An investor plans to purchase a small retail shopping center…
An investor plans to purchase a small retail shopping center. Potential gross income (PGI) over the next 12 months is estimated at $120,000. PGI is expected to increase by 3.5% per year. The vacancy rate is expected to be 7% of PGI. Operating expenses are 40% of effective gross income (EGI). Capital expenditures are 4% of EGI. The vacancy rate, operating expense ratio, and capital expenditure ratio are expected to remain a constant percentage of EGI during the investment period of 3 years. Determine the current market value of the property using the direct capitalization approach, assuming the overall capitalization rate, RO, is 8.75%.