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Dr. Dulbit Drillum, partner in the dental firm of Drillum, Fillum,




1) Dr. Dulbit Drillum, partner in the dental firm of Drillum, Fillum, and Billum, exchanged;an office building (market value = $1,528,000) for an apartment building (market;value = $1,450,000). Dr. Drillum owes $800,000 on a note secured by a mortgage;on his office building, which has an adjusted tax basis of $1,000,000. The building;he will receive in the exchange is encumbered with a mortgage that has a balance;of $700,000. Dr. Drillum incurs transaction costs of $50,000. Each party agrees to;take title subject to the existing mortgage on the substitute building.;a. Assuming that cash will be tendered to balance the equities, how much cash;is tendered and by whom?;b. What is Dr. Drillum?s realized gain on this exchange?;c. What will be Dr. Drillum?s substitute tax basis after the exchange?;2) Arnold Benedict is thinking of buying an apartment complex that is offered for sale;by the firm of Getabinder and Flee. The price, $2.25 million, equals the property?s;1;When you e-mail me the assignment, please make it clear what software package the;assignment is in. I can usually access most types of files, if I know what it is in! If I have problems;opening the file, I will contact you (so please keep a copy of the file!).;Page 1 of 4market value. The following statement of income and expense is presented for;Benedict?s consideration;The Sated Satyr Apartments Prior Year?s Operating Results;Presented by Getabinder and Flee, Brokers;-----------------------------------------------------------------------------------------------------------;30 Units, All Two-Bedroom Apartments, $975 per Month $351,000;Washer and Dryer Rentals 10,000;Gross Annual Income $361,000;Less Operating Expenses;Manager?s Salary $10,000;Maintenance Staff (one person, part time) 7,800;Seedy Landscapers 1,300;Property Taxes 13,000 32,600;Net Operating Income $328,400;-----------------------------------------------------------------------------------------------------------;By checking the electric meters during an inspection tour of the property, Benedict;determines the occupancy rate to be about 80 percent. He learns, by talking to;tenants, that most have been offered inducements such as a month?s free rent or;special decorating allowances. A check with competing apartment houses reveals;that similar apartment units rent for about $895 per month and that vacancies;average about 5 percent. Moreover, these other apartments have pools and;recreation areas that make their units worth about $20 per month more than those;of the Sated Satyr, which has neither.;The tax assessor states that the apartments were reassessed 12 months ago, and;that current taxes are $71,400.;Benedict learns that the resident manager at Sated Satyr, in addition to a $10,000;salary, gets a free apartment for her services. He also discovers other expenses;insurance will cost $6.50 per $1,000 of coverage, based on estimated replacement;cost of about $1.8 million, workers? compensation ($140 per annum) must be paid;to the state, utilities, incurred to light hallways and other common areas, cost about;$95 per month for similar properties, supplies and miscellaneous expenses typically;run about.25 percent of effective gross rent. Professional property management;fees in the market area typically are about 5 percent of effective gross income.;Based on this information that Benedict obtained and assuming typically competent;professional management, Benedict arrived at the following reconstructed operating;statement as shown below;Page 2 of 4The Sated Satyr Apartments;Reconstructed Operating Statement;-----------------------------------------------------------------------------------------------------------;Potential Gross Rent (30 Units, at $875 per month) $ 315,000;Less: Allowance for Vacancies (5 percent) 15,750;Plus: Other Income (Laundry and vending Machines) 10,000;Effective Gross Income $ 309,250;Less: Operating Expenses;Management Fee (5% of effective gross income) $ 15,463;Resident Manager (Salary Plus Free Rent) 20,500;Utilities 1,140;Property Insurance 11,700;Workers' Compensation Insurance 140;Supplies and Miscellaneous (.0025 X $299,250) 748;Landscaping and Grounds Maintenance 1,300;Maintenance and Repairs 7,800;Property Tax 71,400 130,191;Net Operating Income (Annual) $ 179,059;-----------------------------------------------------------------------------------------------------------;Given the reconstructed operating statement, you need to do the following (please;use the format I have in my online presentations);a. Based on the reconstructed net operating income and the current market;value, determine the capitalization rate.;b. Develop a five-year forecast of net operating income for the Sated Satyr;Apartments;2, incorporating the following assumptions;1) Potential gross rent and miscellaneous other income will grow at 2.5;percent per annum over the forecast period.;2) Vacancies in the market area will remain constant over the forecast;period.;3) Operating expenses other than management fees and property taxes;will grow at 2.5 percent per annum over the forecast period.;3;4) Management fees as a percent of effective gross income will remain;constant over the forecast period.;5) Property taxes are expected to increase to $76,048 in the third year;of the forecast.;c. Develop a 5-year amortization schedule for Sated Satyr Apartments;assuming that Benedict can obtain a $1,500,000 loan with terms of interest;2;Remember that the Reconstructed Operating Statement is for the present (year;0), you need to develop an five-year forecast (year 1, 2, 3, 4 and 5).;3;You can group all operating expenses, except for management fees and property;taxes, into one category for the purposes of this forecast.;Page 3 of 4at 8.5 percent per annum and level annual payments to amortize the loan;over 20 years.4;There are no points or loan amortization fees anticipated.;d. With information from (b) and (c) above, calculate the BTCFs for each of the;5 year holding period.;e. Using the capitalization rate arrived at in (a), assuming that it will remain;constant over the holding period, estimate the property?s market value at the;end of the 5 year holding period. Assuming that transaction costs;(brokerage, legal and accounting fees, and so forth) equal 8 percent of the;sales price, determine the BTER from the sale of the property.;f. Using the information from (d) and (e) and the following assumptions, we;next need to arrive at the ATCFs (from operation) and the ATER (from;reversion). We can assume;1) Eighty percent of the purchase price is attributed to the buildings;2) The taxpayer is in the 40 percent marginal income tax bracket and will;incur no liability for the alternative minimum tax during the projected;holding period.;3) It is assumed that the property is put into service on January 1;st;and;sold on December 31;st;4) Assume the client is "active" in the property management.;5) It is assumed that the client has an adjusted gross income of $95,000;and has no other passive income not offset by other passive losses;(for each year of the anticipated holding period).;Additional Requirements;Level of Detail: Show all work


Paper#26001 | Written in 18-Jul-2015

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