What is the most you could pay for this property

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You are considering the acquisition of a 12,600 square foot industrial building that is fully leased for $0.31 per square foot per month. Market vacancy is 6% and operating expenses total $0.15 per square foot per month, $0.10 per square foot of which is paid by the tenant. Rent is contracted to increase at a rate of 2.5% annually, and operating expenses are anticipated to increase at the same rate.

The building is bank owned and the bank is asking $395,000. This appears to be an attractive price and competition to acquire the building is anticipated to be high, and may result in offers in excess of the asking price. Your plan is to acquire the property, hold it for three years, and sell it at the end of year three. You estimate a terminal cap rate of 9.0% which will be applied to the fourth year's NOI to establish your sale price. Your discount rate is 11%.

1. What is the most you could pay for this property and obtain an overall target yield of 11%?

Reference no: EM132577843

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