70.2K

Verified Solution

Link Copied!

You have an opportunity to purchase the 23 site Plum Creek manufactured home/RV park for $250,000. The park caters to extended stay residents (six months or longer) and charges a market rental rate of $240 per month plus electricity per site. You expect to he ahle to raise site rentals The owner reports an annual vacancy rate of 10% but you believe an annual 15% vacancy rate every year of the holding period is a more realistic estimate. ASSIGNMENT (CONTINUED) For expense estimates, you rely on public records (tax office), an income/expense statement provided by the owner/seller, and Darrell Hess & Associates, a national manufactured home park brokerage company that compiles expense data from hundreds of parks nationwide. The previous year's property taxes were $5,042. The new assessment and tax rate has not beern set, so the previous year's taxes are used in your pro-forma for the first year. Hazard and liability insurance is estimated to be 2% of effective gross income (EGI) in first year Each site is individually metered for electricity and the tenants are responsible for their usage. The park owner reported annual water and trash removal expenses of $5,460 for the previous year and this amount appears reasonable for your first year projection The annual administrative/management expense (part time on-site manager, advertising, legal fees, accounting fees and office expenses, etc.) is estimated to be 29% of EGI by Darrell Hess & Assoc. The owner did not report any maintenance expense as he did all of the work himself. You believe a $2,000 first year expense is reasonable for the road maintenance, landscape maintenance, etc. You have obtained a loan commitment from a bank for 80% (20% down payment aka equity contribution) of the purchase price with a 20 year amortization at 6% interest. 1 Create a Year One-Five Pro-forma statement of cash flows on an Excel spreadsheet. 2) Calculate the following ratios (all before tax) by Excel formulas at the bottom of the spreadsheet similar to Exhibit 16-9: A) Operating expense (annual operating expense/EGI); according to Darrell Hess & Associates, oper B) Debt Coverage Ratio (NOI/debt service); 1.4 or greater is considered good by the lender C) Return on Equity (BTCF/equity invested); investor surveys indicate 13% or better is expected ators can expect a 50% operating expense ratio. 3) Using the IRV formula, calculate the indicated overall rate (cap rate) Ro for Year One to see if it is within the 9-11% range for manufactured home parks indicated by a national investor survey 4) Calculate the value of the subject after the five year holding period (the reversion) using a 10.5% terminal Ro. Remember to carry the pro-forma to a sixth year to obtain Year Six NOI. 5) Calculate the IRR of the cash flows by calculator using the $250,000 purchase price. 6) Calculate the NPV of the property by calculator using a 12% IRR.

Answer & Explanation Solved by verified expert

See Answer