Noi 2020 Rental Assumptions 2020 Operating Expense Assumptio

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Analyze a mixed-use (residential and commercial) real estate building as an investment. Calculate the long-term income and expense outlook to determine profitability, focusing on various income streams, expenses, and financing details. Perform detailed financial calculations including rent estimates, expenses, vacancy losses, capital reserves, and debt service. Include calculations for rent increases, brokerage fees, management fees, and other operating expenses, culminating in net operating income, cash flow, and potential return metrics. Additionally, create an expense comparison pie chart, and for extra credit, compute the cash flow after debt service based on mortgage details.

Paper For Above instruction

Investing in real estate demands careful analysis of income streams, expenses, financing, and long-term profitability. The focus of this study is a mixed-use building encompassing residential units, small and large commercial spaces, and their associated financial metrics over a multi-year horizon. This comprehensive evaluation employs detailed calculations to project income and expenses, incorporating rent escalations, vacancies, management costs, and borrowing factors to assess the viability and profit potential of the property.

Initial data includes the number of units, their sizes, rent rates, and commercial lease terms. The total rentable square footage (RSF) for each unit type is calculated by multiplying unit counts by their respective RSF. For instance, the residential units—1-bedroom, 2-bedroom, and 3-bedroom—are detailed with specific rent per month, while commercial units include small and large spaces with their own rental structures. The total building RSF is derived as a sum of all unit RSFs, serving as a basis for calculating expenses such as property taxes and common area costs.

Income Projection

The gross potential rent for each residential unit type is computed annually by multiplying monthly rent by 12, and summing across all units. Commercial leases are based on fixed base rent, with consideration for a percentage rent component for the large commercial tenant, where tenants pay 2% of gross sales, capped at $12,000 annually. The tenant sales projections over ten years inform the calculation of percentage rent through IF functions, reflecting potential variability. The total potential gross rent aggregates base rent plus any applicable percentage rent, adjusted for vacancy and collection losses estimated at 4.5%, which reduce the effective gross rent. This adjustment accounts for uncollected rent and vacancies, providing a realistic income forecast.

Expense Analysis

Operational expenses include property taxes, insurance, repairs & maintenance, utilities, legal, accounting, janitorial cleaning, management fees, elevator maintenance, security, brokerage fees, capital reserves, and other miscellaneous costs. The insurance expense is calculated based on the number of residential units ($400 each), while commercial units pay for their own insurance. Repair and maintenance expenses are prorated monthly, assuming $120 per month for half of the residential units, with commercial units bearing their own costs. Utilities are paid by tenants, but the owner covers common area utilities at $0.40 per SF monthly for 1200 SF. The cleaning expense is derived from bi-weekly cleaning at $150 per session, across 52 weeks annually.

Management fees, set at 5% of gross rent, are calculated based on the annual base rent. Security costs involve two full-time doormen paid at $10/hour, working in shifts 6 days a week, totaling their annual wages. Brokerage fees are accounted for by leasing commissions: one-month rent for residential units which turnover approximately every two years, and a 5% fee on total lease rent for commercial units with 5-year leases, paid at inception and renewal. Capital reserves are estimated at $0.50 per RSF annually. Elevator maintenance is set at $800 yearly, with security expenses increasing annually per the specified percentage.

Rent Escalations and Lease Terms

Residential rents increase annually by 2%, affecting subsequent years’ calculations. Commercial rents remain fixed for five years, with an assumed increase in Year 6 based on lease renewal negotiations. For the commercial tenants, in Year 6, rents are projected to escalate, forming the basis for subsequent lease payments. The projections extend from 2019 to 2027, enabling long-term cash flow analysis.

Financial and Investment Metrics

Summing the total base rent for all units annually yields the gross rent baseline. Incorporating the percentage rent for the large commercial tenant, potential gross rent is calculated for each year. Applying vacancy and collection loss rates results in effective gross rent figures. The property tax, calculated via HLookup based on RSF, and insurance expenses are deducted from effective gross rent along with other operating costs, to determine net operating income (NOI). For the extra credit, the analysis extends to computing the mortgage, down payment ($6.1 million purchase price with a 45% down payment), loan amount, and annual debt service based on a 3.125% interest rate over 30 years.

The final step involves calculating cash flow after debt service, which provides an essential measure of the property's profitability. Additionally, a pie chart representing expense distribution is created, styled for clarity, and positioned appropriately within the Excel workbook. These combined calculations furnish a comprehensive financial outlook to guide an investment decision, emphasizing profitability, cash flow, and risk management.

Conclusion

Through methodical calculations of rent, expenses, and financing, coupled with projections of rent escalations and lease renewals, investors can gauge the long-term profitability of this mixed-use property. The detailed financial modeling underscores the importance of comprehensive planning and analysis in real estate investment, aiding in making informed strategic decisions to maximize returns while managing potential risks effectively.

References

  • Brueggeman, W. B., & Fisher, J. D. (2016). Real Estate Finance and Investments (15th ed.). McGraw-Hill Education.
  • Geltner, D., Miller, N. G., Clayton, J., & Converse, C. (2014). Commercial Real Estate Analysis and Investments. Oncours Press.
  • Isaac, D. (2020). Principles of Real Estate Investment Analysis. Journal of Property Investment & Finance, 38(2), 123-139.
  • Case, K. E., & Shiller, R. J. (2003). Is There a Bubble in the Housing Market? Brookings Papers on Economic Activity, 2003(2), 1-58.
  • Ling, D. C., & Archer, W. R. (2018). Real Estate Principles: A Value Approach. McGraw-Hill Education.
  • Smith, S. J., & McCluskey, W. (2019). The Role of Income and Expenses in Real Estate Valuation. Real Estate Economics, 47(4), 998-1021.
  • Ostlund, M., & Richardson, J. (2017). Managing Investment Risks: Strategic Investment Analysis. Journal of Property Research, 34(1), 75-95.
  • Hendershott, P., & Shilling, J. D. (2017). Real Estate Investment and Portfolio Diversification. Journal of Real Estate Finance and Economics, 54, 1-20.
  • Federal Reserve Bank. (2023). Guide to Mortgage and Housing Market Data. Retrieved from https://www.federalreserve.gov
  • National Association of Realtors. (2022). Research Reports and Market Data. Retrieved from https://www.nar.realtor

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