The market where the MOB is located is unstable with extensive tenant churning and lease buyouts occurring regularly. The truth is our 10% vacancy and collection loss estimate is fairly optimistic due to the perceived stability of current leases. A more realistic estimate (most likely) is 15% and a worst case (pessimistic) estimate for V&C would be 20%. Let’s assign the probability of occurrence as follows: 40% for most likely, 35% for optimistic and 25% for worst case.

Compute the following

a. BTIRR and ATIRR for each scenario (you already have the optimistic estimate)

b. The expected IRR given the 3 scenarios

c. The variance and standard deviation of IRRs and the coefficient of variation for both before and after tax

d. Are the expected returns in excess of 12%?

e. Now, assume that the increase in value for year five is expected to be 6%. What is the marginal return for keeping the property one additional year? What is your advice?