After viewing many retail centers, the Carpenters have asked you to provide a complete cash flow analysis for a 50,000 square foot property, in the upscale neighborhood of Indian Trials. The two-year-old property is in excellent condition and it is unlikely that it will require any major repairs in the near future, however the Carpenters would like to create a capital account of 4% of EGI (above the line) as a reserve against future repairs. The Carpenters expect a 9% unlevered first year return from NOI on the purchase price. The Carpenters would like to know what price they should offer if their investment expectation is a levered 15% per year. They will purchase on the first day of year one and sell on the last day of year five. The appraisal indicates a ratio of 80% of the purchase price allocated to structures/improvements and 20% to land.
Working with your mortgage broker sources, the Carpenters received a commitment for a loan for the lesser of 75% or a DSCR of 1.20. The loan will have a 25-year term, a 8.25 percent annual interest rate, and monthly payments as well as a 1% loan fee payable to the bank. Assume there are 2% of non depreciable purchase price closing costs for the acquisition. They are anticipating buying the property on the first day of the year and plan to hold the property for five years. The project disposition will occur on the last day of the year.
The Carpenters have asked you to be conservative in your analysis.
The Rent roll is as follows
Tenant	Square Feet	OpEx Recapture	Rental Rate (sq ft per year)	Rent Increases per year
Sals Steak House	10,000	Full	$17.00	3%
Bobs Bikes	5,000	Up to $2.20 per sq ft	$10.50	3%
Freyas Fashion (men and womens clothing boutique)	7,500	Full	Freya's Fashion Info $8.00 plus percentage rent of 6%	None
			More Freya's Fashion Info The year of acquisition (year 0) sales were $500,000	Tenant sales revenue is projected to grow at 4% per year
Veggie Fresh Grocery	20,000	Up to $1.75 per sq foot	$6.25	$0.50
Petes Pet Store	2,500	Full	$12.00	3%
Pauls Pizza	2,500	Up to $2.45 per sq foot	$11.00	3.50%
Nancys Nails	2,500	Full	$11.50	3%
The Operating Expense is projected below
Category	Year One Expense	Annual Increases
Property Taxes	32,500	2%
Insurance	54,000	2.75%
Electric	78,000	1.50%
Water	62,500	1.50%
Garbage Removal	15,000	2%
Janitorial	24,000	2.80%
You explained to the Carpenters that your forecast of market capitalization rates for this kind of property five years from now would be in the 10.5 percent range. A 10.5 percent cap rate will be applied to year six NOI to calculate the sales price at the end of year five. Sale closing costs will be 6%.
Your analysis will include a five-year forecast of the annual before- and after tax cash flows from operations and before-and after tax sales proceeds from the projected disposition. Finally, you will present the Carpenters with the IRRs the investment is projected to generate on a before-and after tax basis with both a levered and unlevered scenario. Their accountant told them that they are in the 28% ordinary income tax bracket, their depreciation recapture tax rate will be 25% and they will have a capital gains rate of 20%. The Carpenters would like to know what cash they will receive after paying taxes at sale and what the wealth effect of this investment will be at a 11% discount rate.
The Carpenters are looking forward to receiving your complete cash flow analysis of the retail plaza to determine if they should purchase the property, and if so, at what price.
PLEASE place your written recommendations and answers in the text box. Please upload your spreadsheet to THIS Assignment!!