Cash flow growth rate: 5% per annum

Required rate of return (OCC): 5%

Lease 3

Initial net cash flow: $2,800,000

Cash flow growth rate: 2% per annum

Required rate of return (OCC): 7%

In each case, the initial cash flow (net rent) occurs in Year 1 and the rent payments on an annual basis thereafter. You must make an investment of $2,500,000 upfront (in Year 0) to pay for tenant improvements to customize the space for the tenants occupancy, in order to get the tenant to agree to the 10-year lease. Cash flow growth rates are simple annual rates with annual compounding.

1.2 You could acquire the lessors rights and obligations to any one of these leases (including the obligation to pay the tenant improvement allowance upfront as well as receipt of the leases net cash flow). The price for each lease would be as follows:

(These prices do not include, and are in addition to, the $2,500,000 tenant improvement cost the lease owner must pay in Year 0.)

Based on this information, and the results obtained in Question 1.1, which one of the three properties is the best investment using the NPV rule? Why is this the case? (Max. 20 words)