What is the difference between contract rent and market rent Why is this

# What is the difference between contract rent and

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12.What is the difference between contract rent and market rent? Why is this distinction more important for investors purchasing existing office buildings than for investors purchasing existing apartment complexes? 13. Estimate the market value of the following small office building. The property has 10,500 square feet of leasable space that was leased to a single tenant on January 1, four years ago. Terms of the lease call for rent payments of \$9,525 per month for the first five years, and rent payments of \$11,325 per month for the next five years. The tenant must pay all operating expenses. During the remaining term of the lease, there will be no vacancy and collection losses; however, upon termination of the lease it is expected that the property will be vacant for three months. When the property is released under short-term leases, with tenants paying all operating expenses, a vacancy and collection loss allowance of 8 percent per year is anticipated. The current market rental for properties of this type under triple net leases is \$11 per square foot, and this rate has been increasing at a rate of 3 percent per year. The market discount rate for similar properties is about 11 percent, the "going-in" cap rate is about 9 percent, and terminal cap rates are typically 1 percentage point above going-in cap rates. Prepare a spreadsheet showing the rental income, expense reimbursements, NOI s, and the net proceeds from the sale of the property at the end of an 8-year holding period. Then use the information provided to estimate the market value of the property. Solution : The fifth year of the 10-year lease is the first year of analysis. The problem calls for an 8-year analysis--one for the last year of the 1st 5-year period, five for the second 5-year period, one to allow the vacancy and collection loss to achieve a normal level, and one at the normal level for calculating the property's value (sale price) at that time. Assume vacancy and collections losses in year 7 are 25 percent, which reflects 100 percent vacancy for three months and no vacancy for 9 months. Assume the “normal” vacancy rate of 8 percent will apply in year 8 of the analysis and beyond. Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 Yr. 6 Yr. 7 Yr. 8 Yr. 9 Contract Rent 114,300 135,900 135,900 135,900 135,900 135,900
9 Market Rent 115,500 118,965 122,534 126,210 129,996 133,896 137,913 142,050 146,311 Less: VC 0 0 0 0 0 0 34,478 11,364 11,705 Effective Gross Inc. 114,300 135,900 135,900 135,900 135,900 135,900 103,435 130,686 134,606 Less: Operating Exps 0 0 0 0 0 0 0 0 0 Net Operating Inc. 114,300 135,900 135,900 135,900 135,900 135,900 103,435 130,686 134,606 Sale price at the end of Yr. 8: = [NOI (yr9) / Terminal cap rate] = \$134,606 / 0.10 = \$1,346,060 Cash Flows: CF 1 = 114,300 CF 2 = 135,900 CF 3 = 135,900 CF 4 = 135,900 CF 5 = 135,900 CF 6 = 135,900 CF 7 = 103,435 CF 8 = 1,476,746 (130,686+1,346,060) PV of Cash Flows @ 11 percent = \$1,246,090

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