14.18. Consider a commercial (nonresidential) property that costs $1 million with an initial before-tax yield of 9% (based on NOI) and an expected growth rate of 2.5% per year (in income and value). Ignoring capital improvements and selling expenses, develop a 10-year proforma for before-tax and after-tax property and equity cash flows. The relevant tax rates are 35% on annual operations, 15% for capital gains, and 25% for depreciation recapture. Assume mortgage financing of 75% of the property price with a 10% interest-only loan, and that land is worth 20% of the property value. a. Use the proforma to determine the ex ante before-tax IRR of the unlevered property investment. b. Use the proforma to determine the after-tax IRR of the unlevered property investment. c. Use the ratio of the ATIRR calculated in (b) divided by the BTIRR calculated in (a) to determine the after-tax borrowing rate for the investor (by applying this ratio to the loan rate). d. Apply the after-tax borrowing rate you just calculated to determine the present value of the DTS during the projected 10-year holding period (including the payback of the DTS in the reversion). e. Compute the implicit PV (DTS) component in the reversion resale price of the property by treating the present value of the DTS you computed in (d) as a constant-growth perpetuity that recurs once every 10 years with a growth rate of 2.5% per year and a discount rate to present value equal to the ATIRR you calculated in (b). f. Add the answers to (d) and (e) to arrive at the total component of DTS in the value of the property, as a percentage of the property value. g. Compute the before-tax ex ante IRR of the levered investment in this property. h. Compute the after-tax ex ante IRR of the levered equity in this property. i. Compute the ratio of the AT/BT in the levered IRR, and note the difference between this ratio and the unlevered equivalent. Do you think this is an argument for debt financing for this property investment for this investor?