Ann is looking to buy an office building in 2014. She plans to rent it out for 5

Question

Ann is looking to buy an office building in 2014. She plans to rent it out for 5 years (2015-2019) and sell it at the end of 2019.

Given:

Asking cap rate 2014: 6.50%

Question:

1a. What is the Vacancy Expenses, Collection losses, Effective Gross Income (EGI), Operating Expenses?

1b. What is the Net Operating Income for 2015?

Square feet 60,000.00 Annual rent per square foot 2015 $55.00 Parking income 2015 $65,000.00 Rental vacancy rate 2015 2.40% % per square foot Collection loss rate 2015 2.00% % of PGI Operating expense rate 2015 47.00% % of EGI

Explanation / Answer

Vacancy Expenses = 2.40% of $3,300,000 =$ 0.024 x 3,300,000 =$79,200

Collection Loss =2.00% of $3,365,000 =$ 0.02 x 3,365,000 =$67,300

Effective Gross Income = Potential Gross Income - Vacancy Expenses - Collection Loss

                        =$3,365,000 - 79,200 - 67,300

                        =$3,218,500

Operating Expenses = 47% of EGI =$0.47 x 3,218,500 =$1,512,695

Net Operating Income for 2015 = EGI - Operating Expenses

                             =$3,218,500 - 1,512,695

                             =$1,705,805

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