Question: Jennifer is considering buying, on 1/1/2020, the Wayne Headqurters (office building ("WH") on the corner of Main Street and Vine, the best location in Metropolis. The Daily Planet's headquarters ("DPH"), one block away, also a great location, was just bought by Superman's mom for $10 million dollars (12/1/2019). The Daily Planet News Paper Company leases the DPH (98 years remaining) on a Triple Net basis with annual 1.5% rent steps. The DPH rent for the calandar year of 2019 was $850,000. Everyone knows that Superman's mom overpaid by $1,000,000 for sentimenal reasons. The Wayne Foundation leases the WH building also Triple Net rent with 99 years remaining with 2.5% annual steps. WH Rent wil be $750,000 for the calander year 2018. The actual rent for both buildings for 2020 are right at market. The market rent at the better location is expected to grow at 3.5% annually over the next ten years while the DP location is expected to grow even faster at 4.0% per annum. The Wayne Foundation and the Daily Planet are both AAA credit tenants.

USE CAP RATES TO DERIVE THE ANSWERS to QUESTIONS IN THIS SECTION. PLEASE ALSO NOTE THAT NOT ALL INFORMATION PROVIDED IS REQUIRED TO ANSWER ALL QUESTIONS. A THOROUGH UNDERSTANDING OF THE CONCEPTS SHOULD ENABLE YOU TO KNOW WHAT INFORMATION SHOULD BE USED AND WHAT SHOULD BE DISREGARDED.

Part 1

a) Using Cap Rates to estimate; for what price should the WH building sell? Explain the rationale behind your answer.

b) What price could Jennifer afford to pay if she only needs is a 9% (unleveraged) yield? Under what type of circumstances might Jennifer pay that price?

c) Assuming the Unleveraged After Tax IRR on the property purchased for the Price in a) above is 8.3%, what would be the Estimated Breakeven Interest Rate on financing for a purchase at this price using a 33% Ordinary Income Tax Rate and assuming 80% of the purchase price was allocated to the building with 39 years to depreciate the building?

Part 2

a) What BTIRR can Superman's Mom Expect on her Equity Investment?

b) Assuming Jennifer can obtain finanacing at the same LTV (assuming this purchase price represents the value) that the bank would have lent to Qualified Buyers of the DPH and the same interest rate (interest only for 10 years), what BTIRR could Jennifer expect to earn on her equity investment in the WH if she pays $9,000,000?

c) IF Bruce Wayne agrees to provide 85% financing at 7.00% interest only for 10 years, What Price could Jennifer pay to get the same expected Return on Equity (leveraged) as in b above?

d) Is there anything about the parameters of the questions a, b & c above which makes the estimation method used to answer these questions less valid than usual?