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consider a strip mall 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 for retail space in orange county is 7%. what is the expected sale price for this building?

User Hadia
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Final answer:

The expected sale price for the strip mall is calculated by dividing the annual net operating income (NOI) by the cap rate. The NOI is determined by subtracting operating expenses from the total revenue generated by the property. Based on a rate of $1 per square foot for 50,000 square feet and a 7% cap rate, the expected sale price is approximately $5,142,857.14.

Step-by-step explanation:

To calculate the expected sale price for the strip mall, we first need to determine the mall's annual net operating income (NOI). The rental rate is $1 per square foot per month, and with 50,000 square feet, this results in a revenue of $50,000 per month or $600,000 annually. With operating expenses being 40% of the revenue, this means the expenses amount to $240,000 annually. Subsequently, the NOI is calculated as $600,000 - $240,000, which equals $360,000.

To arrive at the expected sale price, we divide the NOI by the cap rate for retail space in Orange County, which is 7%. Thus, the expected sale price is $360,000 / 0.07, equating to approximately $5,142,857.14.

Using this method aligns with the given example of the Yoga Center, which highlights the relevance of revenues and costs in determining profitability and decision-making, mirroring the importance of NOI in real estate valuations.

User Bishwajyoti Roy
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