculate the expected sale price of the office building, we need to determine the net operating income (NOI), which is the revenue from the rental minus the operating expenses. The NOI is then divided by the cap rate to determine the expected sale price. In this case, the NOI is calculated as follows:

Rental revenue: $50,000/month x 12 months = $600,000

Operating expenses: 40% of revenue = 0.4 x $600,000 = $240,000

NOI: $600,000 - $240,000 = $360,000

Expected sale price: $360,000 / 0.06 (6%) = $6,000,000

Next, we can calculate the expected rate of return on the investment. If office rents remain flat, the rate of return can be calculated by dividing the NOI by the purchase price:

Rate of return: $360,000 / $6,000,000 = 0.06 or 6%

If office rents grow by 1% per year, we need to account for the expected increase in revenue. The NOI would be adjusted by multiplying it by the growth rate:

Adjusted NOI: $360,000 x (1 + 0.01) = $364,000

The adjusted rate of return can then be calculated:

Adjusted rate of return: $364,000 / $6,000,000 = 0.0607 or 6.07%

Lastly, if $2,000,000 worth of improvements are made to raise the rent by 10% (with zero growth), the new NOI would be:

New rental revenue: $50,000 + (0.10 x $50,000) = $55,000

New NOI: $55,000 - $240,000 = $315,000

New sale price: $315,000 / 0.06 = $5,250,000