Exercise 3 There is a new office building recently constructed in downtown Iowa City. The...
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Exercise 3 There is a new office building recently constructed in downtown Iowa City. The building, designed by renowned French architect Fanetta Defaneau, is not just pretty on the outside, but it also boasts four courtyards, an open staircase, and glazed elevators. The building has 50 office spaces (3000 sf each) for leasing.
These are the cash flows related to the building construction and operation, according to the building owner, NY Real Estates, Inc:
Cost of Land: $3.35 million dollars
Cost of construction: $6.4 million dollars over a 2-year period (basically, half each year)
Maintenance & operation costs: $525,000 per year
Annual property taxes: 2.2% of total initial investment, increasing by 10% every 10 years
Expected life of building: 50 years
Vacancy rate: 15%
Buildings salvage value: It is estimated that after the 50-yr life of the building, its salvage value
will be 45% of initial construction cost, plus the full recovery of the cost of land with an increase in its value at 2% per year
If NY Real Estates wants a 20% annual rate of return, what is the annual leasing cost they should charge to corporations for each office space?
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