Reference no: EM132364355

Question

Bill owns a multi-tenant mixed-use property with a combination of retail, office, and residential. Bill purchased the property for $750,000 cash and invested an additional $150,000 three years ago. The land was valued at 20% of the original purchase price. The building was valued at $450,000 and building improvements (BI) as part of the original purchase were deemed to be $150,000 for depreciation purposes. Depreciation rates are 39 years for buildings and 15 years for BI. Bill uses a target rate of 15% to analyze cash flows.

In the three years since he acquired the property, it has generated an average NOI of $162,250 annually, and average after-tax cash flow of $101,189 annually. The property is underperforming due to a vacancy rate of 30%. The property has six retail spaces at street level. Currently, four are occupied with net rent averaging 12,000 SF at a rate of $22/SF. Of the 144,000 available office space on floor two and three, 100,000 is leased at an average rate of $27. There 175 units averaging 1,100 SF renting at $1,500 per month. Of these, 124 are leased.

There is another investor that has offered $950,000 to Bill for the property. Selling costs would be 6% of the selling price and paid from the proceeds. Bill has estimated he would need to invest an additional $750,000 to modernize the property to reduce the vacancy loss and increase the rates. Bill assumes he could reduce the vacancy and collection loss to 15% over the next five years by investing the money. He also believes he could reduce the Cap/Ex reserve from $200,000 to $100,000. To prepare the forecast, Bill holds rents to the current market over the five-year forecast period. Bill assumes the operating expenses will increase by 3% per year.

What types of risk should Bill consider before analyzing the offer to sell the property?

Select one:

a. Business risk

b. Management risk

c. Tax risk

d. All of the above

e. Only A and B