A 5,000 square foot commercial space rents for $2.25 per square foot per month (NNN). Annual operating expenses for the building are $45,000. The cap rate is 7%. What is the building value? (Assume full occupancy, and the building has 10,000 sq ft total)

Explanation

Annual gross rent = 10,000 × $2.25 × 12 = $270,000 (full 10,000 sq ft). With NNN, tenant pays operating expenses. NOI = Annual rent − owner's expenses. Under NNN, operating expenses are the tenant's. Assuming owner has no operating expenses beyond debt service (excluded in cap rate): NOI ≈ $270,000 − $45,000 (owner portion) = $225,000. Value = $270,000 / 0.07 = $3,857,143. Or if only 5,000 sq ft occupied: NOI = $135,000/0.07 = $1,928,571. With occupancy only of 5,000 sq ft and expenses = $45,000 against owner: NOI = $135,000 − $15,000 = $120,000/0.07 = $1,714,285.