Reference no: EM133070802

You work in a property management company. You are assigned to develop financial reports for a rental property, Spring Heights, which is a 50-unit apartment building in the city of Melbourne. The building has 50 three-bedroom apartment units with current monthly rent of $2,500. Leases with tenants are made for 12-month periods. 

The following table shows the lease structure and status of all the units as of 30 June 2021. 

When these leases (Type I) rollover near end of June 2022, a certain percentage are expected to be renewed at market rents for an additional 12 months. The rest would remain vacant for a month on average. On the other hand, vacant units (Type II) will be leased out at the market rent throughout the year. Some units are vacated due to non-payment of rent, early termination, etc. In terms of additional income, Spring Lake expects to earn a total of $40,000 from laundry facilities, renting of tennis courts, parking, and others in a year. 

You find that operating expense per unit is approximately $300 per month in the first 6 months in 2021, including utilities, real estate taxes, security, landscaping, insurance, and repairs. Your company is paid $20,000 annually for managing this property. The recurring expense, primarily make-ready expense (carpet, paint, drywall repairs, ...), is currently $50,000 per annum. The property has no mortgage. The owner has an income tax bracket of 25%. The property is subject to an annual depreciation allowance of 2.5%. The purchase price (in 2010) of this property was $15 million. Its building component was recorded as $8 million.  

The owner feels that the rental apartment sector may not recover soon. She is considering selling the property at the end of 2021 because she has several other investment opportunities. She could also hold it for another two years and wait for the market to rebound. Additionally, she wonders if she should invest in remodeling of the kitchens and bathrooms and make other investments to increase the selling price if she must sell it in two years. 

Given the information provided, you are asked to make recommendations on: (1) whether the owner should sell this property now or wait for two years; (2) whether she need to renovate the building to get a better price in two years.   In completing this task, you SHOULD make your own assumptions if the information given above is insufficient. 

1. Create table in a spreadsheet and copy the table here. Prepare 2-year forecast of income and expenses for Spring Heights Apartments (from 01/01/2022 to 31/12/2023). Ensure that the table includes estimates of NOI, BTCF, and ATCF. Explain the process of your calculation briefly. Write down the formulas if necessary. (Suggested word count: 200)
2. Without calculation or creating a spreadsheet model, explain the steps in making a recommendation to the owner on whether she should dispose the property now or wait for another two years. If you strongly prefer, you could use a spreadsheet table to demonstrate it. But it is not requested. Some information to answer this question is not given. You must fill in the gaps yourself and indicate the information you need to collect. (Suggested word count: 300)
3. Without calculation or creating a spreadsheet model, explain the steps in making a recommendation to the owner on whether she should renovate the property. Some information is not given. If you strongly prefer, you could use a spreadsheet table to demonstrate it. But it is not requested.  Some information to answer this question is not given. You must fill in the gaps yourself and indicate the information you need to collect. (Suggested word count: 300)