PLEASE ANSWER 1 & 2 Jamie Horn is thinking of buying an apartment complex that is offered for sale by Shelly Realty, an

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PLEASE ANSWER 1 & 2
Jamie Horn is thinking of buying an apartment complex that is
offered for sale by Shelly Realty, an investment brokerage firm.
The listing price of $3,550,000 equals the property’s market value.
The following statement of income and expense is presented for the
buyer's consideration:
The Dolphin Apartments Prior Year's Operating Results,
Presented by Shelly Realty
30 units, all two-bedroom apartments, $1400 per month
$504,000
Washer and dryer rentals
11,000
Gross annual income
$515,000
Less operating expenses:
Super's salary
$36,000
Maintenance staff (part time)
12,000
Landscaping and snow removal
3,900
Property taxes
23,000
74,900
Net Operating Income
$440,100
By checking the electric meters during an inspection tour of the
property, the buyer determines the occupancy rate to be about 80%.
He learns, by talking to tenants, that most have been offered
inducements such as a months' free rent or special decorating
allowances. A check with competing apartment houses reveals that
similar apartment units rent for about $1350 per month and that
vacancies average about 6%. Moreover, these other apartments have
pools and other amenities that make their units worth about $20
more than those of The Dolphin Apartments, which have neither.
The tax assessor states that the apartments were reassessed 12
months ago and that the current taxes are $87,500.
Horn learns that the super at the apartment complex, in addition
to the $36,000 salary, gets a free apartment for her services. He
also discovers other expenses: insurance will cost $7.00 per $1,000
of coverage, based on estimated replacement cost of about $2.4
million; workers' compensation ($150 per annum) must be paid to the
state; utilities, incurred to light hallways and other common
areas, cost about $170 per month for similar properties; supplies
and miscellaneous expenses typically run about 0.30% of effective
gross income. Professional property management fees in the market
area typically are about 6.0% of effective gross income.
Assignments:
1. Develop a prior years' reconstructed operating statement,
assuming typically competent, professional management. Based on the
reconstructed NOI and current market value, determine the
property's capitalization rate.
2. Develop a seven-year forecast of NOI for the The Dolphin
Apartments, incorporating all the following assumptions:
a. The inflation rate is 2.xx%, where xx is the last two digits
of your Hofstra ID. Potential gross rent and miscellaneous other
income will grow at this inflation rate every year over the
forecast period.
b. The vacancy rate in the market area will remain at a constant
percentage over the forecast period.
c. Operating expenses other than management fees and property
taxes will grow at the same inflation rate (see a. above) over the
forecast period.
d. Management fees as a percent of effective gross income will
remain constant over the forecast period.
e. Property taxes are expected to increase to $96,250 in the
third year of the forecast and to $105,875 in the seventh year.
3. Assuming that the property's capitalization rate that you
determined in #1, above is also the market rate, and assuming this
market rate will remain constant, develop an estimate of the
property's market value at the end of the projected holding
period.
4. Suggest some reasons why a market's capitalization rate might
NOT remain constant. Why might it become larger or smaller than the
currently prevailing market rate?