INCOME PROPERTY PRACTICE PROBLEM

Property:                    Multi-tenant Office Building

Useable Building Area:      50,000 square feet

Load Factor:             1.10

Occupancy:               85%

Avg. Contract Rent:             $15.00 SF

OER:                          Market – Calculate from Data Provided

Mortgage Loan Terms:                  

Interest Rate: 7.0%

Loan Term: 5 years

Amortization Period: 20 years

Loan to Value Ratio: 70%

Investment Assumptions:

Effective Gross Income Increases @ 4%/year

Purchase at market derived EGIM or Ro – whichever results in the lower price

Sell after 3 years at a terminal capitalization rate - .25 higher than going-in Ro

Marginal tax rate of 35%

Land Value: $300,000

Personal Property: $100,000

Market Data for Rate/Ratio Derivation:

                                                        Sale #1                      Sale #2                        Sale #3

Sale Price                                 $1,000,000               $3,500,000               $3,900,000

Effective Gross Income          $   250,000                $   875,000                $   975,000

Net Income                               $   100,000                $   350,000                $   390,000

1. What is the Purchase Price?

2. Calculate the going-in cap rate and EGIM

3. Calculate 3 years of after-tax cash flow and ATCF from resale

4. Calculate DCR and Re for each year

5. Calculate the PV and NPV of after-tax cash flows at an 11% discount rate

6. What is the after-tax Internal Rate of Return for this investment?