A small, single-tenant retail building is on the market in downtown Ames. It currently has a tenant with a lease with ten-years remaining for which they now pay $40,000 per year in rent. According to their lease, their rent increases at a rate of 3% annually. You've owned similar buildings before, and you expect that you can operate the space for $3,000 per year, which you expect to grow at an annual rate of 10% per year. Additionally, you decide to put aside a fixed (non-growing) $2,000 each year to cover significant capital expenses. After negotiating with the building's owner, you've got them to accept a sales price of $600,000, which you will finance with a 90% LTV interest-only loan with payments annually, an interest rate of 4%, and 2 points due at signing (which you have to pay in cash). Based on this information, answer the following questions:

a. At what capitalization (cap) rate did you purchase the building? (2 pts)

b. You plan to hold the building for four years and sell it at the start of the fifth (i.e., you will collect rent on the building for four full years). You're confident that given your management expertise when you sell the building, you can do so at an improved cap rate of 5.5% (based on the building's performance in the previous year). If you're correct, what can you expect as a sales price be at the beginning of year 5? (3 pts)

c. Finally, assuming your next best investment yields an annual return of 7%, what is the net present value and IRR of this project? To do so, you should create a simple pro forma analysis of this investment. For each year, show the gross potential revenue, OpEx, NOI, CapEx, Debt Service, BTCF, and net cash flow to the investor. Although you must show all your work to receive full credit (hint: display how you discount the annual investor cash flow back to present values), you can use Excel or a financial calculator to solve for the IRR and NPV.) (10 pts)