Robust Properties is planning to go public by creating a REIT that will offer 1 million shares of stock. It is currently trying to develop a pro forma set of financial statements. Robust is faced with a number of questions about its handling of some accounting and financial disclosure issues.
Robust Properties
I. Major Financial Information:
a. Assetsproperties (actual cost) …………………………………….. $100,000,000
b. Depreciable basisbuildings only …………………………………… $80,000,000
c. Useful life ……………………………………………………………………………… 40 years
d. Operating expenses ……………………………………………………….. 38% of rents
e. Management expenses3rd parties ………………………………… 5% of rents
f. General and administrative expenses ……………………………….. 3% of rents
g. Mortgage @ 8% interest only, 10 yrs. ………………………………. $30,000,000
h. Financing fees …………………………………………………………………….. $900,000
II. Lease Information:
a. Average lease term ………………………………………………………………… 5 years
b. Leasable space ………………………………………………………………. 1,000,000sf.
c. Base rents (year 1) ………………………………………………………………… $15 psf.
d. Escalation factorrents per year ………………………………………………….. 5%
e. Lease commissions …………………………………………………….. 4% of yr 1 rent
f. Tenant improvements ……………………………………………………………. $10 psf.
The management of Robust Properties has asked you to prepare preliminary pro forma financials for the next three years. Specifically, you should have
(1) A beginning balance sheet,
(2) Operating statements for each of the next three years, and
(3) All relevant for year 1 results only. Robust will pay all financing fees, tenant improvements, and lease commissions upon commencing operations. It would like to pay a minimum of $4.00 per share.
In preparing your pro forma operating statements, Robust wants you to consider the effects of reporting in the following two ways:
a. What would EPS, FFO, and ROC be under both approaches? How should Robust think about its accounting policy?
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