Estimate the market value of the following small office building. The property has 10,500 square feet of leasable space that was leased to a single tenant on January 1, four years ago.

Estimate the market value of the following small office building.  The property has 10,500 square feet of leasable space that was leased to a single tenant on January 1, four years ago.  Terms of the lease call for rent payments of $9,525 per month for the first five years, and rent payments of $11,325 per month for the next five years. The tenant must pay all operating expenses.

During the remaining term of the lease, there will be no vacancy and collection losses; however, upon termination of the lease it is expected that the property will be vacant for three months.  When the property is released under short-term leases, with tenants paying all operating expenses, a vacancy and collection loss allowance of 8 percent per year is anticipated.

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The current market rental for properties of this type under triple net leases is $11 per square foot, and this rate has been increasing at a rate of 3 percent per year.  The market discount rate for similar properties is about 11 percent, the “going-in” cap rate is about 9 percent, and terminal cap rates are typically 1 percentage point above going-in cap rates.

Prepare a spreadsheet showing the rental income, expense reimbursements, NOIs, and the net proceeds from the sale of the property at the end of an 8-year holding period. Then use the information provided to estimate the market value of the property.

Solution:  The fifth year of the 10-year lease is the first year of analysis. The problem calls for an 8-year analysis–one for the last year of the 1st 5-year period, five for the second 5-year period, one to allow the vacancy and collection loss to achieve a normal level, and one at the normal level for calculating the property’s value (sale price) at that time.  Assume vacancy and collections los……………………..