I am considering the purchase of a commercial property that totals 30,000 square feet.The owner has not given a price for the building and instead is asking me to put in an offer.The property is currently 80% occupied with an average rental rate of $20/sqft/yr.The leases on average increase in rent by $1.00/sqft/yr.Leases for this property are full pass-through and the operating expenses for this property including taxes and insurance total $6.00/sqft.I have a tenant in mind for the remaining 6,000 unleased square feet but they will not start paying rent for 6 months and I need to invest $20,000 in improvements and lease commissions to bring the tenant in.The rent for this new tenant is $24.00/sqft/yr and is fixed for the duration of it lease term.I will finance the purchase solely with equity (no debt - a cash deal).Once the new tenant is in, the property will be 100% full!!To account for unexpected vacancies and collection issues that may arise, however, I will assume a vacancy/collection reserve of 10% of my gross potential rent throughout my ownership.I will also assume I must invest $60,000 per year fixed for capital items to maintain the property - I cannot recover this capital cost from the tenants.

A)The capitalization rate for similar properties is around 10%.If I base my offer using the cap rate of 10% on thesecond year NOI (a more stabilized figure), what will my offer be?

B)Let's assume that my offer in Part A) is accepted.I plan on holding the property for 5 years and will sell the property based on my Year 5 NOI at a capitalization rate of 9%.Assume that the property will be sold at the end of the fifth year.Sales expenses will total 10% of the sale price.Disregarding taxes (look at this from a pre-tax basis and disregard depreciation), what rate of return (use IRR) will this investment yield for me?