Property Value Exercise

Value the property using the cost approach and the income approach using the direct capitalization method.
The rectangle-shape land measures 80 meters by 100 meters. The gross building area is 5,000 square meters. Common area hallways use around 1,000 square meters. The economic life for buildings in this neighborhood is estimated at 40 years. The building is 8 years old. It costs 1,000 riyals per square meter to building a new building similar to the subject property. Land values in the neighborhood are estimated at around 2,500 per square meter.

The building is rented out to five tenants. They each have 800 square meters. Two tenants pay 400,000 a year and the other three pay 500,000 a year. You estimate credit and vacancy loss at 5 percent of potential gross income. Based on historical operating statements you estimate expenses at 20 percent of the effective gross income.

You have reviewed recent sales and estimate a capitalization rate of 7 percent.

What is your estimate of value under the cost approach?

What is your estimate of value under the income approach?