INCOME PROPERTY PRACTICE PROBLEM
Property: Multi-tenant Office Building
Useable Building Area: 50,000 square feet
Load Factor: 1.10
Occupancy: 85%
Avg. Contract Rent: $15.00 SF
OER: Market – Calculate from Data Provided
Mortgage Loan Terms:
Interest Rate: 7.0%
Loan Term: 5 years
Amortization Period: 20 years
Loan to Value Ratio: 70%
Investment Assumptions:
Effective Gross Income Increases @ 4%/year
Purchase at market derived EGIM or Ro – whichever results in the lower price
Sell after 3 years at a terminal capitalization rate - .25 higher than going-in Ro
Marginal tax rate of 35%
Land Value: $300,000
Personal Property: $100,000
Market Data for Rate/Ratio Derivation:
Sale #1 Sale #2 Sale #3
Sale Price $1,000,000 $3,500,000 $3,900,000
Effective Gross Income $ 250,000 $ 875,000 $ 975,000
Net Income $ 100,000 $ 350,000 $ 390,000
1. What is the Purchase Price?
2. Calculate the going-in cap rate and EGIM
3. Calculate 3 years of after-tax cash flow and ATCF from resale
4. Calculate DCR and Re for each year
5. Calculate the PV and NPV of after-tax cash flows at an 11% discount rate
6. What is the after-tax Internal Rate of Return for this investment?