A Property with and existing building generates NOI of $9,500/year. The appraiser believes that a 10% overall capitalization rate is appropriate to estimate the value of the existing property as improved. The value of the site as if vacant is determined to be $100,000 before considering demolition costs.
a. Should the existing building be demolished if there are no demolition costs?
b. Should the existing building be demolished if demolitioon costs are $10,000?
c. Suppose the existing building could be converted at a cost of $40,000 to a use that would increase the NOI by $4,000 during the first year after conversion. The appraiser belives that an overall capitalization rate of 9.5% would be appropriate for the converted use because of lower risk and greater potential for increase in NOI in the future. Should the existing building be converted or demolished if there are no demolition costs?