GreenTree Investment Company is considering the purchase of an office property. It has done extensive market analysis and has estimated that based on current market demand and supply relationships, rent and its estimate of operating expenses are expected to generate annual net operating income based on the assumptions:

• A market that is currently oversupplied is expected to result in NOI remaining flat for the first three years. The initial NOI is $1,000,000.
• In year 4, NOI is projected to spike 20% over year 3 but slows down dramatically in years 5 and 6 by only $50;000, respectively.
• However, market analysts suggest a stable and balanced market thereafter, implying an annual growth rate of 3%.
• Greentree expect to hold the property for seven years then sell it. The selling brokers fee is 5% of the sale price.

Required:

Use the attached Excel template to model the answers.

1. What would be the market value of the property today if typical investors require a 12% rate of return?
2. What is the terminal capitalization rate?
3. What is the implied going in cap rate based on the first year NOI?
4. If GreenTree also requires a free and clear or unleveraged return of 12%, what is the most it should pay for this property
5. Suppose GreenTree can obtain financing for the purchase of the property based on the purchase price computed in (4) based on 80% LTV, interest rate of 7%, debt service coverage of 1.15, term of 7 years and payment based on a 25-year amortization schedule:

1. What is the debt service?
2. What is GreenTrees equity?
3. What is GreenTrees leveraged internal rate of return?

Name: GREENTREE INVESTMENT COMPANY 2 3 1 4 5 6 7 NOI $ $ $ $ $ $ $ $ $ $ $ $ Terminal Value PV/Mkt.value Term. cap rate Implied cap rate $0 $ 0.0% 0.0% $0 $ $0 $ $ - $ $ $ $ $ $ $ $ $ Investment Value Loan at 80% $ Debt service $ DSCR BTCF Terminal Value Less Transaction Cost Less Mortgage Balance Year 7 BTCF (NO yrz-DS) Net Proceeds BTCF Green Tree's Equity Greentree's Leveraged IRR $ $ $ - - $0 $ $0 0.0%