Dave is considering an acquisition of an aging office building with the details outlined below.

1) Purchase Price - $7,300,000

2) First Year NOI $572,500

3) NOI Growth:4% from the first year, 2.5% the next year and 1% growth thereafter.

4) Reversion - Dave expects to sell the property at the end of his fifth year of ownership. At that time he expects that buyers will be want a BTIRR of 10.25% and that those buyers will anticipate the NOI will increase by 1.5% per annum from the fifth year of his investment period forward.

5) Dave has $30,000 in Passive Activity Gains available for him to use in conjunction with Passive Activity Losses generated by this property.All PAL's should be utilitized at the earlist possible time.

6) David's Ordinary tax rate is 33%, his Capital Gains Tax rate is 20% and his Recapture Tax Rate is 25%.

7) 90% of the Purchase Price can be allocated to the building, and that must be depreciated over a 27.5 year period.

8) Selling Costs are expected to be 2% of the sales price.

9) David has two loans available to him:

Loan 1) The loan amount is limited to the lesser amount as determined by either a 1.25x Debt Service Coverage Ratio (in the First Year ) or 80% Loan-to-Price, 6.75% interest rate, 25 yearamortization, no prepayment prohibition. (i.e. no penalty for prepayment at any time.) This is a non-recourse loan.

Loan 2) 75% Loan-to-Value, 6.15% interest rate, 25 year amortization. The loan matures in 10 years, and there is a yield maintenance penalty if repaid before then. The Yield Maintenance penalty is based on 1/2 the difference between a) the comparable term US Treasury interest rate (i.e. a US Treasury Bond with a maturity equal to the term remaining on the loan) and b) the loan's interest rate discounted by the comparable term treasury rate for the remainder of the loan term. The loan is assumable, but only to a buyer who has a minumim net worth of $10 million and is willing provide a repayment guarantee. This loan is a non-recouse loan for John.

a) What are the BTIRR & ATIRR for the investment using Loan 1(on a leveraged Basis.)

b) What is the estimated Break Even Interest Rate"BEIR" for the Debt on this property? (Note: use the Ordinary Tax Rate for this BEIR.)

c) Using goal seek, or evenmannually plugging in numbers, what is the Actual Break Even Interest Rate for this loan. TO ANSWER THIS QUESTION ASSUME THE BUYER HAS UNLIMITED PASSIVE ACTIVITY GAINS.

d) What would be the yield maintenance fee that David will have to pay if he takes loan 2 and sellsthe property after 5 yearsto a buyer who does not assume the loan.

Treasury rates at the time of the sale are forecast to be 2.0% for the 2-year US Treasuries, 3.0% for the 5-year US Treasuries and 4.0% for the 10-year USTreasuries. The loan agreement calls Yield Maintenance to be calculated based on 1/2 the amount as determined by taking the difference between the comparable term treasury rate and interest rate on the loan discounted using the comparable term treasury Rate.

e) What is the BTIRR & ATIRR for the Investment using Loan 2 assuming a sale at the end of the fifth year, with the buyer assuming the loan.

f) What is the BTIRR & ATIRR for the investment using Loan 2, assuming the sale at the end of the fifth year with the buyer not assuming the loan. Note:add the yield maintenance payment to the selling costs.

g) Which loan would you recommend to David, and why?