Real Estate Finance

Questions & Answers

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.


Part II The market where the MOB is located is unstable with extensive tenant churning and lease buyouts occurring regularly. The truth is our 10% vacancy and collection loss estimate is fairly optimistic due to the perceived stability of current leases. A more realistic estimate (most likely) is 15% and a worst case (pessimistic) estimate for V&C would be 20%. Let's assign the probability of occurrence as follows: 40% for most likely, 35% for optimistic and 25% for worst case. Compute the following a. BTIRR and ATIRR for each scenario (you already have the optimistic estimate) b. The expected IRR given the 3 scenarios C. The variance and standard deviation of IRRs and the coefficient of variation for both before and after tax d. Are the expected returns in excess of 12%? e. Extra Credit: Now, assume that the increase in value for year five is expected to be 6%. What is the marginal return for keeping the property one additional year? What is your advice?


Suri has decided to buy a car. The car has a MSRP of $24 500. She wishes to get several upgrades that will cost $2654. She has negotiated a $2800 discount from the MSRP. Freight costs $800. She must pay a fuel-efficiency tax of $500 and an air conditioner tax of $90. The dealer is charging her a non-taxable administration fee of $45. Licence fees (non-taxable) cost $80, and gas (also non-taxable) costs $50. Calculate the total amount, including taxes, that Suri must pay the dealership. (Bold text startNote:Bold text End Tax is 13%.


Use the TVM solver to answer this question. Suppose a new car with a purchase price of $25 150 can be bought or leased at an interest rate of 5.6%, compounded monthly for 48 months. The down payment on the purchase is 10% of the purchase price or $2515, while the down payment on the lease is $1040. The residual value for the lease is $14 750. There is a similar car on the lot that is two years old, selling for $17 500. The down payment required on the used car is $1750. Assume the residual value of the car at the end of the lease is $0.00.  Determine the monthly payment for each of the three options if the terms of each loan are the same. Determine the total amount of interest paid on each loan. Determine the total amount paid for each of the three options, including principal, interest, and down payment.


Use the TVM solver to determine the monthly payment of a lease of $21 568 if the interest rate is 4.8% compounded monthly for 48 months.


Use the provided TVM solver to determine the interest rate on a loan of $5400 if interest is compounded monthly for 72 months and the final amount of the loan is $6965.35. List the values you used for present value, future value, number of years, and number of compounding periods per year.


Determine the total interest on a loan of $5000 if the interest rate is 6.24%, compounded monthly for 12 years.


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