J&M Company is a real-estate developer considering a 40-unit apartment complex in a growing college town. As the area is also booming with foreign automakers locating their US assembly plants, the firm expects that the apartment complex, once built, will enjoy a 90% occupancy for an extended period. The firm already compiled some of the critical financial information related to the development project as follows:  Land price (1 acre) = $1,200,000  Building (40 units of single bedroom) = $4,800,000  Project life = 25 years  Building maintenance per unit per month = $100  Annual property taxes and insurance = $400,000 Assuming that the land will appreciate at an annual rate of 5%, but the building will have no value at the end of 25 years (it will be torn down and a new structure would be built), determine the minimum monthly rent that should be charged if a 12% return (or 0.9489% per month) before tax is desired.

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Business

Enzo

29 October, 04:53

J&M Company is a real-estate developer considering a 40-unit apartment complex in a growing college town. As the area is also booming with foreign automakers locating their US assembly plants, the firm expects that the apartment complex, once built, will enjoy a 90% occupancy for an extended period. The firm already compiled some of the critical financial information related to the development project as follows:  Land price (1 acre) = $1,200,000  Building (40 units of single bedroom) = $4,800,000  Project life = 25 years  Building maintenance per unit per month = $100  Annual property taxes and insurance = $400,000 Assuming that the land will appreciate at an annual rate of 5%, but the building will have no value at the end of 25 years (it will be torn down and a new structure would be built), determine the minimum monthly rent that should be charged if a 12% return (or 0.9489% per month) before tax is desired.

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Kai Robinson · Answer 1

Salvage value = price (1+i) ^n; i - interest rate; n-time period

Salvage value = 1,200,000 * (1+0.05) ^25 = 4,063,680

Monthly rent = ((price+building cost) - salvage value) * (i (1+i) ^n/[ (1+i) ^n-1]) +

+ i*salvage value + maintenance cost*12*number of buildings + insurance and property tax) * (return/[ (1+i) ^n-1]) =

((1,200,000+4,800,000) - 4,063,680) * (0.12 * (1+0.12) ^25/[ (1+0.12) ^25 - 1]) + 0.12*4,063,680 + (100*12*40) + 400,000) * (0.009489/[ (0.009489 + 1) ^12 - 1]) =

= (6,000,000 - 4,063,680) * 2/16 + 487,641.6 + 48,000 + 400,000) * 0.0791 =

= (1,936,320 * 0.125 + 487,641.6 + 448,000) * 0.0791 =

= (249,398.016 + 487,641.6+448,000) * 0.0791 = 97.636.63

So the minimum monthly rate is 97.636.63