Elbie Louw is considering the purchase of a commercial real estate property. The property is a strip mall near full vacancy, and most of the tenants are currently in the early months of five-year leases. One retail space is vacant, representing 5% of potential gross income. Louw has analyzed the property and has arrived at the following conclusions about next years property income and expenses for next year:

Rental income at full occupancy $850,000

Miscellaneous other income $50,000 Operating expenses (as % of effective gross income) 35%

Property management fee 8%

Louw is trying to estimate a market value for the property. Louw begins by estimating the value of the property using the discounted cash flow (DCF method). Louw starts by calculating expected net operating income (NOI) for next year. Since most tenants are locked into existing five-year leases, Louw believes that NOI will remain unchanged over the next 4 years. However, in year 5, Louw believes that NOI will increase by 25%, and then increase by 3% every year thereafter into perpetuity. The property value is also expected to increase by 3% each year after Year 5 into perpetuity. Louw elects to use a discount rate of 13% in her analysis.

What is the estimated current value of the property using the DCF method?