A banker has just received a new loan request from a new entity known as 753 State Street, LLC. This new entity is controlled by current clients of the financial institution and was formed to be an industrial building for investment purposes.

The property produces $387,000 each year in net operating income (NOI) that is expected to increase by 3% each year over the next 5 years. The bank will make a loan for the property at 60% LTV for 25 years, fully amortized, at 4%. The bank also requires a 1.5% debt service coverage for this type of loan. At the end of the 5-year NPV analysis, the value of the property will be based on the NOI at that time and the same CAP rate as the purchase price. For your NPV formula, the discount rate is the 4% interest rate.

Checklist:

1. Based on the information above, provide the capitalization rate (or yield) required by the seller for the purchase of the property.
2. Using NPV, explain if this is a good deal for the buyer.
3. Explain and support your choice from your response to bulleted checklist item 2, showing the calculations used.