Mabuse is considering investing in a 150,000 square foot office building near Randburg, Johannesburg. Market rents in this area are expected to average R9.50 per square foot, increasing by 2.00 percent per year for the foreseeable future. The average vacancy rate for similar office space is 15 percent, and the operating expense ratio for the building is 40 percent of Effective Gross Income (EGI). The tax assessors office currently estimates the value of the property to be R6 million, with R1 million of this value attributable to land. Mabuses expects that he can purchase this building for R6.6 million, with acquisition costs of 3 percent of the purchase price (embed acquisition costs in Loan).

Financing is available for up to 75 percent of the purchase price, with an interest only loan, and 1.5 percent in closing costs. (embed closing cost to loan).

The property will be put in service on January 1, 2018. The expected holding period is 5 years (expected sale date of December 31, 2023), at which time it will be sold at a 12 percent cap rate (based on projected NOI for 2024). Transaction costs at the time of sale are expected to be 7 percent of the gross sale price.

Mabuse is at the 35 percent tax rate on ordinary income, and at 15% for long-term Capital Gains Tax. The annual depreciation allowance on property is 5%.

Calculate expected first-year NOI for this property. At what cap rate is Mabuse purchasing this property? What is the before-tax cash flow for this property? What is Mabuses cash-on-cash return?