The building will be held and rented indefinitely

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Reference no: EM131826470

Consider a 100,000 sqf office building with the following cash flows: The gross rent in year 1 is $30/sqf/year and the rents are expected to grow at 2% per year. The operating expenses in the first year are $5/sqf/year and are expected to increase at 3% per year. All cash flows are in arrears. The discount rate for the property is 9%. 1

Please start with a time line to understand the pattern of cash flows. Once a contract is signed, the rents are fixed for 5 years. In the mean time the market rents rise every year. When the next contract is signed, annual rents jump to the new market rent level. 2Hint: No rents will come from the office building during the construction period. 1

a. What is the value of the building if the building will be held and rented indefinitely? What is the implied cap rate at time 0?

b. What is the value of the building if the building is sold at the end of 10 years at a 8% cap rate? What is the implied cap rate at time 0?

Reference no: EM131826470

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