Consider a commercial (nonresidential) property that costs $1 million with an initial beforetax yield of 9% (based on NOI) and an expected growth rate of 2.5% per year (in income and value). Ignoring capital improvements and selling expenses, develop a 10-year proforma for before-tax and after-tax property and equity cash flows. The relevant tax rates are 35% on annual operations, 15% for capital gains, and 25% for depreciation recapture. Assume mortgage financing of 75% of the property price with a 10% interest-only loan, and that land is worth 20% of the property value.

a. Use the proforma to determine the ex ante before-tax IRR of the unlevered property investment.