8. You are analyzing a 11,000 square foot office property for potential acquisition. The property is currently being used as a small animal veterinary clinic. The three veterinary doctors who run the clinic have just renewed the lease for ten years at $14.50 psf/yr gross rent. The lease calls for a rent increase of $0.50 psf per year for the term of the lease. Although the property is fully occupied by a single tenant, your lender and your investors will demand that you impute a 5% vacancy rate. Purchase price: $1,100,000 Acquisition costs: $20,000 • Year one operating expenses: $4.50 psf/yr • ° • • Operating expenses annual growth rate: 3 percent Projected end of year five sale price: Capitalize year six NOI at 9.25 percent End of year five cost of sale: 4 percent of sale price Anticipated holding period: Five years Assessed land value: $160,000 • Assessed improvement value: $640,000 Ordinary income tax rate: 39.6 percent Capital gains tax rate: 20 percent Cost-recovery recapture tax rate: 25 percent Following are the loan terms from Wells Fargo Bank: • • Maximum loan-to-value (LTV) ratio: 75 percent • Minimum debt-service coverage ratio (DSCR): 1.2 • Interest rate: 8.5 percent Amortization period: 20 years • • Loan term: 10 years Payments per year: 12 Loan costs: 2 percent of loan amount Answer the following: 1. What is the IRR Before Tax on Equity for a 5 year hold? 2. What is the IRR After Tax on Equity for a 5 year hold? (5 points) (5 points) 3. Assuming the $20,000 in acquisition costs remain constant, how much can you pay for this property (purchase price) to get a 10% After Tax IRR. (5 points)
8. You are analyzing a 11,000 square foot office property for potential acquisition. The property is currently being used as a small animal veterinary clinic. The three veterinary doctors who run the clinic have just renewed the lease for ten years at $14.50 psf/yr gross rent. The lease calls for a rent increase of $0.50 psf per year for the term of the lease. Although the property is fully occupied by a single tenant, your lender and your investors will demand that you impute a 5% vacancy rate. Purchase price: $1,100,000 Acquisition costs: $20,000 • Year one operating expenses: $4.50 psf/yr • ° • • Operating expenses annual growth rate: 3 percent Projected end of year five sale price: Capitalize year six NOI at 9.25 percent End of year five cost of sale: 4 percent of sale price Anticipated holding period: Five years Assessed land value: $160,000 • Assessed improvement value: $640,000 Ordinary income tax rate: 39.6 percent Capital gains tax rate: 20 percent Cost-recovery recapture tax rate: 25 percent Following are the loan terms from Wells Fargo Bank: • • Maximum loan-to-value (LTV) ratio: 75 percent • Minimum debt-service coverage ratio (DSCR): 1.2 • Interest rate: 8.5 percent Amortization period: 20 years • • Loan term: 10 years Payments per year: 12 Loan costs: 2 percent of loan amount Answer the following: 1. What is the IRR Before Tax on Equity for a 5 year hold? 2. What is the IRR After Tax on Equity for a 5 year hold? (5 points) (5 points) 3. Assuming the $20,000 in acquisition costs remain constant, how much can you pay for this property (purchase price) to get a 10% After Tax IRR. (5 points)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:8. You are analyzing a 11,000 square foot office property for potential acquisition. The property is
currently being used as a small animal veterinary clinic. The three veterinary doctors who run the
clinic have just renewed the lease for ten years at $14.50 psf/yr gross rent. The lease calls for a
rent increase of $0.50 psf per year for the term of the lease.
Although the property is fully occupied by a single tenant, your lender and your investors will demand
that you impute a 5% vacancy rate.
Purchase price: $1,100,000
Acquisition costs: $20,000
•
Year one operating expenses: $4.50 psf/yr
•
°
•
•
Operating expenses annual growth rate: 3 percent
Projected end of year five sale price: Capitalize year six NOI at 9.25 percent
End of year five cost of sale: 4 percent of sale price
Anticipated holding period: Five years
Assessed land value: $160,000
• Assessed improvement value: $640,000
Ordinary income tax rate: 39.6 percent
Capital gains tax rate: 20 percent
Cost-recovery recapture tax rate: 25 percent
Following are the loan terms from Wells Fargo Bank:
•
•
Maximum loan-to-value (LTV) ratio: 75 percent
• Minimum debt-service coverage ratio (DSCR): 1.2
• Interest rate: 8.5 percent
Amortization period: 20 years
•
•
Loan term: 10 years
Payments per year: 12
Loan costs: 2 percent of loan amount
Answer the following:
1. What is the IRR Before Tax on Equity for a 5 year hold?
2. What is the IRR After Tax on Equity for a 5 year hold?
(5 points)
(5 points)
3. Assuming the $20,000 in acquisition costs remain constant, how much can you pay for this
property (purchase price) to get a 10% After Tax IRR.
(5 points)
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