Here are some issues concerning the physical property which may adversely affect its future cash flows. How will you deal with the following? 1. Roof needs $50,000 worth of repair work. 2. Several (6) heat pumps as part of your HVAC (Heating, Ventilation, Air Conditioner) system need to be replaced at a cost of $5,000 each. A workout facility is planned for the lower level at a cost of $125,000.
The total amount of repairs that the building will need is $205,000.00. This can be broken up over a series of five years, by investing a consistent amount of $41,000.00 per year. This will ensure that the net operating income remains high, while addressing long-term maintenance issues that could be affecting the property.
Given the information at your disposal, what do you believe are reasonable estimates of the property's value over the next 5 years?
Given the implosion in real estate prices and the fact that revitalization is occurring throughout the area, means that a reasonable growth rate of 3% is logical. Over the course of five years, this would be total return of 15.0% or market value of: $1,981,715.60.
Next consider a sale and the gain on sale proceeds before tax
If the building was to be held for total of five years, it would generate a pretax profit of $258,484.65. This number was calculated by taking 15.0% and multiplying it by $1,723,231.00 (the present value of the property).
Considering your personal vision and your family considerations, are...
There are several ways that you can benefit from the property. The most obvious would be the potential appreciation that can be realized, from efforts to revitalize the area. This will create an increase in the value of the property over the long-term. Especially when you consider the fact: that Blue Cross / Blue Shield and Niagara Mohawk have just relocated to nearby properties. This will have ripple effects in area, as their presence and efforts to redevelop the will continue to increase the value of the property.
At the same time, the long-term leases and the ones that are coming up for renewal will allow for periodic increases in the rent. This will help to improve the operating income and the overall returns. In many ways, this is tied directly to what is taking place in the area. Where, the various effects will increase demand for a host of commercial rental properties. At which point, the average lease rate for office space will increase.
Clearly, the Jefferson Center has the potential to generate consistent long-term income and growth. As the building is located in an area where realization is occurring and a number of large employers are relocating. These facts mean that demand for a number of properties will increase, affecting leasing rates and prices.
Bibliography
Impressive in Syracuse. (2009). CEOs for Cities. Retrieved from: http://www.ceosforcities.org/blog/entry/2201
