Question

I am considering purchasing a building in downtown Atlanta. Three other buildings have all sold there in the past year. All three are exactly the same square footage (45,000 sq. ft.); all three generate the same rent annually ($1.2 million); all three have the same annual maintenance costs ($600,000). All sold for $9.8 million.

The building I am considering purchasing is also 45,000 square feet, and has the same maintenance costs, but only generates $950,000 in rent revenues annually.

What's the proper valuation for this property based on this information?

	A. $9.8 million, same as the other 45,000 square foot buildings.
	B. $5.72 million, using the same price/NOI multiple as the other buildings.
	C. Definitely less than $5.72 million.
	D. Definitely more than $9.8 million.
	E. Somewhere between $5.72 million and $9.8 million.

Answer 1

Step 1 : Calculate Cap rate of comparable property :

NOI (Net operating income) = Rent - Annual maintenance cost

NOI = $1.2 million - $0.6 million

NOI = $0.6 million

Value (Comparable property sold Value) = $9.8 million

Step 2 : Calculate Value of your property :

NOI (Net operating income) = Rent - Annual maintenance cost

NOI = $0.95million - $0.6 million

NOI = $0.35 million

Correct Answer : B. $5.72 million, using the same price/NOI multiple as the other buildings.

PLEASE THUMBS UP :)