A real estate investor has the following information on an office building: Purchase price is $1,250,000 with acquisition costs of $60,000 45,000 leasable square feet Initial rent of $10/sq. ft. per year and will increase 1.0 percent per year Vacancy rate of 8% of gross rent per year Operating expenses are 42% of effective gross income Three financing choices: All equity without any financing; Mortgage with 75% LTV ratio, 15 years, annual payments and 3.5% contract rate; Mortgage with 95% LTV ratio, 15 years, annual payments and 6.0% contract rate; Expected increase in value is 3.0% per year. Holding period is 15 years, and 5% selling expenses For simplicity, assuming that no capital improvement over the entire holding period 75% depreciable Investor’s tax rate is 28%, and capital gain tax rate is 15%. How much percentage of the IRR comes from cash flows from operations and how much from sale for each financing choice?

A real estate investor has the following information on an office building: Purchase price is $1,250,000 with acquisition costs of $60,000 45,000 leasable square feet Initial rent of $10/sq. ft. per year and will increase 1.0 percent per year Vacancy rate of 8% of gross rent per year Operating expenses are 42% of effective gross income Three financing choices: All equity without any financing; Mortgage with 75% LTV ratio, 15 years, annual payments and 3.5% contract rate; Mortgage with 95% LTV ratio, 15 years, annual payments and 6.0% contract rate; Expected increase in value is 3.0% per year. Holding period is 15 years, and 5% selling expenses For simplicity, assuming that no capital improvement over the entire holding period 75% depreciable Investor’s tax rate is 28%, and capital gain tax rate is 15%. How much percentage of the IRR comes from cash flows from operations and how much from sale for each financing choice?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 8P

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A real estate investor has the following information on an office building: Purchase price is $1,250,000 with acquisition costs of $60,000 45,000 leasable square feet Initial rent of $10/sq. ft. per year and will increase 1.0 percent per year Vacancy rate of 8% of gross rent per year Operating expenses are 42% of effective gross income Three financing choices: All equity without any financing; Mortgage with 75% LTV ratio, 15 years, annual payments and 3.5% contract rate; Mortgage with 95% LTV ratio, 15 years, annual payments and 6.0% contract rate;
A real estate investor has the following information on an office building: Purchase price is $1,250,000 with acquisition costs of $60,000 45,000 leasable square feet Initial rent of $10/sq. ft. per year and will increase 1.0 percent per year Vacancy rate of 8% of gross rent per year Operating expenses are 42% of effective gross income Three financing choices: All equity without any financing; Mortgage with 75% LTV ratio, 15 years, annual payments and 3.5% contract rate; Mortgage with 95% LTV ratio, 15 years, annual payments and 6.0% contract rate; Expected increase in value is 3.0% per year. Holding period is 15 years, and 5% selling expenses For simplicity, assuming that no capital improvement over the entire holding period 75% depreciable Investor’s tax rate is 28%, and capital gain tax rate is 15%. Questions: What is the equity after-tax return (internal rate of return) for each financing choice? How much percentage of the…
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