Strasburg is a census-designated place in Adams and Arapahoe counties in the U.S. state of Colorado. The population of Strasburg is approximately 5,000. The Strasburg Post Office has the ZIP Code 80136. The Town of Strasburg is about 40 miles east of Denver along I-70 and sits at an elevation of 5,381 feet. You have an opportunity to purchase the post office building in Strasburg, Colorado. The U.S. Postal Service has just signed a 5 year extension of the current lease on the 2,000 Rft2 office building at $24.00 per square foot per year. The tenant pays most all expenses in terms of maintenance and upkeep. Your only out of pocket costs are for utilities, which are projected to be $3.00 psf this year and will increase, you believe, at a rate of 5% per year for the next several years. Strasburg is a very small town in Eastern Colorado and thus the demand for office space is quite low. However, of the office buildings in the market there is currently no vacancy. Typical rents range between $21.00 and $27.00 per square foot with typical owner expenses amounting to about $9.00 per square foot (taxes, utilities, insurance, general maintenance). The postal service plans to build a new facility, perhaps a bit larger, by the time in the lease period is over. The investor who currently owns the building is offering it for sale at $375,000.

The Assumptions: You assume you will be able to secure a cash buyer for the property at the end of year 5 at a 10% cap on the sixth years projected market NOI. Assume all of your analyses before tax Assume the property would rent for $25.50 today if not for the postal service lease. Also assume typical expenses of $9.00 psf. Compound both amounts forward at 5% to figure the sixth years NOI. Assume an all cash transaction, both purchase and sale, with no transaction costs. Important. Assume you are in Strasburg, needing to make a decision within the next couple hours and all you have is your phone and a pad of paper.

Calculations & Questions: 1. Set up and calculate a 5 year projection from PGI to NOI. (Note that in this all cash scenario NOI = BTCF) 2. Calculate the reversion based upon the projected market sixth year NOI. 3. Calculate the acquisition Cap Rate ______________. 4. Calculate Cash/Cash year 1; assuming $375,000 purchase price. _________________ 5. Assuming the purchase price of $375,000 and the projected cash flows and reversion. What is the IRR? ______________________ 6. Lets say you wish to achieve a rate of return of 14% (your discount rate). What is the gross present value of this investment? ______________________