# FIR 4340 / 6340 Problem Set #2

DEPARTMENT OF FINANCE, INSURANCE AND REAL ESTATEMark Sunderman In working this problem set pay close attention to the instructions on our class web site.Remember, even though you can gain help in the threads, this is still an individualassignment. This assignment does not need to be typed; however, it is very important thatyou organize your answers clearly and legibly. Since I give partial credit, it is imperativethat you show your work in a logical manner. In any written response, remember thatI place more weight on content and organization than I do on quantity.You can deliver this assignment to me by posting it the “Dropbox” for this unit – see top barfor the tab for the Dropbox. Attaching it as a file in an e-mail to me is another possibility.1After the due date, I will be posting the solutions on the web site, and once graded, I willbe posting your grade in the grade book. If you would like me to return the problem set toyou after I have graded it, please send me an e-mail with the address you would like it sent.This problem set is worth 75 points (question 1 and 4 are worth 15 points – questions 2 isworth 25 points – question 3 and 5 are worth 10 points). 1. An apartment is expected to produce $115,000 NOI the first year, increasing by 3percent per year each year over a projected 7 year holding period. A 80 percentloan-to-value ratio is typical. Current terms are 6.5 percent interest for 25 years(annual payments). Equity investors expect a 12 percent yield. The property isexpected to increase in value by 15 percent over the holding period. Value theproperty using Ellwood. 2. An office property with 60,000 square feet of rentable space is expected to rent for$40 per square foot in the coming year. Rent is expected to decline 3 percent peryear over a projected holding period of seven years. Vacancy will be at 7.5 percent,and the operating expense ratio (based on effective gross income) will be at 35percent. The property is expected to appreciate at the rate of 2 percent per year.It will be financed using 75 percent debt at an interest rate of 8 percent, amortizedover 15 years with monthly payments. Equity investors expect an 15 percent beforetax yield. What is the value of this property? HINT: Use the Finance-ExplicitModel.1 When you e-mail me the assignment, please make it clear what software package theassignment is in. I can usually access most types of files, if I know what it is in! If I have problemsopening the file, I will contact you (so please keep a copy of the file!). Also please put your namein the name of the file! Page 1 of 2 3. A small shopping center is expected to produce net operating income of $24,980 inyear 1. You expect NOI to increase by 4 percent per year over an expected holdingperiod of seven years. Property value is expected to increase by 3.5 percent peryear. The discount rate is 10 percent. Assume there will be no costs of sale.Estimate the value of the shopping center. HINT: Use the Net Operating Incomeand Net Selling Price Model. 4. The following property information is provided…. operating income (NOI)Debt service (DS)Mortgage AmountLoan-to-value ratio (M)a.b.c.d. e. 5. $95,000$62,500$620,0000.80 Calculate the indicated debt coverage ratio.Calculate the mortgage constant, or mortgage capitalization rate (Rm)….ing the debt coverage ratio and the other information provided, calculatethe overall rate (RO) for this property.The property you are attempting to appraise using the income approach hasa NOI of $125,000. Can you use the above information (a through c) toestimate the value of this property? If so, what is it?What role does the loan-to-value ratio play in this valuation approach? First-year NOI for a long-term net lease is expected to be $75,000. Rent isescalating at a rate of 4 percent per year, but there is a two-year period betweenadjustments. Thus, the income for years 1 and 2 will be $50,000, increasing to$50,000 (1+.03)2 = $53,045 in years 3 and 4, and so on. The discount rate is 12percent. Assuming beginning-of-year payments, estimate the value of the leasedfee