Calculate the Leveraged IRR for the following investment in a fully occupied retail center.

Retail center encompasses 75,000 square feet.

Cash available for partner distributions and debt payments per year = $8.00 per square foot. This amount is projected to grow at a rate of 2% per year.

Initial Investment = $6.0 million

Debt Financing = 55% of your initial investment

Debt interest rate is fixed at 8%

Debt is interest only for the first two years, then amortizes an a 25-year amortization schedule.

You analyze your investments assuming a 7-year hold.

You project cap rates for similar retail centers to be 6%. Assume this is your terminal cap rate.

Broker commission and other closing costs are estimated to be 2% of proceeds at time of sale.

Don't forget to pay off the loan in year 7.

If your investors expect a 15% IRR, would they be happy with this investment? What might you do to improve the returns? (Hint:  Think about the capital stack.)