8-4 Valuing Commercial Real Estate BuildingOne Properties is a limited partnership

formed with the express purpose of investing in commercial real estate. The firm

is currently considering the acquisition of an office building that we refer to simply as

building B. Building B is very similar to building A, which recently sold for $36,960,000.

BuildingOne has gathered general information about the two buildings, including valuation

information for building A:

Per Square Foot Total Square Footage

A B A B

Building size (sq. ft.) 80,000 90,000

Rent $100/sq. ft. $120/sq. ft. $8,000,000 $10,800,000

Maintenance (fixed cost) (23)/sq. ft. (30)/sq. ft. (1,840,000) (2,700,000)

Net operating income $ 77/sq. ft. $ 90/sq. ft. $6,160,000 $ 8,100,000

Buildings A and B are similar in size (80,000 and 90,000 square feet, respectively).

However, the two buildings differ both in maintenance costs ($23 and $30 per square

foot) and rental rates ($100 versus $120 per square foot). At this point, we do not know

why these differences exist. Nonetheless, the differences are real and should somehow

be accounted for in the analysis of the value of building B using data based on the sale

of building A. Building A sold for $462 per square foot, or $36,960,000. This reflects a

sales multiple of six times the building’s net operating income (NOI) of $6,160,000 per

year and a capitalization rate of 16.67%

Using the multiple of operating income, determine what value BuildingOne should

place on building B.

BIf the risk-free rate of interest is 5.5% and the building maintenance costs are

known with a high degree of certainty, what value should BuildingOne place on

building B’s maintenance costs? How much value should BuildingOne place on

building B’s revenues and, consequently, on the firm?