A 150,000-SF office building has a triple-net lease providing a constant rent of $20/SF per year. (With a triple-net lease, you can assume the rent equals the net operating cash flow.) The lease was signed two years ago and it has three more years before it expires. That is, assume the next payment comes in one year (time = 1), and there are two more annual payments after that under the present lease.

The leases in this particular market always have this same structure (constant rents for 5 years when signed). Rents on similar leases starting today are $23/SF. You expect rents on new leases to grow at 2.5% per year for existing buildings. That is, the market rent is 23/sf now (time = 0) and it will be 23 x 1.025 next year (time =1). You expect to release the building in year 4 and again in year 9 after the leases expire, but only after experiencing an expected vacancy of four months, and after spending $10/SF in tenant improvements (TIs). After 10 years, you expect to sell the building at a price equal to 10 times the then-prevailing rent in new triple-net leases. That is, 10 times the market rent in year 10. Based on survey information about typical going-in IRRs prevailing currently in the market for this type of property, you think the market would require a 12% expected return for this building:

a) What is the NPV of an investment in this property if the price is $30 million? Should you do the deal?

b) What will be the IRR at that price? 

c) What is the going-in cap rate at the $30 million price? 

d) What would be the cap rate for this building at the zero-NVP price?