Real Estate Principles 3rd Edition by David Ling,Wayne Archer

Exercise 19

A real estate investor is considering the purchase of a small office building. The following assumptions are made:
• The purchase price is $775,000.
• The project is a two-story office building containing a total of 34,000 leasable square feet.
• Gross rents are expected to be $10 per square foot per year.
• The vacancy rate is expected to be 15 percent of potential gross income per year.
• Operating expenses are estimated at 45 percent of effective gross income.
• 75 percent of the purchase price will be financed with a 20-year, monthly amortized, mortgage at an interest rate of 7.5 percent. There will be no up-front financing costs.
• Of the total acquisition price, 75 percent represents depreciable real property improvements (no personal property).
• The investor's ordinary tax rate is 30 percent and the capital gain tax rate is 15 percent.
• Estimated capital expenditures are projected to be $10,000 per year, but for simplicity assume these expenditures will not be separately depreciated, although they will be added to the basis.
Answer the following questions for the first year of operations:
a. What is the equity (cash) down payment required at "time zero"
b. What is the annual depreciation deduction
c. What is the total debt service in year 1
d. What is the estimated net operating income