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We are located in LA, one of the world's leading real estate markets, and many of you are interested in real estate. Understanding how it

We are located in LA, one of the world's leading real estate markets, and many of you are interested in real estate. Understanding how it works is important. Below I relate what is intended to be a very simple stripped down example. I want to get a feel for your level of understanding of business matters. In this example you own a property, and the income stream is riskless. The tenant has a lease and will continue to pay the rent forever.1 This lease has a yearly escalator. In particular, the rent increases each and every year by 2.5%. Thus, the monthly rent for next year will be 1.025 times the monthly rent for this year, the monthly rent for two years later will be 1.050625 = (1.025)2 times the monthly rent for this year, etc. The lease on this property is absolute triple net, which means that as landlord you incur no expenses whatsoever. All you do is sit back and wait for the rent checks to arrive. Consequently, the annual net operating income [NOI] is 12 times the monthly rent [minus expenses 0 due to

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