PREPARE A PRO FORMA FOR THE FOLLOWING INVESTMENT:

A 5,000-square-foot warehouse is offered for a price of $100,000. The property is currently leased to an AAA tenant for the next 5 years at a rate of $3 per foot per year. This is a single net lease (meaning that the lessee pays operating and property maintenance expenses while the lessor pays the real estate taxes of $2,000 per year and insurance of $1,000 per year). This property is located on leased land from the city. The lease is $1 per year and can be disregarded. The property can be sold after 5 years for $100,000.

The investor can finance through all equity or via a loan for 80% at 11% amortized over 20 years. Calculate the before-tax IRR and after-tax IRR for an investor in the 31% marginal tax bracket under both alternatives.

If the mortgage rate increases at the rate of 0.5% for each additional 5% change in loan-to-value (i.e., 85% loan has a rate of 11.5%, etc.), what is the optimal LTV ratio? What is the incremental cost of borrowing when you move from the 80% loan to the 90% loan? What is the break-even cost to borrow? Show math, spreadsheet, and graph as appropriate (you should have 5 different spreadsheets).

Prepare a ratio analysis for (1) the all-equity investment plan and (2) with the optimal leverage loan. What are the differences in the relevant ratios, and what do they tell you about the investment?