To address the higher risk associated with percentage rents, a real estate analyst isolated the forecasted percentage rent from the rest of the net operating income (see below). The analyst also suggested isolating that portion of the gross sales price at end of year five attributable to overage rent by capitalizing the overage rent NOI for year six at an 8 percent capitalization rate versus the 6 percent used for the base rent NOI. She felt that to justify the risk, an 11 percent discount rate then should be applied to the percentage rent segment of the income stream, versus the 9 percent on the base rent segment of the income stream. Using the analysts suggested cap rates and discount rates, how much should Teachers Pension Fund pay for the property? (Round to nearest $1,000; Ignore sales costs.)

a. $625,000

b. $825,000

c. $833.000

d. $500.000

End of Year Total NOI-*Overage Rent NOI = Base Rent NOI 1 $50,000T $0 $50,000 2 $53,145 - $2,145 = $51,000 3 $54,272 - $2,252 = $52,020 $55,425 | $2,365 = $53,060 ... 5 $56,605 - $2.483 = $54,122 $57,811 -1 $2,607 = $55, 204 *Net of Vacancy and Credit Losses and Management End of Year Total NOI-*Overage Rent NOI = Base Rent NOI 1 $50,000T $0 $50,000 2 $53,145 - $2,145 = $51,000 3 $54,272 - $2,252 = $52,020 $55,425 | $2,365 = $53,060 ... 5 $56,605 - $2.483 = $54,122 $57,811 -1 $2,607 = $55, 204 *Net of Vacancy and Credit Losses and Management