Problem:

You have just received (late 1993) the attached setup from a local broker for the purchase of a commercial warehouse facility in the City of Commerce, a city east of downtown Los Angeles with a heavy industrial base. As either an investor or someone representing investors with capital available to be directed towards real estate assets, you want to analyze this property for possible acquisition/syndication. Review the attached setup. Additionally, make the following assumptions:

Assumptions
Size of Building	81,200.00
Rent / SF (Rugby Tenant)	0.475
Annual Rent (Rugby Tenant)	462,840.00
Vacancy Time (months)	3
New Rental Rent / SF	.35
Rent Inflation (adjusted every 30 months)	3.00% (conservative vs. 5%)
Discount Rate Estimate (inflation = 4%)	TBD - assume one
Sale Price	3,400,000.00
Property Taxes	2.00%
Property Tax Growth	2.00%
Insurance	7,500.00
Insurance Growth	3.00%
Maintenance	10,000.00
Maintenance Growth	2.00%
Exit Cap Rate	10%

• You could close the purchase of the property on January 1, 1994, at a purchase price of$3.4 million, inclusive of all closing costs.
• Rugby's rent will increase to$0.475 per SF per month NN2on 8/1/1994.
• The current tenant, Rugby Labs, vacates the property at the end of their primary lease term ending on 8/1/1994.
• The building is subsequently leased up after 90 days, at$0.35 NNN for a primary term of 10 years and an option term of an additional 10 years. The rent will be adjusted every 30 months for changes in the Consumer Price Index (CPI), compounded annually. The minimum rental increase is 3% per annum, and the maximum, 5%.
• Upon re-leasing, you would have to pay$1/SF in tenant improvements, and a lease commission equal to 4.5% of the total base rents (without inflation adjustment) over the lease term.
• You will sell the property at the end of 10 years (beginning of 2004), the exit cap rate is projected to be 10%.
• Assume that there is no income tax consideration. (There are still property taxes!) Also, assume that the seller is taking care of the outstanding mortgage.
• Roof maintenance costs$10,000 in the first year, and is projected to increase 3% per year.
• Insurance expense is initially$7500 per annum, and is projected to increase 3% per year.
• Property taxes are projected to increase 2% per year. Inflation rate is projected to be 4%.
• To simplify the calculations, assume that all payments (rents, expenses, taxes, ...) in a year are made at the end of that year.
• Historical risk premium on industrial properties has been 3.5% per year. The treasury yields as of the end of 1993 are as follows: 3-months: 3.07%, 1 year: 3.63%, 2 years: 4.25%, 3 year: 4.58%, 5 year: 5.21%, 7 years: 5.53%, 10 year: 5.83%. Moody's Aaa corporate bond yields exceed the treasury yields by 1%, Baa yields exceed the treasury yields by 2%

Solve the following:

1. What do you project the IRR to be?
2. What do you project the NPV to be?
3. Which discount rate did you use and why?
4. Any assumptions you would change?