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Operating Expenses <br /> The typical rents paid by landlords in warehouse type properties are <br /> property taxes, property insurance , exterior building maintenance <br /> and property management. <br /> The property tax estimate is the actual property tax the property <br /> presently incurs. The insurance was estimated at $1 , 500 per year <br /> and the maintenance was estimated on the basis of 25 cents per <br /> square foot of building area. The management expense was estimated <br /> at 5% of effective gross income. <br /> The total operating expenses are 14% of the estimated effective <br /> gross rent . This relationship falls in the experience range <br /> exhibited by other warehouse properties in Garfield County. <br /> Capitalization Rate <br /> The Capitalization rate applied is under a modified "band of <br /> investment" concept . This rate makes provision for the mortgage <br /> portion of the investment as well as for cash flow or "equity <br /> dividend" on the equity portion. In recent history many investors <br /> in income producing properties in the Garfield County area were <br /> willing to base their yield on an anticipated gain in property value <br /> resulting from inflation and a continuing upward trend in property <br /> values . These investors also expected to benefit from mortgage <br /> reduction , tax shelter during the term of their ownership and future <br /> rent increases. They required that net income be sufficient to <br /> cover all operating expenses , in addition to the mortgage loan <br /> payment. Cash flow was not anticipated and in some cases negative <br /> cash flow was experienced . <br /> However , currently high interest and an recessionary economy have <br /> once again created market expectation of cash flow or "equity <br /> dividend . " In formulating an estimated cap rate for the <br /> capitalization of the net economic rent , the writer has estimated <br /> the equity dividend rate for subject property under normal <br /> investment conditions at 5 .5% per year . This compares favorably <br /> with other investments of similar scope and risk . The <br /> capitalization rate applied is based on the availability of a <br /> "typical" first mortgage loan at 66.7% ratio of loan to value. This <br /> financing assumes a 15% interest rate and 30 year amortization . <br /> Available financing to a typical , private investor today would <br /> probably require a 5-year "call" or balloon at the end of five <br /> years . However , the loan payment would be based on a full 30 year <br /> schedule. This formulation of the capitalization rate indicates a <br /> capitalization rate of 11 .98% which has been rounded to 12%. <br /> -14- <br />