You have purchased your property and successfully operated it during its first year. Building on the financial statements that you have developed complete a ten year pro forma for the asset.
In order to construct the pro forma you will need additional information:
Revenues
Supermarket Lease:
Current term expires 12/31/2014. Has a renewal option for five years at 10% over the current rent. Assume the option is exercised.
Drug Lease:
Current Term expires 12/31/2010. Has a single five- year renewal option at 15% over the current rent. Assume the option is exercised.
At the end of the five year renewal period assume that the space is released to a new tenant at the then market rent.
To calculate the “then market rent” meaning the market rent at a specific time in the future:
1) assume that the rent is currently $5 below market
2) adjust to current market level
3) allow for CPI growth at 3.5% per annum
Assume that:
The space remains vacant for 6 months after the expiration of the renewal option lease.
The space requires a TA of $25 per foot (the cost $25 is stated in “today’s dollars”, to calculate the cost in the future adjust the level using the CPI).
You must pay 2% of the new ten year lease’s rent as leasing commission.
Tile Store
Set up as per the prior exercise.
Expenses
Assume that insurance, legal, accounting and maintenance/repairs grow at CPI.
Assume utility costs grow at 1.5x CPI.
Assume that taxes pop up to 2.5% of FMV at the end of year five and that your property is reassessed at that time. Assume that the cap rate remains the same as that implied in the prior exercise for year one (cap rate = NOI/Purchase Price). Assume that he first payment impacted is that for the following June.
Capital Repairs
At the end of year seven the parking lot needs to be resurfaced. Assume that this costs $200,000.
Cash Flow
Add a cash flow statement to your analysis. Are you generating enough cash to cover your expenses and major cash items?
Can you pay a dividend to your equity holders? At what level?
If you are short on cash what are some of your options?
