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Given certain indicators of slow market growth and the high purchase price being advertised by the seller, this is most likely a bad investment for Laflin and his investors. While employment growth may be on the rise, the lack of speculative construction is troubling as this implies the market is not expecting an increased demand. In any case, when considering the expiration of the current tenants’ above market rents and the unfortunately low current market rents, Laflin would still need a great deal of growth in addition to a lower negotiated price to make this investment profitable.
Question 2 Laflin’s setup suffers from some overly optimistic assumptions. His revised set up assumes a base rent of …show more content…
Unfortunately, even that manipulation would force Laflin to make a bid the seller would surely refuse, given that it would have to be somewhere around 50% lower than the stated price. Laflin must then resort to some combination of asking for a lower purchase price and hoping for appreciated value to come through a growth in NOI. It is only when the NOI is increased to $3.00 PSF in year 2, while still accounting for a market vacancy of 16%, that the IRR is finally greater than the r discount rate, and the NPV is positive by $77,947. Given that no speculative construction has been done in the last five years, it seems the market is not expecting any new demand. This much of a dramatic increase in NOI growth, therefore, is unlikely. Furthermore, relying on appreciation to add value to an investment is always more risky, as this is widely dependent upon an exit cap rate and NOI growth due to market rents in a possibly stale economy. These are factors which are out of Laflin’s control. (See Lower Purchase Price and Growth)
Question 4 Valuations of the property, like those proposed by the appraiser, vary wildly because they are based on assumptions. The Replacement Cost appraisal may differ currently because a slower market with less demand may lower the cost of construction. The Income approach varies because it is widely