Problem 5 [20 points] A real estate investor has the following information on an office building: Purchase price is $1,250,000 with acquisition costs of $60,000 45,000 leasable square feet Initial rent of $10/sq. ft. per year and will increase 1.0 percent per year Vacancy rate of 8% of gross rent per year Operating expenses are 42% of effective gross income Three financing choices: 1. All equity without any financing; 2. Mortgage with 75% LTV ratio, 15 years, annual payments and 3.5% contract rate; 3. Mortgage with 95% LTV ratio, 15 years, annual payments and 6.0% contract rate; . Expected increase in value is 3.0% per year. Holding period is 15 years, and 5% selling expenses . For simplicity, assuming that no capital improvement over the entire holding period . . 75% depreciable Investor's tax rate is 28%, and capital gain tax rate is 15%. Questions: 1. What is the equity after-tax return (internal rate of return) for each financing choice? 2. How much percentage of the IRR comes from cash flows and how much from capital gain for each financing choice? 3. Which financing choice is the best and why