Question: A 150,000-SF office building has a triple-net lease providing a constant rent of $20/SF per year. (With a triple-net lease, you can assume the rent equals the net operating cash flow.) The lease has five years before it expires (i.e., assume the next payment comes in one year, and there are four more annual payments after that under the present lease). Rents on similar leases being signed today are $22/SF. You expect rents on new leases to grow at 2.5% per year for existing buildings. You expect to release the building in year 6 after the current lease expires, but only after experiencing an expected vacancy of six months, and after spending $10/SF in tenant improvements (TIs). After 10 years, you expect to sell the building at a price equal to 10 times the then-prevailing rent in new triple-net leases. Based on survey information about typical going-in IRRs prevailing currently in the market for this type of property, you think the market would require a 12% expected return for this building.

a. What is the NPV of an investment in this property if the price is $30 million? Should you do the deal?

b. What will be the IRR at that price?

c. What is the cap rate at the $30 million price?