Consider a Property with expected future NOI of $25,000 per year for the next 5 years (starting one year from now). After that, the operating cash flow will step up 20% to $30,000 for the following 5 years. Assume no capital- and leasing expenses.

(a) If you expect to sell the property 10 years from now at a going-out cap rate of 10%, what is the value of the property if the required return is 12%?

(b) Now suppose the seller of the building wants $260,000. Should you make the deal? Why or why not?

(c) Suppose now that the required return on the property is 11%. What is the value of the property? By what percentage has this value changed from part 1a as a result of this 100 basis point change in the required rate of return?

(d) Go back to the original 12% required return. Suppose now that after five years, the cash flow steps up by 25% to $31,250, instead of the original assumption. By what percentage has this [roughly 1% per year] change in rental growth altered the value of the property?

(e) Assuming this is a representative example, what conclusions can you draw about the sensitivity of property value to changes in expected cash flow growth compared to discount rate? One sentence is a sufficient as an answer.

(f) Go back to the original assumptions (12% required return, 30% step-up of cash flows). Now suppose you want to take a 60% LTV loan to purchase this property. Please provide the equity before tax cash flows (EBTCF), debt service payments (interest and amortization) and the running outstanding loan balance to include this debt service. Perform these calculations for the following mortgage types:

i. Interest-Only Mortgage 10 year

ii. Constant Payment Mortgage 20 year amortization