Question

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?

Answer 1

The expected sale price of the office building is $6,000,000.

Step-by-step explanation:

To calculate the expected sale price of the office building, we need to use the capitalization (cap) rate formula. The cap rate is the ratio of the net operating income (NOI) to the purchase price. In this case, the NOI is the annual revenue minus the operating expenses, and the cap rate is given as 6%.

First, calculate the annual revenue by multiplying the rental rate per square foot ($1) by the total square footage (50,000) and then by 12 (months in a year). This gives us $600,000.

Next, calculate the operating expenses by multiplying the revenue by the expense ratio (40%). This gives us $240,000.

Finally, divide the NOI ($600,000 - $240,000 = $360,000) by the cap rate (6%) to find the expected sale price. The formula would be:

Expected Sale Price = NOI / Cap Rate. Substituting the values:

Expected Sale Price = $360,000 / 0.06 = $6,000,000.