A developer plans to start construction of a building in one year if at that point rent levels make construction feasible. At that time the building will cost $1,000,000 to construct.
During the first year after construction would take place, there is a 60 percent chance that NOI will be $150,000 and a 40 percent chance that the NOI will be $75,000. In either case, NOI would be expected to increase at 2 percent per year after the first year.
How much should the developer be willing to pay for the land if he wants a 12 percent rate of return?