Mr. Arnold Benedict is thinking of buying an apartment complex that is offered for sale by the firm of Getabinder and Flee. The price, $2.25 million, equals the propertys market value. Further, Mr. Benedict can obtain a $1,500,000 loan with terms of interest at 8.5 percent per annum, level annual payments, to amortize the loan over 20 years. There are no points or loan amortization fees anticipated.

You need to adjust the yearly NOIs up by 10% in one scenario, adjust them down by 5% in second scenario, and then down by 10% in the final scenario. Also remember that since the future selling price is impacted by the fifth year NOI, the ESP will also change. At this point you are ready to calculate the NPV (use the same 7 percent discount rate you did in question 2) for each of the four different NOI senerios (110%, 100%, 95%, and 90%).

He has obtained the following estimates from an investment analyst for the BTCF and ATCF (before and after-tax cash flows) for the five year holding period (as well as the reconstructed income statement for period 0). In addition, he has the BTER and ATER (before and after-tax equity reversion) for the property assuming it is sold at the end of the 5 year holding period. This information is shown below (this is taken from the solution for question #2 from Problem Set 2) Year 0 PGI 309,600 Year 1 1 316,566 22,160 Year 2 323,689 22,658 Year 3 330,972 23,168 Year 4 338,419 23,689 Year 5 346,033 24,222 - Vacancy 21,672 + Misc Income 7,500 7,669 7,841 8,0181 8,198 8,383 EGI 295,428 302,075 308,872 315,822 322,928 330,194 - Operating Exp 46,499 47,661 48,853 50,074 L 51,326 52,609 - M. Fee 17,726 18.125 18,532 18,949 19,376 19,812 - Property Taxes 76,374 76,374 80,193 80,193 84.203 84,203 NOI 154,829 159,915 161,294 166,606 168,023 173,570 - Debt Service 158,506 158,506 158,506 158,506 158,506 BTCF 1,409 2,788 8,100 9,517 15,064 NOI - Interest 159,905 127,500 62,730 161,285 124,864 65,448 166,596 122,005 65,448 168,013 118,902 65,448 173,559 115,536 62,730 - Depreciation -P. Penalty - Discount Exp Passive Income LO L0L0L09 (30,325) (29,027) (20,857) (16,337) (4,707) 25,000 25,000 25,000 25,000 25,000 0 0 Pass Through Other Passive S. Losses 5,325 9,352 9,352 9,352 9,352 Taxable income (25,000) 1 (4,707) x MTR AD (25,000) _ .40 (10,000) (20,857) .40 L (8,343) (16,337) .40 (6.534) TAX (10,000) L (1.883) BTCF 1,399 2,779 8,090 15,053 - TAX (10,000) 11,399 (10,000) 12,779 (8,343) 16,433 9,507 (6,534) 16,041 | (1,883) 16,936 ATCF ESP 2,522,453 NSP 2,320,657 - SE 201,796 - Adjusted Basis 1,928, 196 NSP 2.320,657 Total Gain on Sale 396,461 - UMB 1,316,277 - Depreciation Recovery 321,804 BTER 1,004,380 Capital Gain on Sale 70.657 TAX 87,309 917,071 ATER 321,804 Depreciation Recovery (DR) x Dep Recovery Tax Rate (tu) Depreciation Recovery Tax (DRT) Tax (DRT) 80,451 70,657 Capital Gains (CG) x Capital Gains Tax Rate (1) Capital Gains Tax (DRT) .15 10,599 Suspended Losses (SL) 9,352 x Marginal Tax Rate Suspended Losses Recapture (SLR) 3,741 In doing research Mr. Benedict has found that there maybe a similar building being planned for construction close to the location of the building he is considering purchasing. If it is built he assumes it will have an impact on his ability to generate the rent that was originally estimated. Also, he is concerned regarding "risk" of a potential market downturn. He has asked you to look into this and advise him how this additional information may impact the analysis. After much research, you have come up with the following data. In the first table you have estimated the associated probabilities of different economic environments. You decided to not only consider a potential downturn in the market, but also if market conditions improved! As will be discussed later, the analysis completed above (and in problem set #2) could be viewed as resulting from a "good" economic environment. Table 1 Economic Environment Associated Probability Excellent Good .25 .60 Poor Total . 15 1.00 You have also made some projections on the potential impact on NOI projections based on different economic environments AND if there is a competing complex built near the apartment complex that Mr. Arnold Benedict is considering purchasing. Note that the 100% shown in the Table 1 represents NO change in the NOI projections from the previous analysis. Table 1 Associated Probability Economic Environment Excellent 25 Good .60 .15 Poor Total 1.00 You have also made some projections on the potential impact on NOI projections based on different economic environments AND if there is a competing complex built near the apartment complex that Mr. Arnold Benedict is considering purchasing. Note that the 100% shown in the Table 1 represents NO change in the NOI projections from the previous analysis. Table 2 Percent of NOI Shown in Above Analysis Excellent Good Poor Competing Complex Built Yes 100% 110% 95% 100% 90% 95% No I L The above table shows the percentage of NOI based on economic condition and whether there is a competing complex built. Table 3 expands Table 1 and includes the probability that a competing property is built near the existing apartment complex based on the economic environment. Table 3 Economic Environment Good Excellent Poor Probability That Competing Property Will... Be Built .70 .20 .10 Not be Built .30 1.00 .80 1.00 .90 1.00 Total Combining the probability values from Table 1 and Table 3 results in Table 4 which represents the "Probability Estimates of Economic Conditions and Related Competitive Environments". Table 4 Economic Environment Good Poor Excellent Probability That Competing Property Will... Yes 120 1 .015 310 No 175 .075 .250 .135 480 .600 .690 11.000 150 Given this new information, you will need to calculate: a. The expected value of the NPVs (calculate the NPVs with the same 7 percent discount rate used in question 2) of these different possible scenarios. HINT: You have three possible outcomes based on economic condition if there is a competing property built AND three possible outcomes (again based on economic condition) if there is NO competing property built. The standard deviation, He has obtained the following estimates from an investment analyst for the BTCF and ATCF (before and after-tax cash flows) for the five year holding period (as well as the reconstructed income statement for period 0). In addition, he has the BTER and ATER (before and after-tax equity reversion) for the property assuming it is sold at the end of the 5 year holding period. This information is shown below (this is taken from the solution for question #2 from Problem Set 2) Year 0 PGI 309,600 Year 1 1 316,566 22,160 Year 2 323,689 22,658 Year 3 330,972 23,168 Year 4 338,419 23,689 Year 5 346,033 24,222 - Vacancy 21,672 + Misc Income 7,500 7,669 7,841 8,0181 8,198 8,383 EGI 295,428 302,075 308,872 315,822 322,928 330,194 - Operating Exp 46,499 47,661 48,853 50,074 L 51,326 52,609 - M. Fee 17,726 18.125 18,532 18,949 19,376 19,812 - Property Taxes 76,374 76,374 80,193 80,193 84.203 84,203 NOI 154,829 159,915 161,294 166,606 168,023 173,570 - Debt Service 158,506 158,506 158,506 158,506 158,506 BTCF 1,409 2,788 8,100 9,517 15,064 NOI - Interest 159,905 127,500 62,730 161,285 124,864 65,448 166,596 122,005 65,448 168,013 118,902 65,448 173,559 115,536 62,730 - Depreciation -P. Penalty - Discount Exp Passive Income LO L0L0L09 (30,325) (29,027) (20,857) (16,337) (4,707) 25,000 25,000 25,000 25,000 25,000 0 0 Pass Through Other Passive S. Losses 5,325 9,352 9,352 9,352 9,352 Taxable income (25,000) 1 (4,707) x MTR AD (25,000) _ .40 (10,000) (20,857) .40 L (8,343) (16,337) .40 (6.534) TAX (10,000) L (1.883) BTCF 1,399 2,779 8,090 15,053 - TAX (10,000) 11,399 (10,000) 12,779 (8,343) 16,433 9,507 (6,534) 16,041 | (1,883) 16,936 ATCF ESP 2,522,453 NSP 2,320,657 - SE 201,796 - Adjusted Basis 1,928, 196 NSP 2.320,657 Total Gain on Sale 396,461 - UMB 1,316,277 - Depreciation Recovery 321,804 BTER 1,004,380 Capital Gain on Sale 70.657 TAX 87,309 917,071 ATER 321,804 Depreciation Recovery (DR) x Dep Recovery Tax Rate (tu) Depreciation Recovery Tax (DRT) Tax (DRT) 80,451 70,657 Capital Gains (CG) x Capital Gains Tax Rate (1) Capital Gains Tax (DRT) .15 10,599 Suspended Losses (SL) 9,352 x Marginal Tax Rate Suspended Losses Recapture (SLR) 3,741 In doing research Mr. Benedict has found that there maybe a similar building being planned for construction close to the location of the building he is considering purchasing. If it is built he assumes it will have an impact on his ability to generate the rent that was originally estimated. Also, he is concerned regarding "risk" of a potential market downturn. He has asked you to look into this and advise him how this additional information may impact the analysis. After much research, you have come up with the following data. In the first table you have estimated the associated probabilities of different economic environments. You decided to not only consider a potential downturn in the market, but also if market conditions improved! As will be discussed later, the analysis completed above (and in problem set #2) could be viewed as resulting from a "good" economic environment. Table 1 Economic Environment Associated Probability Excellent Good .25 .60 Poor Total . 15 1.00 You have also made some projections on the potential impact on NOI projections based on different economic environments AND if there is a competing complex built near the apartment complex that Mr. Arnold Benedict is considering purchasing. Note that the 100% shown in the Table 1 represents NO change in the NOI projections from the previous analysis. Table 1 Associated Probability Economic Environment Excellent 25 Good .60 .15 Poor Total 1.00 You have also made some projections on the potential impact on NOI projections based on different economic environments AND if there is a competing complex built near the apartment complex that Mr. Arnold Benedict is considering purchasing. Note that the 100% shown in the Table 1 represents NO change in the NOI projections from the previous analysis. Table 2 Percent of NOI Shown in Above Analysis Excellent Good Poor Competing Complex Built Yes 100% 110% 95% 100% 90% 95% No I L The above table shows the percentage of NOI based on economic condition and whether there is a competing complex built. Table 3 expands Table 1 and includes the probability that a competing property is built near the existing apartment complex based on the economic environment. Table 3 Economic Environment Good Excellent Poor Probability That Competing Property Will... Be Built .70 .20 .10 Not be Built .30 1.00 .80 1.00 .90 1.00 Total Combining the probability values from Table 1 and Table 3 results in Table 4 which represents the "Probability Estimates of Economic Conditions and Related Competitive Environments". Table 4 Economic Environment Good Poor Excellent Probability That Competing Property Will... Yes 120 1 .015 310 No 175 .075 .250 .135 480 .600 .690 11.000 150 Given this new information, you will need to calculate: a. The expected value of the NPVs (calculate the NPVs with the same 7 percent discount rate used in question 2) of these different possible scenarios. HINT: You have three possible outcomes based on economic condition if there is a competing property built AND three possible outcomes (again based on economic condition) if there is NO competing property built. The standard deviation