BACKGROUND An institutional investor is interested in purchasing a multi-tenant industrial building in Portland, OR which has an asking price of $170 per SF. Assume that, apart from the 3% purchasing cost, there are no additional acquisition-related costs. The building size is 96,500 SF. It is currently leased to four tenants: Tenant 1: occupies 24 500 SF and currently pays $27/SF/year. The lease will expire at the end of year 2. There will be no rental increase for the first two years. Based on conversations with the tenant, you can assume that the lease renewal probability is 60%. Tenant 2 occupies 30,800 SF and currently pays $24/SF/year. The lease will expire at the end of year 4 and has annual rent increases of 4.5%. Based on conversations with the tenant, you can assume that the lease renewal probability is 30%.

FIN457 Project 2 Real Estate Investment 2 Tenant 3 occupies 22,000 SF, and their current rent is $22/SF/year. The lease will expire at the end of year 6. Rental increases of $2 per SF will occur at the beginning of year 3 and year 5. There are no increases for the other years. Tenant 4: occupies the remaining space, and their current rent is $25/SF/year. The lease will expire at the end of year 6 and has annual rent increases of 3%. Note: Assume the current contract rents as the basis for your year 1 potential gross income. The vacancy and collection losses for the first three years are assumed to be 3% of the potential gross income. From year four assume vacancy and collection losses of 5% each year. The average market rent for industrial is currently $23/SF/year, and it is forecasted to decrease by 3% for one year and then increase again at 4% each year for the subsequent years. Renewing tenants receive a $1/SF discount to the market rental rate. The landlord covers 70% of the operating expenses. Operating expenses are $10/SF/year in year 1 and are expected to increase by 4% each year (expense inflation). The roof has to be replaced in year 3. The total estimated cost is $450,000 with a reserve of $225,000 created in years 1 and 2. For simplicity, no other capital expenses are assumed, and no tenant improvements and leasing commissions are incurred for new or renewing tenants. Assume that the building is bought in January 2024 and sold in December 2028, i.e., the investor expects to hold the building for 5 years. The building is depreciated over 39 years (mid-month convention for first and last year) and the value of improvements (building) is considered to be 80% of the purchasing price. The new roof is depreciated over 39 years (mid-month convention). The going-out cap rate is 6% and the investor requires a return of 15%. Selling costs are 3% of the sales price. Assume an income tax of 35% and a capital gains tax of 15%. Make sure you tax the depreciation recapture and capital gain with the appropriate tax rates.

FIN457 Project 2 Real Estate Investment 3 ASSIGNMENTS Part 1: Assuming that the investor wants to hold the property for 5 years, create the proformas for cash flows from operations and equity reversion until the NOI and net selling price level respectively. Conduct a discounted cash flow analysis (DCF) to calculate the IRR and NPV based on NOI and net selling price for this investment. Is this investment worth undertaking? Why/why not? For this and other parts/sections, you can add your answers to my questions to the respective spreadsheet and do not need to prepare a separate file.