Black Mountain Community Hospital is considering building an addition medical of
ID: 2722762 • Letter: B
Question
Black Mountain Community Hospital is considering building an addition medical office building on campus. The current plans call for a 38,500 sq. ft. building which will have 35,000 sq. ft. of leasable space, the balance will be needed for mechanical, storage and hallways. The architect believes the building will cost $200 per sq. ft. to construct. The non-leased space will cost $3.00 per sq. ft. to operate (housekeeping and utilities) per month. The building will be built on land owned by the hospital and will be financed at 85% of the cost of the building at 7% interest rate for 20 years. Montreat Internal Medicine has agreed to lease 20,000 sq. ft at $18.45 per sq. ft. per month. Asheville Orthopedics is considering leasing 5,000 sq. ft. at $19.00 per sq. ft. per month. Two other groups are considering the remaining 10,000 sq. ft at $19.25 per sq. ft. per month. Questions: 1 Will the building cash flow if the entire building is leased? 2 What interest rate would cause the building to have a cash flow loss? 3 If the Asheville Orthopedics decided not to lease the space how much would the remaining tenants need to pay per month to cover the loss? Black Mountain Community Hospital is considering building an addition medical office building on campus. The current plans call for a 38,500 sq. ft. building which will have 35,000 sq. ft. of leasable space, the balance will be needed for mechanical, storage and hallways. The architect believes the building will cost $200 per sq. ft. to construct. The non-leased space will cost $3.00 per sq. ft. to operate (housekeeping and utilities) per month. The building will be built on land owned by the hospital and will be financed at 85% of the cost of the building at 7% interest rate for 20 years. Montreat Internal Medicine has agreed to lease 20,000 sq. ft at $18.45 per sq. ft. per month. Asheville Orthopedics is considering leasing 5,000 sq. ft. at $19.00 per sq. ft. per month. Two other groups are considering the remaining 10,000 sq. ft at $19.25 per sq. ft. per month. Questions: 1 Will the building cash flow if the entire building is leased? 2 What interest rate would cause the building to have a cash flow loss? 3 If the Asheville Orthopedics decided not to lease the space how much would the remaining tenants need to pay per month to cover the loss?Explanation / Answer
1. If the entire building is leased, the building cash flow will be calculated as follows:
Building cash flow = (20,000 x $18.45) + (5,000 x $19) + (10,000 x $19.25) - (3,500 x $3)
= $369,000 + $95,000 + $192,500 - $10,500
= $646,000 per month
2. The building will be constructed at a cost of $200 per square feet.
Total construction cost of the building = 38,500 x $200 = $7,700,000
85% of the total building cost will be financed by debt.
Debt = $7,700,000 x 85% = $6,545,000
Now if the interest is more than $646,000 per month, there will be a cash flow loss.
Therefore,
Maximum interest rate before cash flow loss = $646,000 / $6,545,000 = 9.87%
Thus,
If the interest rate is more than 9.87%, it will cause the building to have a cash flow loss.
3. If A Orthopedics decided not to lease the space, the remaining tenants will have to pay $95,000 (5,000 x $19) more to cover the loss.
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