In this scenario, the acquisition price of a hotel in NYC is $600,000,000. The LTV is 70%. The closing costs to acquire the property are 5% of the loan amount. The investor will sell the property after 5 years. The loan on the property is a 5/1 ARM amortized over 30 years with an interest rate of 5%. The lender requires a DSCR of 1.1 The lender requires a Debt Yield Ratio of 9% or higher. Potential Gross Income is projected to be 15% of the acquisition price and is projected to increase 2% per year every year during the hold period. Vacancy is projected to be 25% of PGI every year with no change over 5 years. Operating Expenses are projected to be 32% of EGI with no change over 5 years. Capital Expenditures are projected to be 12% of EGI with no change over 5 years. The cost to sell the property in year 5 is 6% of the future sales price. The investor acquiring the hotel has a WACC/hurdle rate of 12% and a reinvestment rate of 18%. The company has projected that the going out Cap Rate will be 5.5. The firm is looking for an IRR of 15% or higher.

What is the Going In Cap Rate of this investment using the acquisition price and year ne projected NOI?

7.6%

7.2%

6.30%

5.74%