Part I

We are considering an acquisition of an existing medical office building (MOB) to our portfolio. There

are 4 tenants. Tenants 1 and 2 occupy 15,000 and 8,000 square feet respective, at $19.00 per square

foot. Tenant 3 has 10,000 at $20.00 and tenant 4 has 4,000 at $22.00. All the leases are presently

expected to continue through the 4 year holding period and have CPI increases estimated at 2% per

year. The asking price for the property is $3,000,000 of which 75% of the value would be allocated to

the building; and vacancy and collection losses are projected at 10% of rents. First year operating

expenses include $120,000 (i.e. taxes, insurance, utilities, maintenance, etc.) and management

estimated at 5% of EGI. Our tax rate is 36% and all loses are recognized in the year they are incurred.

Capital gains and depreciation recapture are both taxed at 15%. A 75% loan can be obtained at 9.0% for

25 years. Both the property value and operating expenses are expected to grow 4% per year and our

projected holding period is 4 years. Selling expenses are projected at 4% of the gross sales price. The

reinvestment rate for cash flows is 7% and the discount rate is 12%.

a. What is the before tax IRR and MIRR to the investor under the proposed mortgage

arrangement? Comment on the differences for the investor yield estimates you just calculated.

IRR: MIRR:

b. What is the after tax IRR, and the effective tax rate under this scenario?

c. Calculate the terminal cap rate based on the information above.

d. What is the NPV to the equity of the project?

e. Assume the 12% discount rate holds. Examine the equity BTIRR under the following sample of

LTVs and interest charges.