I have received a proposal from one of our long$-$term partners, Mr$.$ Kara, an experienced real

estate manager in Toronto. Mr$.$ Kara has several units with us for more than $20$ years and is

now interested in renting us one of his strata buildings, Aurora, located in downtown Toronto.

The building comprises $30$ units, including $20$ one$-$bedroom and $10$ two$-$bedroom apartments.

Mr$.$ Kara has been the landlord of this building for over $25$ years. The initial rent contract he

provided outlines a rental period of $10$ years with the option to negotiate for another $10$ years

upon expiration. During our recent meeting, Mr$.$ Kara expressed an interest in selling the

building and mentioned that the initial assessment values the property at around $$30$ million.

Through negotiations with TD and CIBC banks, I have discovered that there is a possibility for

the company to obtain a loan for purchasing the building, as detailed in the provided Appendix

Could you please assist us in analyzing this long$-$term asset investment? Or do you think we

should go with the renting the building or buying it$?$ Additionally, I would like to see the

budgeted income statement for the next three years for this project. I am also interested in

understanding how acquiring this long$-$term asset could impact our profitability and capital

structure ratios.

Appendix $1.$

CIBC is willing to finance $90\%$ of the sale price. The term od this loan would be fixed$-$

term $6\%($Prime plus $1\%)$ interest per annum$/20-$year term.

TD bank is willing to finance the whole sale price. The terms of this loan would be

fixed$-$ term $7\%($Prime plus $2\%)$ interest per annum $/10-$year term.

Both banks will secure the loan with the assets of VAL. TD will ask for a personal

guarantee from me$,$ my husband, and my son.

My husband and I have a total of $3$ million dollars in our RRSP account that we've

saved for our retirement. We are not sure about the tax consequences if we use it as

a down payment for this building.

Since the Aurora building is located in downtown Toronto, all assessments indicate

that the building will retain its value despite market changes.

If we purchase the building there are annually $50$K additional property tax and

insurance expenses.

For the next three years, we estimate that our prices and cost rates will increase by$\backslash$table$[[$Units$,\backslash$table$[[$House $3-],[$bedrooms$]],\backslash$table$[[$House$],[>-],[$bedrooms$]],\backslash$table$[[$Apartment$],[3-],[$bedrooms$]],\backslash$table$[[$Apartment$],[2-],[$bedrooms$]],\backslash$table$[[$Apartment$],[1-],[$bedroom$]]],[$# of units,$100\mathrm{.}00,40\mathrm{.}00,25\mathrm{.}00,75\mathrm{.}00,100\mathrm{.}00],[$Price per night,$350\mathrm{.}00,300\mathrm{.}00,250\mathrm{.}00,200\mathrm{.}00,175\mathrm{.}00],[$Weight in sales mix,$0\mathrm{.}29,0\mathrm{.}12,0\mathrm{.}07,0\mathrm{.}22,0\mathrm{.}29],[$Owner$/$vendor portion $(65\%),227\mathrm{.}50,195\mathrm{.}00,162\mathrm{.}50,130\mathrm{.}00,113\mathrm{.}75],[$Housekeeping expense,$35\mathrm{.}00,30\mathrm{.}00,25\mathrm{.}00,20\mathrm{.}00,17\mathrm{.}50],[$Utilities expense,$10\mathrm{.}50,9\mathrm{.}00,7\mathrm{.}50,6\mathrm{.}00,5\mathrm{.}50],[\backslash$table$[[$Repair$/$maintenance$/$insuranc$],[$e$]],17\mathrm{.}00,15\mathrm{.}00,13\mathrm{.}00,10\mathrm{.}00,8\mathrm{.}00],[$Laundry expense,$7\mathrm{.}00,6\mathrm{.}00,5\mathrm{.}00,4\mathrm{.}00,3\mathrm{.}50],[$Setting up expense,$7\mathrm{.}00,6\mathrm{.}00,5\mathrm{.}00,4\mathrm{.}00,3\mathrm{.}50],[\backslash$table$[[$Variable selling and$],[$marketing$]],10\mathrm{.}00,8\mathrm{.}00,7\mathrm{.}00,6\mathrm{.}00,5\mathrm{.}00],[\backslash$table$[[$Variable admininstrative$],[$expense$]],5\mathrm{.}00,4\mathrm{.}00,3\mathrm{.}00,2\mathrm{.}00,1\mathrm{.}00],[$Total variable cost,$319\mathrm{.}00,273\mathrm{.}00,228\mathrm{.}00,182\mathrm{.}00,157\mathrm{.}75],[$Contribution Margin $($CM$),31\mathrm{.}00,27\mathrm{.}00,22\mathrm{.}00,18\mathrm{.}00,17\mathrm{.}25]]$

an average of $5\%$ annually.