Question

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.

Answer 1

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