My company is considering putting in an offer on a property located in a small college town. The property has the following attributes:

• 7,000 square feet of total rentable space in a 13 year old building
• 100% fully leased with four tenants Subway, Dominos, Starbucks, and Campus Liquor
• Average blended rental rates for the tenants is $12.50/sqft/yr
• Rental rates are projected to increase annually by 5%
• Total operating expenses for the center are $5.25/sqft/yr and are projected to increase by $0.25/sqft/yr for the entire analysis period operating expenses include CAM, property management costs, insurance and property taxes
• Tenants reimburse us 100% of all operating expenses full pass through
• All four leases are long-term leases but we project that we will experience some rent collection difficulties due to summer-time lulls in activity. We will assume a collection reserve of 5% of rents and reimbursable expenses
• Capital expenditures are estimated to total $1.00/sqft/yr
• Initial Cap Rate at purchase = .075 (7.5%)
• Reversion (sale) Cap Rate = .070 (7.0%)
• Sales Costs at reversion = 2% of gross proceeds
• Building is depreciable over 39 years (straight line)
• Debt Info:

• 70% LTV
• 20-year amortization period
• 5.25% interest rate

• Assume a Three-year Hold with Sale at the end of year 3. Sales price will be based on the Year 3 NOI using the Reversion Cap Rate above

From this information, create a detailed pro forma for the hold period (preferably using Excel if you are comfortable doing so). If you feel that certain information is missing that is essential to completing the pro forma, identify what it is and then make an educated assumption to fill the data void so you can proceed with the pro forma development.

Ultimately, you will want to determine the following:

1. What is the approximate price I should offer for this property based on the cap rate given and applied against the project NOI for Year 1 determined using the information above?
2. What is the IRR for the project from the standpoint of the equity investors? Assume sale of the property at the end of year 3s operations. Disregard taxes to investors but if you will feel better knowing about taxes, assume they are 30% to the equity investors.
3. Summarize key items you may have had to assume to arrive at your answers and let me know if you would pursue this purchase or not if the equity investors generally demand a 12% return on their investment.