Question
Comprehensive Pro Forma and Analysis You have been asked to analyze the potential purchase of Regency Manor, an apartment building with the following characteristics: Purchase
Comprehensive Pro Forma and Analysis
You have been asked to analyze the potential purchase of Regency Manor, an apartment building with the following characteristics:
Purchase Price: $2,000,000, of which 30% is allocated to the land and 70% to the building.
The building is a Class 1 (4% CCA) asset.
Initial loan: $1,300,000 mortgage at j= 6.5% with a 20-year amortization, 3-year term, and monthly payments, rounded up to the next higher dollar.
The investor's projections for the building for the upcoming year of operation are as follows:
Gross Potential Income $300,000 increasing at 2% per year
Vacancy Rate = 3% of Gross Potential Income
Operating Expenses $155,000 increasing at 2.5% per year
The investor has a 50% marginal tax rate and intends to sell the building at the end of the third year. The allocation to land and building is expected to remain at 30% and 70%, respectively.
The property value (land and building) is expected to increase 4% per year for each year of the three-year holding period.
A commission of 6% of the gross sale price is required at the time of sale.
Where appropriate, you may find it helpful to present your answers in table format.
- Construct an after-tax cash flow pro forma for the intended holding period.
- Calculate the after-tax equity reversion given that 50% of the capital gain is taxable and the only closing costs are the commission.
- Calculate the effective gross income multiplier (GIM) for Year 1. (2 pts)
- Calculate the operating expense ratio (OER) for Year 1. (2 pts)
- Calculate the after-tax internal rate of return on equity (IRR). (2 pts)
- Calculate the net present value (NPV) of the investment if the investor requires an after-tax return of j = 8%. (2 pts)
- Based on the IRR and NPV measures, should the investor buy the building? Briefly explain.
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