Pro forma statement without finance
Your company is considering making an investment in an apartment building. You will not use any debt (i.e. a mortgage) to buy the building (i.e. it will be all equity).
The building has 40 two-bed room apartments and 15 three-bed room apartments. You assume that the monthly rent for two-bed room units is $1,875 and the rent for three-bed room apartments is $2,250.
The building has 110 parking spaces. The charge for each of them is $125 per month. The projected information about the investment is as follows. Please construct the pro forma statement (round to dollars):
Annual inflation of rents and parking charge 3%
Vacancy and collection loss as of PGI 7%
Parking Vacancy Allowance 6%
Purchase Price / Current Assessed Value $6,050,000
Land value as % of the total value 24%
Annual growth of assessed value in each of Years 2-5 3%
Property tax mill rate 23
Other Operating Expenses (% of EGI) 42%
Planned holding period 4 years
Terminal cap rate (applied to 5th year's NOI) 7.25%
Selling cost as a % of Gross Sales Price 4.0%
# of Years for calculating Depreciation 27.5
Capital gains tax rate 15%
Depreciation Recapture tax rate 25%
Income tax rate 35%
Your after tax discount rate (After tax required rate of return) 8.75%
Pro Forma Statement
Yearly Cash Flows from Operations
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Year 1
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Year 2
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Year 3
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Year 4
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Year 5
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Potential Gross Income
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(Less Vacancy & Coll.)
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Potential Other Income
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(Less Other Income Vacancy)
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Effective Gross Income
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Memo: Assessed Property Value
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(Less Property Taxes)
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(Less Other Operating Expenses)
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Net Operating Income
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(Less Depreciation)
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Taxable Income
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Income Taxes
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Before Tax Cash Flows
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(Less Income Taxes)
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After Tax Cash Flows
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Reversion Cash Flow
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Gross Sales Price
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(Less Selling Cost)
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Net Sales Price
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Net Sales Price
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(Less Original Purchase Price)
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Capital Gain from Appreciation
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Capital Gain Tax on Appreciation
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Total Accumulated Depreciation (Recapture)
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Recapture Tax
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Total Capital Gain Tax
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ATCF from Reversion
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Total Cash Flows
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Time 0
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Year 1
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Year 2
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Year 3
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Year 4
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Total After Tax Cash Flows
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Net Present Value (NPV) __________
Internal Rate of Return (IRR) __________
(1) Should you invest in this property under the terms and assumptions outlined? (Hint: you need to look at your answers for NPV and IRR.) Why or why not?
(2) If the after tax required rate of return was 11.0%, would your answer to Question #1 change? Why or why not?
(3) If Congress changed the depreciation period for apartment buildings from 27.5 years to 15 years, would the annual After Tax Cash Flows from operations increase or decrease?
(4) Would the after tax cash flow from reversion increase or decrease if the depreciation period was decreased to 15 years?
(5) List at least 2 questionable assumptions from the proforma and explain how they might be improved.