Question

(Appraisal) Write a reconciliation statement and conclusion of value based on the below facts:

• An office building was just built in a well developed area with a construction cost of $5 million on a lot recently purchased for $1 million. The property has a long guaranteed lease that will generate $40,000 in rent each month with expenses equal to 20% of rent. Cap Rates in the area for similar properties are 7%. The only other recent sale was a drugstore property for $12 million, 2-years prior in a new are of town without any other commercial developments nearby.

Answer 1

Value of property can be calculated by capitalising the net rentals.

Total rentals receivable in a year = $40000*12 = $480000

Less : Expenses = 20% of 480000 = $96000

Net rentals = $384000

Capitalisation rate for similar properties in the area is 7%.

Hence, the value of property will be = $384000/.07 = $5485714 i.e. approxiamtely $5.5million

Based on the cost of the property, the value will be = $1mn + $5mn = $6mn

Moreover there was another sale two years ago at $12mn. But this property is in no way similar to the given property and the area is also far different. So this value cannot be used for the purpose of valuation.

Based on cost method and capitalisation methods the value comes to be $6mn and $5.5mn respectively.

As per my opinion capitalisation method is more relevant as it takes into account the actual economic benefits that will flow from the asset.