Assume you could close the purchase of the property on January 1, 1994, at a purchase price of $3.4 million, inclusive of all closing costs. Further, assume the following: Rugbyis rent will increase to $0.475 per SF per month NN2 on 8/1/1994. The current tenant, Rugby Labs, vacates the property at the end of their primary lease term. The building is subsequently leased up after 90 days, at $0.35 NNN for a primary term of 10 years and an option term of an additional 10 years. The rent will be ad- justed every 30 months for changes in the Consumer Price Index (CPI), compounded annually. The minimum rental increase is 3% per annum, and the maximum, 5%. Upon re-leasing, you would have to pay $1/SF in tenant improvements, and a lease commission equal to 4.5% of the total base rents (without inaation adjustment) over the lease term. You will sell the property at the end of 10 years (beginning of 2004), the exit cap rate is projected to be 10%. For now, assume that there is no income tax consideration. (There are still real estate taxes!) Also, assume that the seller is taking care of the outstanding mortgage. Roof maintenance costs $10,000 in the Orst year, and is projected to increase 3% per year. Insurance expense is initially $7500 per annum, and is projected to increase 3% per year. Real estate taxes are projected to increase 2% per year. Inaation rate is projected to be 4%. To simplify the calculations, assume that all payments (rents, expenses, taxes, ...) in a year are made at the end of that year. Historical risk premium on industrial properties has been 3.5% per year. The trea- sury yields as of the end of 1993 are as follows: 3-months: 3.07%, 1 year: 3.63%, 2 years: 4.25%, 3 year: 4.58%, 5 year: 5.21%, 7 years: 5.53%, 10 year: 5.83%, 10 years: 5.83%. Moodyis Aaa corporate bond yields exceed the treasury yields by 1%, Baa yields exceed the treasury yields by 2%.

Question 2: What do you project the IRR and the NPV of this investment to be? Which discount rate(s) did you use, how can you justify the use of these discount rates? What assumptions did you make?

INDUSTRIAL FOR SALE INVESTMENT CHEnron o erce The 2004 Strong Credit Tenant a high-quality, Dock-high Distribution Building - Built in 1987 * 24 " clear .45/3000 PM Extra Land Entire Warehouse a conditioned by Tenant in 1992 3 Blocks to Washington Boulevard/Santa Ana (5) Pay On/off Ramp 442,472.28 SALE PRICES - Los ANNUAL GROSS INCOME CAN DOWNPAYMENT 1 LS00000 00 L ACTUAL PROJECTED 0 LESS VACANCY RESERVE 13,274.17 LOAN LESS ANNUAL DEPENSES 20 58Z AZ 12,JOU ,000.00 LouALS NT OPERAT INCOME STOBBE ,94C INTEREST RATE S L S LESS ANNUALDENT SERVICE MONTHLY PAYMENT B 91 . r FOUALLENT PRE TAX INCOME DUE DATE CAPRATE CASH ON CASH ELD MPROVEMENTS ARE CDs OF TAXES 100s ERCENT OCCUPIED SEE REVERSE SIDE FOR PHYSICAL DETAILS, DEPENSES AND TENANTRLEASE INFORMATION 126709.02 Ame a earned her at a rate Is A NOINT IS OBTA man was an enor and means lear arsenalties at INDUSTRIAL FOR SALE INVESTMENT CHEnron o erce The 2004 Strong Credit Tenant a high-quality, Dock-high Distribution Building - Built in 1987 * 24 " clear .45/3000 PM Extra Land Entire Warehouse a conditioned by Tenant in 1992 3 Blocks to Washington Boulevard/Santa Ana (5) Pay On/off Ramp 442,472.28 SALE PRICES - Los ANNUAL GROSS INCOME CAN DOWNPAYMENT 1 LS00000 00 L ACTUAL PROJECTED 0 LESS VACANCY RESERVE 13,274.17 LOAN LESS ANNUAL DEPENSES 20 58Z AZ 12,JOU ,000.00 LouALS NT OPERAT INCOME STOBBE ,94C INTEREST RATE S L S LESS ANNUALDENT SERVICE MONTHLY PAYMENT B 91 . r FOUALLENT PRE TAX INCOME DUE DATE CAPRATE CASH ON CASH ELD MPROVEMENTS ARE CDs OF TAXES 100s ERCENT OCCUPIED SEE REVERSE SIDE FOR PHYSICAL DETAILS, DEPENSES AND TENANTRLEASE INFORMATION 126709.02 Ame a earned her at a rate Is A NOINT IS OBTA man was an enor and means lear arsenalties at