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Before and After Tax Cash Flow – Mixed Use Project

You have been hired to perform an investment analysis for a high net worth individual to determine if they should purchase a commercial real estate investment. The investment is includes office, retail apartments, and a parking deck.


The following are the income characteristics:


Office – 70,000 square feet is leased to a national tenant, Dewey, Cheatham and Howe that pays $45 per square foot for the next 15 years. The rent will increase by 3 percent per year and there are expense stops of $8.00 per square foot and there is no risk of vacancy or credit loss. 30,000 square feet is leased to a boutique accounting firm, Waite and Higgins for $40 per square foot for the next three years with no increases. At the end of three yeas they will vacate the space and it will take six months to lease the space at which time the market rent is project to be $50 per square foot with annual increases of 4 percent. The lease term on this space is 10 years and the vacancy and credit loss on this space is 3 percent. Office expenses are $7.50 per square foot and increase by 3 percent per year.


Retail – 15,000 square feet is leased to Walgreens for $65 per square foot with no rent increases on a triple net basis for the next 20 years and there is not risk of default. 30,000 square feet is leased to Best Buy for $60 per square foot triple net basis for the next 15 years with rents increasing by 2 percent a year and there is no risk of vacancy or credit loss. Starbucks leases 1,000 square feet for $80 per square foot with rent increases of 5 percent per year on a triple net basis for 15 years and there is no risk of credit loss.


Multi-Family – There is a mixture 80 of one and two bedroom apartments that rent for $3,000 to $5,000 per month with the average rent of $3,800 per month. These rents increase by 5 percent a year and the unrecoverable expense ratio is 30 percent. The market vacancy and credit loss for the apartments is 4 percent.


Parking Deck – There is a combination of parking for each of the property types. Some of the parking spaces are rented on a monthly basis where others are rented on a daily or hourly basis. The annual parking revenue is $300,000 per year with expenses of 15 percent. It is anticipated that the parking revenue will increase by 6 percent per year.

Financing –The Bank of Mellon is providing 65 percent loan to value interest only financing for 10 years at 7 percent.

Income Taxes – Your investor has an ordinary tax rate of 36 percent. The long term capital gain taxes are 20 percent and recapture is 25 percent.


Investment Criteria – The going in cap rate is 6.5 percent, the terminal cap rate is 7 percent and the discount rate is 8 percent. Assume that the purchase price is based on the first year NOI and the land value is 20 percent of the purchase price. Also assume that the cost of sale at the end of the holding period is 1 percent.


What is the before and after tax NPV and IRR? Show all calculations – PGI, EGI, Expenses, NOI, Taxes, etc. If unclear about something, clearly state your assumptions.

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