3. Courtney Baxter has presented Joshua with yet another opportunity: It is related to a commercial property investment. Based upon a market analysis involving the review of supply and demand, rents, and estimated operating expenses, annual net operating income (NOI) is estimated as follows:
Year NOI
1 $1,000,000
2 $1,000,000
3 $1,000,000
4 $1,100,000
5 $1,200,000
6 $1,250,000
7 $1,287,500
8 $1,326,125
Answer:
4. There is the expectation that Citadel, LLC should be able to earn a 10% return on an investment like this venture. And, starting from year 6 to year 7 and every year thereafter, the NOI is expected to grow at 3% per year indefinitely. Assuming this investment is expected to produce NOI in years 1-8 and be owned for seven years and then sold, what would be the value for this property today?
5. Why should Joshua and Jim consider building a portfolio by investing in real estate income property? Are there any special considerations that should be taken into account when it comes to taxation of income property? What about depreciation?
6. American National is willing to make a loan for $750,000 on a commercial property at a 9% interest (accrual) rate with payments calculated using a 7% rate and a 30-year loan term. After the first five years, the payments are to be adjusted so that the loan can be amortized over the remaining 25-year term. What is the initial payment? What will the balance be after 5 years?
7. How should Citadel, LLC go about analyzing the risk of different properties and investments? What is the difference between business and financial risk, and what should be more important to take into consideration? Finally, explain the concept of a real option and how this can help Joshua and Jim as they continue with their business.