Answer the following questions and submit responses as well as your work.
Ned Stark wants to buy a building. The annual revenues are $250,000 and annual operating expenses are $100,000. Ned decides that a fair and honorable price to pay would be $2,500,000.
What is the simple cap rate for this purchase?
After Ned’s unexpected and almost immediate demise, his son Robb inherits the building. Ever the crazy optimist, Robb expects that through his superior management skills, revenues will grow 10% a year after Year 1 and expenses will decrease 5% a year after Year 1.
If Robb is successful, assuming the cap rate is unchanged, what will the value of this building be at the end of Year 5 based on his in-place income?
After Robb’s unexpected and almost immediate demise, his half brother Jon Snow inherits the building. Jon Snow knows nothing about real estate, but he does sense that the economic climate is changing. One indication of this is the valuation the probate court puts on the building.
The value is 25% less than the price Ned paid for the building. Jon Snow’s worst fears are realized. Keep in mind that state law treats an inheritance of a property as a transfer, and the probate court and the IRS will treat that transfer as if made at the probate court valuation. Increasingly harsh conditions lead to lower occupancies and higher expenses, due mainly to higher utility expenses. Revenues drop by 5% a year after Year 1, and expenses increase by 3% a year after Year 1. For the purposes of your computations, assume that the probate transfer to Jon Snow occurred at the end of Year 1. At the end of Year 5 Jon Snow quits in frustration and sells the building to Dwight Walker for the same cap rate that applied when he inherited it. What does Walker pay for the building on forward income?
Little sister Arya Stark decides she wants to pursue a career in real estate like the men in her family. Her approach, however, will be different.
She vows to view market conditions clearly and unemotionally, and to be disciplined and hardworking in managing her assets.
She decides to try her luck in a new market with sunnier economic conditions. She purchases a partially empty building with great potential that has revenues of 175,000 and expenses of 80,000. Arya is a real estate rock star. Her revenues increase by 20% in Year 2 and 5% each year thereafter. Her expenses increase at 2% per year. If she sells the building for $3,135,000 to Cersei Lanister at the end of Year 5 on her in-place income, what cap rate will she report she sold it for?
Cersie Lanister sees that she purchased the property on forward income. What cap rate will she report that she bought the property for? .
What to Include
If you use a spreadsheet, include formulas and submit Excel file.
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