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Problem 1 4 - 4 Richard Rambo presently owns the Marine Tower office building, which is 2 0 years old, and is considering renovating it
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Richard Rambo presently owns the Marine Tower office building, which is years old, and is considering renovating it He purchased the property two years ago for $ and financed it with a year, percent loan at percent interest monthly payments Of the $ the appraiser indicated that the land was worth $ and the building $ Rambo has been using straightline depreciation over years per year for simplicity At the present time Marine Tower is producing $ in NOI, and the NOI and property value are expected to increase percent per year. The current market value of the property is $ Rambo estimates that if the Marine Tower office building is renovated at a cost of $ NOI will be about percent higher next year $$ due to higher rents and lower expenses. He also expects that with the renovation the NOI will increase percent per year instead of percent. Furthermore, Rambo believes that after five years, a new investor will purchase the Marine Tower office building at a price based on capitalizing the projected NOI six years from now at a percent capitalization rate. Selling costs would be percent of the sale price. Rambo is currently having to pay percent tax on ordinary income, percent on capital gain, and percent on depreciation recapture which he expects to remain the same in the future. He also would not be subject to any passive activity loss limitations If Rambo does the renovation, he believes that he could obtain a new loan at a percent interest rate and a year loan term monthly payments
Required:
a Assume that if Rambo does the renovation, he will be able to obtain a new loan that is equal to the balance of the existing loan plus percent of the renovation costs. What is the incremental return for doing the renovation versus not doing the renovation?
Assume a fiveyear holding period.
b Repeat a but assume that Rambo is able to obtain a new loan that is equal to percent of the sum of the the property $ plus the renovation costs $This assumes that after renovation the value of the property will at least increase by the cost of the renovation.
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Assume that if Rambo does the renovation, he will be able to obtain a new loan that is equal to the balance of the existing loan plus percent of the renovation costs. What is the incre return ATIRR for doing the renovation versus not doing the renovation? Assume a fiveyear holding period.
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to decimal places.
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Incremental return ATIRR :
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