You are estimating the value of a small office building. Suppose the estimated NOI for the first year of operations is $100,000.

You are estimating the value of a small office building. Suppose the estimated NOI for the first year of operations is $100,000.

a. If you expect that NOI will remain constant at $100,000 over the next 50 years and that the office building will have no value at the end of 50 years, what is the present value of the building assuming a 12.2% discount rate? If you pay this amount, what is the indicated initial cap rate?

Solution: The present value, using a financial calculator, is $817,078.

N = 50 I = 12.2 PV = ? PMT = 100,000 FV = 0

The initial (going-in) cap rate is $100,000/$817,078 = 12.24%

b. If you expect that NOI will remain constant at $100,000 forever, what is the value of the building assuming a 12.2% discount rate? If you pay this amount, what is the indicated initial cap rate?

Solution: The value of the building with NOI remaining constant at $100,000 is calcul,,,,,,,,,,…………….

Describe the conditions under which the use of gross income multipliers to value the subject property is appropriate.

Solution:  The use of gross income multipliers is predicated on two primary assumptions. First, it is assumed that the ope………….

In what situations or for which types of properties might discounted cash flow analysis be preferred to direct capitalization?

Solution: Direct capitalization is dependent on information obtained from sales of properties that are deemed to be comparable to the subject property. Identifying comparable properties is par……

Distinguish between levered and unlevered cash flows.  In what sense does the equity investor have a residual claim on the property’s cash flow stream if mortgage financing is employed?

What is the difference between a fee simple estate and a leased fee estate?

What is the difference between contract rent and market rent? Why is this distinction more important for investors purchasing existing office buildings than for investors purchasing existing apartment complexes?