You are an investor considering the purchase of an upscale office/warehouse "flex" building. The terms of the purchase are a price of $6,150,000 with 80% of the purchase price financed with a 25-year loan at 7% interest with fixed monthly payments and 20% financed with cash (equity). Eighty-five percent of the purchase price is attributed to the improvements and can be depreciated. A total of 120,000 square feet can be leased at $10 per square foot per year. Vacancies losses are expected to be 15%. The operating expenses are estimated to be 33% of the effective gross income. Rents are expected to grow 2% per year.

Assume that you will sell the property in 5 years. At the end of year 5, the property is projected to be valued at the year 6 NOI capitalized at 8%(direct capitalization). Selling expenses are estimated to be 9% of the selling price. You are in the 30% income tax bracket and expect to pay a 15% tax on the capital gain and a 25% tax on the recovery of depreciation.  

Partial Amortization Schedule (rounded to the nearest dollar)

Year Balance due Interest Principal

1 ................. $342,016 $75,267

2 ................... ............. 80,708

3 .................. 330,740 ...........

4 ................ ............ 92,798

5 $4,485,178 $317,776 ...........

a. Calculate the first year NOI

b. Calculate the first year taxes

c. calculate the first year ATCF

d. calculate the fifth year ATCF

e. what is the sixth year NOI?

f. Calculate the ATER, as if you were selling after 5 years

g. what is the break-even vacancy rate (year 1)?

h. If the discount rate is 16%, what is NPV?

i. What is the IRR?

j. do you accept or reject this investment opportunity? Why?