Real estate & Finance

D) Lets suppose that you lose a tenant in year 3, which lowers the NOI in years 3, 4 and 5 by $100,000 in each year. What is the new IRR for both scenarios?

E) Explain the outcome of D)

F) When you lose a tenant it is likely that the value of your property at sale will also decline, hence cells G6 and G18 will also be affected. Explain how and why the sale price will change and what the effect on the IRR is?

G) Which scenario is more risky? Explain.

A14 fx Year: A B C D E F G H - J K L Scenario with a Mortgage: 0 1 2 3 4 5 $200,000.00 $240,000.00 $245,000.00 $250,000.00 $260,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $75,000.00 $115,000.00 $120,000.00 $125,000.00 $135,000.00 $1,400,000.00 = After Tax Equity Reversion: Profit for the Equity Investor. -$1,250,000.00 $75,000.00 $115,000.00 $120,000.00 $125,000.00 $1,535,000.00 1 2 Year: 3 NOI: 4 DS: 5 After Tax Cash Flows: 6 7 Total Cash Flows: 8 9 10 11 12 13 14 Year: 15 NOI: 16 DS: 17 After Tax Cash Flows: IRR = 10.83% Scenario without a Mortgage: 0 1 2 3 4 5 $200,000.00 $240,000.00 $245,000.00 $250,000.00 $260,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $200,000.00 $240,000.00 $245,000.00 $250,000.00 $260,000.00 $2,900,000.00 = After Tax Equity Reversion: Profit for the Equity Investor. -$2,800,000.00 $200,000.00 $240,000.00 $245,000.00 $250,000.00 $3,160,000.00 18 19 Total Cash Flows: 20 IRR = 9.05% 21 22 23 A14 fx Year: A B C D E F G H - J K L Scenario with a Mortgage: 0 1 2 3 4 5 $200,000.00 $240,000.00 $245,000.00 $250,000.00 $260,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $75,000.00 $115,000.00 $120,000.00 $125,000.00 $135,000.00 $1,400,000.00 = After Tax Equity Reversion: Profit for the Equity Investor. -$1,250,000.00 $75,000.00 $115,000.00 $120,000.00 $125,000.00 $1,535,000.00 1 2 Year: 3 NOI: 4 DS: 5 After Tax Cash Flows: 6 7 Total Cash Flows: 8 9 10 11 12 13 14 Year: 15 NOI: 16 DS: 17 After Tax Cash Flows: IRR = 10.83% Scenario without a Mortgage: 0 1 2 3 4 5 $200,000.00 $240,000.00 $245,000.00 $250,000.00 $260,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $200,000.00 $240,000.00 $245,000.00 $250,000.00 $260,000.00 $2,900,000.00 = After Tax Equity Reversion: Profit for the Equity Investor. -$2,800,000.00 $200,000.00 $240,000.00 $245,000.00 $250,000.00 $3,160,000.00 18 19 Total Cash Flows: 20 IRR = 9.05% 21 22 23