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Problem 21-2 Robust Properties is planning to go public by creating

a REIT that will offer 1,990,000 million shares of stock. It is currently trying to develop a pro forma set of financial statements. Robust is faced with a number of questions about its handling of some accounting and financial disclosure issues. Robust Properties I. Major Financial Information: a. Assets—properties (actual cost) $ 100,950,000 b. Depreciable basis—buildings only $ 80,760,000 c. Useful life 40 years d. Operating expenses 38 % of rents e. Management expenses—third parties 5 % of rents f. General and administrative expenses 3 % of rents g. Mortgage at 8% interest only, 10 years $ 30,095,000 h. Financing fees $ 909,500 II. Lease Information: a. Average lease term 5 years b. Leasable space 1,000,000 square feet c. Base rents (year 1) $ 34 pounds per square feet d. Escalation factor—rents per year 5 % e. Lease commissions 4 % of year 1 rent f. Tenant improvements $ 14.75 pounds per square feet The management of Robust Properties has asked you to prepare preliminary pro forma financials for the next three years. Specifically, you should have (1) a beginning balance sheet, (2) operating statements for each of the next three years, and (3) all relevant financial ratios for year 1 results only. Robust will pay all financing fees, tenant improvements, and lease commissions upon commencing operations. It would like to pay a minimum dividend of $6.75 per share. In preparing your pro forma operating statements, Robust wants you to consider the effects of reporting in the following two ways: Required: a. What would EPS, FFO, and ROC be under both approaches? (Round your intermediate calculations and final answers to 2 decimal places.) Approach 1 Approach 2 Lease commissions Amortize, 5 years Expense in year 1 Finance fees Amortize, 10 years Expense in year 1 Tenant improvements Depreciate, 40 years Depreciate over 5-year lease term Buildings Depreciate, 40 years Depreciate, 40 years

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