time value and mortgage

Mar 20, 2005 2 Replies
T

I have a time value problem, and I'm not sure how to analyze it.



An investor owns 50% of a building (valued at $1,400,000) and is a tenant in this building paying rent of $250,000 annually. At the end of every year the 50% ownership of this building pays a dividend of $80,000.



The investor can sell their portion of the building and receive $700,000 and a 10% rent reduction. The other option is for the investor to continue owning the building and receiving the annual dividend.



Assuming that the investor expects to stay a tenant for the next twenty years is it better to sell the half of the building and receive a rent reduction, or is it better to continue receiving the dividend? Also assuming that the building's value will stay fixed at $1,400,000 and that the investor can invest spare cash at 2%.



If their is no timeline would this be treated like a perpetuity? I'm thinking that a present value annuity is needed to evaluate the cost of the mortgage payments moving forward.



Thoughts?



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R

That looks like over a 11% return on investment.

An investor would then need to be able to get $55,000 per year on a $700,000 investment. (7.8%)

receive

If the investor can only get 2%, the investor shouldn't sell.

I don't see how this needs to be evaluated as a time series.

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G

Let me see if I can restate the situation -

Investor owns 50% of an appreciating asset. Investor actually pays a net $170,000 in annual rent - $250K rent less $80 annual dividend.

If investor sells he gets to pay annual rent of $225,000 - $55,000 more than he pays now (rent less dividend). If investor sells he gets $700,000 - invested at 2% for 20 years this equates to about $3,500 per month or $42,000 per year. So the adjusted net cash flow for the investor IF he sells is rent of $225,000 less $42,000 annual return for a net rent of $183,000 - this is $13,000 more annually than if he keeps his ownership in the building.

Not to mention that the building will likely continue to appreciate over the next 20 years. And I'd bet appreciation will be greater than the 2% return he can get on spare cash - though to be fair, I think 2% is unreasonably low.

Good luck, Gene E. Utterback, EA, RFC

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