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Total development costs are $400/SF. Investors are willing to pay property prices of $10 per dollar of current net rental income. What is the ‘‘replacement cost rent’’ in this market?

Question

Total development costs are 400/SF.Investorsarewillingtopaypropertypricesof400/SF. Investors are willing to pay property prices of 10 per dollar of current net rental income. What is the ‘‘replacement cost rent’’ in this market?

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Solution

The replacement cost rent is the rent that would justify the cost of constructing a new building, given the current market conditions. It is calculated by dividing the total development cost by the price investors are willing to pay per dollar of net rental income.

Given that the total development cost is 400/SFandinvestorsarewillingtopay400/SF and investors are willing to pay 10 per dollar of net rental income, the replacement cost rent can be calculated as follows:

Replacement Cost Rent = Total Development Cost / Price per Dollar of Net Rental Income Replacement Cost Rent = 400/400 / 10 Replacement Cost Rent = $40/SF

So, the replacement cost rent in this market is $40 per square foot.

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