In: Finance
You bought the building, located at Little Ferry, NJ for $50 Million, which was 6% Capitalization Rate (CAP). This building is occupied only by Wal-Mart. You made 40% down and financed 60% of the purchase price at 5% APR, 5 year balloon with 25 year amortization schedule. You have 25 year Absolute Triple Net lease with Wal-Mart. There is no annual escalation of the base rent. The building’s $50 million value consists of $25 million land value and $25 million improvement. In addition to $50 million purchase price, you had to pay 3% transaction (closing) costs (equivalently $1.5 million), which include the legal, financing, administrative, inspection, and all taxes. Use 39 years for the annual depreciation. Assume 30% tax rate.
What is the net cash flow for the first year? Note: Net Cash Flow is defined as NOI – Annual Interest Payment – Tax + Annual Depreciation.
Given:
Property Value or Cost = $50 million
Loan taken (.i.e. Principal amount) = 60% of Cost = $30 million
Capitalization Rate (.i.e. Cap Rate) = 6%
Amortization years = 25
Transaction cost over and above cost = $1.5 million
Useful life of the asset (years) = 39
Tax Rate = 30%
Note:
Net Cash Flow = NOI - Annual Interest Payment - Tax + Annual Depcreciation
This problem is solved by calculating individual components as under:
Step 1)
Calculate Ne Operating Income (.i.e. NOI) using Cap Rate formula given as under:
Cap Rate = NOI / Purchase Price
Therefore,
NOI = Cap Rate * Purchase Price
NOI = 6% * 50,000,000
NOI = $3,000,000
Step 2)
Calculate Annual Depreciation as under:
Since land is not subject to depreciation, the total value of the equipment is $25 million with useful life of 39 years and assumed zero salvage value.
Therefore,
Annual depreciation = (Cost - Salvage Value) / Useful Life
Annual Depreciation = $25,000,000 / 39
Annual Depreciation = $641,025.64
Step 3)
Calculate Annual Interest Payment as under:
As we know, APR = [((Interest) / Principal Amount) / n) *(12/25*12)
Therefore,
5% = ((Interest) / $30,000,000) / 25)*(12/12*25)
.i.e Interest = (5%*$30,000,000)/(12/12*25)
Annual Interest = $60,000
Step 4)
Calculate Tax as under:
Tax = NOI *Tax Rate
Therefore, Tax = $3,000,000 *30%
Tax = $900,000
Finally, Net Cash Flow = NOI - Annual Interest Payment - Tax + Annual Depcreciation
Therefore, Net Cash Flow = 3,000,000 - 60,000 - 900,000 + 641,025.64
Net Cash Flow = $2,681,026.64