Task 1 (30 points): Construct the cash flow proforma statement for the following project by filling out the white cells of the following table.

A 2-year levered equity investment between t=0 and t=2.

The first NOI is 10 at t=1, and NOI grows at 5%/yr until t=3.

The cap rate is 5% (going-in) at t=0 and increases by 0.5%/yr to 6% (going-out) at t=2.

Capital Expenditures are 10% of NOI.

The investment is levered with a two-year interest-only loan at a 5% interest rate with the face value of 80 (i.e., the initial loan amount is 80).

Solve Cap Rate for:

T=0 (Cash flow at beginning of project, today)

T=1 (1 year later)

T=2 (2 years later, Cash flows for the second period, between t=1 and t=2, the last CF)

Solve NOI for:

T=1 (1 year later)

T=2 (2 years later, Cash flows for the second period, between t=1 and t=2, the last CF)

T=3 (3 years later)

Solve Capital Expenditures (Negative Number) for:

T=1 (1 year later)

T=2 (2 years later, Cash flows for the second period, between t=1 and t=2, the last CF)

Solve for Disposition CF for (Negative Number)

T=2 (2 years later, Cash flows for the second period, between t=1 and t=2, the last CF)

Solve for Property BT CF for

T=0 (Cash flow at beginning of project, today)

T=1 (1 year later)

T=2 (2 years later, Cash flows for the second period, between t=1 and t=2, the last CF)

Solve forLoan at:

T=0 (Cash flow at beginning of project, today)

Solve forDS, include the final payment:

T=1 (1 year later)

T=2 (2 years later, Cash flows for the second period, between t=1 and t=2, the last CF)

Equity BT CF for:

T=0 (Cash flow at beginning of project, today)

T=1 (1 year later)

T=2 (2 years later, Cash flows for the second period, between t=1 and t=2, the last CF)

Task 2 (70 points): Estimate the percentage-point contribution to the equity IRR of (1) the baseline return under no NOI growth and no cap rate change, (2) NOI growth, (3) cap rate changes, and (4) leverage. Furthermore, (5) estimate the equity IRR by adding (1), (2), (3), and (4). Of course, you could calculate equity IRRs under alternative assumptions using spreadsheet, but you can answer these questions without computing an IRR if you understand the approximate method explained in the lecture. Write legibly your explanations and calculations.

(1) Baseline

(2) NOI growth

(3) cap rate changes

(4) leverage

(5) The estimated equity IRR