Consider an apartment building with the following cash flows: Effective gross income in year 1 is $1.5 million, and it is expected to grow at 2% a year (indefinitely). The operating expenses in year 1 are $600 thousand and are expected to grow at 3% per year (indefinitely). All cash flows are in arrears. The discount rate for the property is 7%. What is the current cap rate of this building?

5.25%

7.2%

5.6%

4.5%

6%