Question

In: Finance

You buy a recently completed industrial-office building and starting at the beginning of the first year,...

You buy a recently completed industrial-office building and starting at the beginning of the first year, you put in a single-tenant who pays net rent $50,000 per year at the end of each year on a 5-year triple-net lease. At the end of the fifth year, if all goes well between you and the tenant, you expect to increase the rent to $70,000 per year and put the tenant on a 10-year triple-net lease. After owning the property for 10 years, and just after collecting the rent for that 10th year, you expect to sell the building at a Reversionary Cap Rate of 10%.

A. What is the value of the property if the required initial return is 12 percent per year?

B. If the cap rate on the price you pay when you initially buy the building is in-line with the market cap rate of 10.5%, then what is your IRR on your excellent real estate investment?

Solutions

Expert Solution

Knowledge Required to solve the sum

- triple-net-lease: It is a lease where the expenses related to the property are including property taxes are borne by lessee only.

- Reversionary Cap Rate = {Net Operating income (NOI)/ Expected Sales Price}

or Expected Sales Price = { NOI/ Reversonary Cap Rate }

Answer 1

Expected Sales Price at year 10 end = { NOI/ Reversonary Cap Rate } = 70000/10% = $700000

Value of Property = Present value of cash inflows from property at 12% p.a.

= 50000/(1.12)1 + 50000/(1.12)2 + 50000/(1.12)3 + 50000/(1.12)4 + 50000/(1.12)5 + 70000/(1.12)6 + 70000/(1.12)7+

70000/(1.12)8 + 70000/(1.12)9 + (70000+700000)/(1.12)10

= $548801

Answer 2

Value at time of investment = (50000/10.50%) = $ 476190

Termial Sales price, as computed above = $ 700000

IRR of the investment is the rate of return at which present value of cash outflows is equal to present value of cash inflows.

Let IRR be r

This implies,

476190 = { 50000/(1+r)1 + 50000/(1+r)2 + 50000/(1+r)3 + 50000/(1+r)4 + 50000/(1+r)5 + 70000/(1+r)6 + 70000/(1+r)7+ 70000/(1+r)8 + 70000/(1+r)9 + (70000+700000)/(1+r)10}

This implies IRR = r = 14.32%


Related Solutions

You buy  a recently completed industrial-office building and starting at the beginning of the first year, you...
You buy  a recently completed industrial-office building and starting at the beginning of the first year, you put in a single tenant who pays net rent $50,000 per year at the end of each year on a 5-year triple-net lease.  At the end of the fifth year, if all goes well between you and the tenant, you expect to increase the rent to $70,000 per year, and put the tenant on a 10-year triple-net lease.  After owning the property for 10 years, and...
You have an opportunity to buy an office building for $125,000 that produces an annual NOI...
You have an opportunity to buy an office building for $125,000 that produces an annual NOI of $10,000. You can obtain an 80% loan from a bank with a 7% interest rate and amortized for 30 years. Your required investor cash on cash return is 12%. You will have to put 20% of the purchase down. What is the value of the office building? A. $140,999 B. $118,242 C. $113,895 D. $125,000
You are considering purchasing a small office building for $1,975,000 Your expectations include: First-year gross potential...
You are considering purchasing a small office building for $1,975,000 Your expectations include: First-year gross potential income of $340,000; Vacancy & collection losses equal to 15% of PGI; Operating expenses = 40% of EGI; Capital expenditures = 5% of EGI Mortgage (75% LTV) @ 7% What is debt amount? Mortgage will be amortized over 25 years with a monthly payment What is the monthly payment ? Can you teach me how to do this on excel? Thank you!
Ann wants to buy an office building which costs $2,000,000. She obtains a 30 year fully...
Ann wants to buy an office building which costs $2,000,000. She obtains a 30 year fully amortizing fixed rate mortgage with 80% LTV, an annual interest rate of 4%, with monthly compounding and monthly payments. The mortgage has a 2% prepayment penalty if the borrower prepays in the first 5 years. Suppose Ann makes the required monthly payment for 3 years and prepays after her final monthly payment at the end of 3 years. What is the annual IRR on...
Ann wants to buy an office building which costs $1,000,000. She obtains a 30 year fully...
Ann wants to buy an office building which costs $1,000,000. She obtains a 30 year fully amortizing fixed rate mortgage at 80% LTV, an annual interest rate of 4%, with monthly compounding and monthly payments. How much is Ann’s monthly payment? A. $3,819.32 B. $2,666.67 C. $3,333.33 D. $4,774.15
1. Ocular Solutions recently (at the beginning of year 1) forecasted first year sales of $9.4...
1. Ocular Solutions recently (at the beginning of year 1) forecasted first year sales of $9.4 million, operating costs other than depreciation of $5.6 million, and depreciation of $0.6 million. The company has no amortization charges, it has $4.2 million of outstanding bonds that carry a 6.5% interest rate, and its income tax rate is 28%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm is required to make $1.3 million...
An industrial property recently sold for $5,500,000. First-year NOI is $440,000. NOI is expected to increase...
An industrial property recently sold for $5,500,000. First-year NOI is $440,000. NOI is expected to increase annually by 4% over the next decade. The expected holding period is 7 years. 1. What would terminal cap rate be appropriate? 2. what is the relationship between today's cap rate and the going out cap rate? 3. In addition to capitalizing income, there is a second method to estimate terminal value describe the method and provide a numerical example.
Mooney Ltd. completed the construction of an office building for £2,400,000 on December 31, 2019. The...
Mooney Ltd. completed the construction of an office building for £2,400,000 on December 31, 2019. The company estimated that the building would have a residual value of £0 and a useful life of 40 years. A more detailed review of the expenditures related to the building indicates that £300,000 of the total cost was used for personal property and £180,000 for land improvements. The personal property has a depreciable life of 5 years and land improvements have a depreciable life...
Ann is looking to buy an office building in 2014. She plans to rent it out...
Ann is looking to buy an office building in 2014. She plans to rent it out for 5 years (2015-2019) and sell it at the end of 2019. Inputs Annual Interest Rate 5.75% Minimum DSCR 1.20 Maximum LTV 90% Cash Available to Close $1,500,000.00 Asking Price / Value $21,257,764.62 NOI 2015 $1,381,754.70 Income Test Maximum Annual Mortgage Payment ? Maximum Loan Amount ? Collateral Test Maximum Loan Amount LTV Test ? Both tests Maximum Loan Amount ? Debt Service Payment...
The roof of your corporation’s office building recently suffered some damage as the result of a...
The roof of your corporation’s office building recently suffered some damage as the result of a storm. You, the president of the corporation, are negotiating with a carpenter who has quoted two prices for the repair work: $600 if you pay in cash (“folding money”) and $700 if you pay by check. The carpenter observes that the IRS can more readily discover his receipt of a check. Thus, he hints that he will report the receipt of the check (but...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT