Fin 40710 – Generic Pro forma/Valuation Problem Set
Q1A:
In Section 2 of the pitch book, the "in-place" NOI and "stabilized" NOI values are listed as
$436,563 and $624,302, respectively. These values were calculated under different assumptions
regarding tenant occupancy and lease terms:
In-Place NOI assumes that current tenants without renewal options will continue at their
current lease terms.
Stabilized NOI projects that all vacancies will be leased at market rent, and a 5%
credit/vacancy reserve is applied.
The potential issue here could be the optimistic assumptions for the stabilized NOI, especially
the 5% vacancy factor and the assumption of leasing all vacant space at market rates. Given the
market's actual conditions, these assumptions may lead to an overestimation of the stabilized
NOI.
Q1B:
Cap Rate Range:
The cap rates for the comparables range from 7.8% to 11.4%.
The median cap rate in this dataset appears to be around 8.5% to 9%, depending on
location and other factors.
Western Avenue Plaza's Implied Cap Rate:
At 9.7%, Western Avenue Plaza’s implied cap rate is slightly higher than most of the
comparables, except for Harvest Place, which has a cap rate of 11.4%.
Price per Square Foot:
The prices per square foot in the comps range from $63.58 to $246.11.
Western Avenue Plaza has 100,000 square feet and an asking price of $4,500,000, which
puts its price per square foot at $45.
This price per square foot is notably lower than any of the comparables, potentially
making it an attractive option if other factors, such as location and tenant stability, are
favorable.
Q2A:
Year NOI ($) PV
1 600,000 550,458$
2 600,000 505,216$
3 1,160,000 896,202$
4 1,160,000 822,204$
5 1,160,000 754,748$
TV 16,571,429 10,764,357$
Total PV = 550,458+505,216+896,202+822,204+754,748+10,764,357
=14,297,185$
Implied Cap Rate=Property Value Year 1/ NOI=
600,000/14,297,185
= 4.20
Explanation:
This implied cap rate is lower than the market cap rate of 7% due to the structure of the leases.
The presence of an in-place lease with a reliable income stream and an additional lease
commitment starting in year 3, both at above-market rents, enhances the property's attractiveness
and stability. Consequently, the DCF valuation reflects a premium over what would be implied
by a simple market cap rate.
Q2B:
1- Reimbursements per Square Foot
Total Operating Costs per Sq Ft=1.50+2.50+0.15=4.15 $/sq ft
1- Years 1-2 (only the current tenant occupies 50,000 sq ft):
o Reimbursement: 50,000 sq ft×4.15=207,500
2- Years 3-5 (both tenants occupy a total of 90,000 sq ft):
o Reimbursement: 90,000 sq ft×4.15=373,500
2- CapEx Reserve:
100,000 sq ft×0.40=40,000
Year NOI ($) PV
1 767,500 550,458$
2 399,500 505,216$
3 1,493,500 896,202$
4 1,493,500 822,204$
5 1,393,500 754,748$
TV 16,571,429 10,764,357$
Property Value=704,587+336,386+1,154,236+1,059,386+904,755+10,764,357
=14,923,707$
Q3A:
The building is worth more in Scenario 1 (U.S. Government as the tenant). This is because
the cash flows are discounted at a lower rate due to the government’s high creditworthiness,
making the net present value of the lease income higher than it would be with a BBB-rated
tenant.
Q3B:
To estimate the difference in value, we would use a Discounted Cash Flow (DCF) analysis. The
DCF method involves projecting the cash flows from the lease over the 10-year period and then
discounting them back to the present based on the tenant's credit risk.
Since the U.S. Government is more creditworthy, we would use a lower discount rate for its
lease. For Macatawa Bank, we would apply a higher discount rate due to its BBB rating, which
reflects moderate credit risk. By comparing the two present values (one with a lower discount
rate for the government and one with a higher rate for the bank), we can see the difference in the
property’s value between these two tenant scenarios.
Q4:
Project Cash Flows for the Next 5 Years:
Years 1–3: Rent is fixed at $15/sq. ft.
o Annual rent income = $15/sq. ft. × 100,000 sq. ft. = $1,500,000.
Years 4–5:
o If tenant renews (55% probability): Rent = $16/sq. ft.
o If tenant does not renew (45% probability): No rent in Year 4 (12-month
vacancy), followed by $16/sq. ft. in Year 5.
Year 4: 0.55×(16×100,000)+0.45×0=880,0000
Year 5: 0.55×(16×100,000)+0.45×(16×100,000)=1,600,0000
Year NOI ($) PV
1 1,500,000 550,458$
2 1,500,000 505,216$
3 1,500,000 896,202$
4 880,000 822,204$
5 1,600,000 754,748$
TV 22,857,142.86 14,852,394
PV= 1,376,146.79+1,262,856.95+1,158,816.47+623,521.82+1,041,084.93+14,852,394.05
=20,315,821
