Doctors William and Joan Carpenter are considering the acquisition of a commercial property. The Carpenters would like to invest in the growing southwestern community in which they have settled. After acquiring an apartment complex in this neighborhood, they are convinced that there is a demand for a retail plaza. The area has been demonstrating strong economic growth in all sectors. It has a mixed population in terms of age and excellent public services, parks and schools. The median income is over $70,000. Because of corporate growth, many executives and managers move to the town and rent for a while before buying a house.

After viewing many retail centers, the Carpenters have asked you to provide a complete cash flow analysis for a 55,500 square foot property, in the upscale neighborhood of Indian Trials. The three-year-old property is in excellent condition and it is unlikely that it will require any major repairs in the near future, however the Carpenters would like to create a capital account of 3% of EGI (above the line) as a reserve against future repairs. The Carpenters expect a 7.6% unlevered first year return from NOI on the purchase price. The Carpenters would like to know what price they should offer if their investment expectation is a levered 18% per year. They will purchase on the first day of year one and sell on the last day of year five. The appraisal indicates a ratio of 76% of the purchase price allocated to structures/improvements and 24% to land.

Working with your mortgage broker sources, the Carpenters received a commitment for a loan for the lesser of 70% or a DSCR of 1.65. The loan will be a partially amortizing 25-year loan with a 7-year term, a 4.15 percent annual interest rate, and monthly payments as well as a 2.4% loan fee (to obtain a better interest rate) and $8,000 loan origination fee payable to the bank. Assume there are 2.8% of depreciable purchase price closing costs for the acquisition.

The Carpenters have asked you to be conservative in your analysis.

The Rent roll is as follows

Tenant	Square Feet	OpEx Recapture	Rental Rate (sq ft per year)	Rent Increases per year
Sals Steak House	13,500	Up to $3.70 per sq ft	$17.85	3.2%
Bobs Bikes	4,200	Up to $4.25 per sq ft	$16.00	2.5%
Freyas Fashion	5,400	Full	$2.75 plus percentage rent of 2.15% The year of acquisition (year 0) Freya's sales were $680,000 Freya's sales revenue is projected to grow at 2.5% per year	None
Veggie Fresh Grocery	25,000	Up to $1.35 per sq foot	$3.75	$0.55
Petes Pet Store	2,200	Full	$15.25	1.20%
Pauls Pizza	2,500	Up to $3.45 per sq foot	$16.00	2.55%
Nancys Nails	2,700	Full	$14.00	$1 every other year

The Operating Expense is projected below

Category	Year One Expense	Annual Increases
Property Taxes	28,500	2.25%
Insurance	47,500	3.75%
Electric	85,200	2.85%
Water	76,725	3.25%
Garbage Removal	14,500	2.50%
Maintenance	45,255	3.50%

You explained to the Carpenters that your forecast of market capitalization rates for this kind of property five years from now would be in the 8.5 percent range. An 8.1 percent cap rate will be applied to year six NOI to calculate the sales price at the end of year five. Sale closing costs will be 5.25%.

Your analysis will include a five-year forecast of the annual before- and after-tax cash flows from operations and before-and after-tax sales proceeds from the projected disposition. Finally, you will present the Carpenters with the IRRs the investment is projected to generate on a before-and after-tax basis with both a levered and unlevered scenario. Their accountant told them that they are in the 39% ordinary income tax bracket, their depreciation recapture tax rate will be 25% and they will have a capital gains rate of 18%. The Carpenters would like to know what cash they will receive after paying taxes at sale and what the wealth effect of this investment will be at a 12% discount rate.

The Carpenters are looking forward to receiving your complete cash flow analysis of the retail plaza to determine if they should purchase the property, and if so, at what price. (Complete return summary is also required to include Levered and Unlevered Before Tax cash on cash, NPV and IRR, Levered and Unlevered After Tax NPV and IRR.)