Computation of Leverage Ratio and Average Cost of Capital.

1. You are trying to apply a multi-year DCF analysis to evaluate an investment property with some long-term leases in it. You observe that other properties with similar lease structure and risk have been selling at cap rates around 8% (based on NOI with no capital reserve). You believe these other properties typically face capital expenditures on the order of 2% of property value per year in the long run, and that given such expenditures their net cash flows and values would reasonably be expected to grow in the long run at about 1% per year. What discount rate should you apply to your subject property in your DCF valuation?

2. A tenant has a gross lease with an "expense stop" of $2.75/SF. If the building has 200,000 square feet of leasable space, reimbursable operating expenses of $750,000, and the tenant rents 25,000 SF, then how much does the tenant owe the landlord in expense reimbursements (the total $ amount)?

3. Suppose the lease on a certain space will expire at the beginning of 2010. You believe that the probability of the existing tenant renewing is 75 percent. If they renew, you will need to spend only an estimated $5.00/SF to upgrade his space. If they do not renew, it will take $20.00/SF to modernize the space and there would be 4 months of expected vacancy in that case. What expected cash flow forecast should you put in year 2010 of your pro-forma for this space, if you expect triple-net market rents on new leases in 2010 to be $20/(SF-year)?

4. If the Loan-to-Value ratio is 60%, what is the "Leverage Ratio"?

5. A REIT has expected total return on equity of 15%, interest on their debt is 9%, and their debt-to-total-value ratio is 40%. What is the REIT's average cost of capital? (Hint: Use the WACC formula)