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Westgate Shopping Center is a 400,000 square foot neighborhood
strip center. An investor is considering purchasing the property on
August 1, 2010, hold if for five years and expects to sell it based
on a cap rate of 7.5% applied to end-of-the year 5 net operating
income. Selling costs would be 3% of the sale price. He hopes to
get a 12% rate of return over the life of the investment. The
purchase price is $3,000,000.
Assumptions:
Inflation over the next 5 years is expected to be 2% per
year
The vacancy rate for similar shopping centers is 5%
Credit loss is projected at 2%
Expenses are as follows:
Real estate taxes are $55,000 the first year increasing 2.5% /
year
Insurance is $.40 per / foot increasing 3% / year
Common area maintenance is $2.25 / square foot increasing 2% /
year
Management fee is 4% of effective gross income
Rent roll:
Tenant A
Square feet: 50,000 square feet
Term: July 1, 2005 – June 30, 2015
Base rent: $12 / square foot
Expenses: Taxes, Insurance, Common Area – Net basis
Expiry:
Base rent: $12 / square foot increasing at 3% / year
Term: 5 years
Expenses: Net basis
Tenant B
Square feet: 20,000 square feet
Term: July 1, 2008 – June 30, 2011
Base rent: $15 / square foot
Percentage rent: 5% of retail sales in excess of $225 / square
foot
Sales: $250 / square foot
Expenses: Taxes, Insurance, Common Area – Net basis
Expiry:
Base rent: $16 / square foot increasing at 3% / year
Term: 3 years
Expenses: Net basis
Tenant C
Square feet: 120,000 square feet
Term: July 1, 1990 – June 30, 2014
Base rent: $8.50 / square foot
Expenses: Taxes, Insurance, Common Area – Net basis
Expiry: Vacating
Based on this information you must decide:
1.Will the investor receive the expected 12% rate of return
over the life of the investment?
2.What types of risks should the investor consider?