Wal-Mart has approached you with the opportunity to enter a sale lease-back transaction with them on a one million square foot warehouse that they have recently developed. In typical Wal-Mart fashion, they have given you a take it, or leave it final offer. The terms are:

Purchase Price: $165 million

Facility Size 1,000,000 SF

Lease Term 7 years

Rent $7 PSF NNN

Operating Expenses Wal-Mart (tenant) pays all operating expenses, utilities, and property taxes (owner pays none)

Renewal Options 7-year extension at $8 per ft^2; a second 7 year extension at $9.50 per ft ²; a third 7 year extension at $11.50 per ft.^2. All at Wal-Marts choice (i.e. its Wal-Marts option). Wal-Mart pays all operating expenses, utilities, property taxes, and capital expenditures undertaken during all lease renewal periods.

You know the market and feel that the location is good, and that the warehouse market is in good supply/demand balance. Vacancy rates are 4% - 5% in quality facilities, while net rents in the market are running about $7.50 - $8 PSF (i.e. a slight premium to the Wal-Mart lease). You have recently seen comparable sales that have traded in the range of $160 - $200 PSF. You also know that implied discount rates are currently at about a 3% premium to implied cap rates and capital costs are running at $0.50 PSF per annum.

You know from your Real Estate Finance & Investments classes that you can value a building using a direct capitalization approach, a comps analysis and a DCF analysis. You also have a handy template that youve been using for these analyses which you will need to complete in order to come to a view on value.

Its decision timewould you agree to pay the $165 million that Wal-Mart is asking? Why or why not?

I wasn't given the cap rates for this assignment but tried looking it up and used 4.24 or 7% all the information I was given is above.