Develop a real estate investment analysis model to calculate the Net Present Value (NPV) and the Internal Rate of Return (IRR) from owning and operating an office building. Calculate the NPV and IRR on cash flows before and after federal income tax.

This building has 250 thousand square foot of gross area of which 213 thousand square feet can be considered net rentable space. The property includes enough land to provide adequate parking. The price to acquire the fee simple interest is $50 million and for depreciation purposes, you will allocate $8 million to the land and $42 million to the depreciable improvements. The Lernalott Building is five years old; however, you have not yet acquired it.

Fill in the charts, with equations/math and solutions. Work has to be shown.

INPUT VARIABLE SECTION:

Current Rent Schedule
Rent Role	Gross SF	Rentable SF	Leased SF	Rent/SF	Revenue	Fully Leased
1st Floor	25,000	15,000	15,000	$32.00	480,000	480,000
2nd Floor	25,000	22,000	18,000	$25.00	450,000	550,000
3rd Floor	25,000	22,000	22,000	$27.00	594,000	594,000
4th Floor	25,000	22,000	22,000	$27.00	594,000	594,000
5th Floor	25,000	22,000	22,000	$27.00	594,000	594,000
6th Floor	25,000	22,000	12,000	$28.00	336,000	616,000
7th Floor	25,000	22,000	22,000	$28.00	616,000	616,000
8th Floor	25,000	22,000	22,000	$29.00	638,000	638,000
9th Floor	25,000	22,000	15,000	$30.00	450,000	660,000
10th Floor	25,000	22,000	22,000	$32.00	704,000	704,000
Total	$250,000	$213,000	$192,000	$24	$5,456,000	$6,046,000
Weighted Average Rent/ Rentable SF			$28.385	Fully Leased/Rentable SF
Percent			100%
Percent of Gross SF			85.20%	Rentable SF/ Gross SF
Occupancy Level			90.2415%	Revenue/Fully Leased
Esimated Vacancy Rate
Year		1	2	3	4	5	6
Estimated Vacancy		9.75852%	8%	8%	6%	6%	6%
Estimated Expenses					Tax Rates
Variable Expenses		Cost/SF			Income Tax		34%
Utilities		$1.85			Capital Gain		15%
Maintenance		$0.50			Recapture		25%
Total Variable Expenses		$2.35
				Depreciation Information
Fixed Expenses				Acquisition Cost of the Building			$50,000,000.00
Insurance		$0.75		Cost allocatable to the land			$8,000,000.00
Ad Valorem Taxes		$5.00		Cost allocated to the building			$42,000,000.00
Total Fixed Expenses		$5.75		Depreciation term in Years			39
Total Operating Expenses		$8.10		Annual Depreciation Expense			$1,076,923.08
				Financing Terms
Property Resale Information				LTV			80%
Going Out Capitalization F		7%		Term in years, monthly payments			25yr./300mo.
Selling Expense		4%		Interest Rate			6%
Discount Rates
Rate on Total Asset Before Tax		7.00%
Rate on Equity Before Tax		12.00%
Rate on Equity After Tax		7.92%

CALCULATION OF OPERATING INCOME AND CASH FLOWS
Net Operating Income
Year	1	2	3	4	5	6
Gross Potential Income
Allowance for Vacancy
Effective Gross Rent
Less Operation Expenses
Variable Expenses
Fixed Expenses
Total Expenses
Net Operation Income
Mortgage Amoritization Schedule
Loan Amount
Year	1	2	3	4	5
EOY Loan Balance
Payment
Principal Reduction
Interest
Calculation of Tax on Operating Income
Year	1	2	3	4	5
Net Operation Income
Less Interest Expense
Less Depreciation
Taxable Income
Income Tax
Calculation of Operating Cash Flows
Year	1	2	3	4	5
Net Operation Income
Less Debt Service
Before Tax Cash Flow
Less Income Tax
After Tax Cash Flow

ESTIMATES OF THE PROCEEDS FROM THE EVENTUAL SALE OF THE PROPERTY
Market Value Estimate = NOI / R
Market Value
Adjusted Basis Caluclation
Acquisition Cost
Less Accumulated Depreciation
Adjusted Basis
Taxable Gain on Sale
Sale Price (Market Value)
Less Selling Expense
Net Sale Price
Less Adjusted Basis
Gain on Sale
Tax on the Gain
Recapture the Depreciation
Tax on Recapture
LT Capital Gain
Tax on LT Captial Gain
Total Tax on Sale
Cash Flow from Sale
Net Sale Price
Loan Balance Payoff
Before Tax Cash From Sale
Less Texes on the Sale
After Tax Cash from Sale

RATES OF RETURN
Before-Tax Return on Investment without Mortgage Financing
Year	0	1	2	3	4	5
Acquisition Cost
Annual Operation CF
Cash Proceeds from Sale
Summary of Cash Flow
Internal Rate of Return
Net Present Value
Before-Tax Return on Equity with Mortgage Financing
Year	0	1	2	3	4	5
Acquisition Cost
Annual Operation CF
Less Debt Service
Cash Proceeds from Sale
Summary of Cash Flow
Internal Rate of Return
Net Present Value
After-Tax Return on Equity with Mortgage Financing
Year	0	1	2	3	4	5
Acquisition Cost
After-Tax Annual Cash Flow CF
After-Tax Proceeds from Sale
Summary of Cash Flow
Internal Rate of Return
Net Present Value