What are selling costs, before tax casf flow from sale, price appreciation, depreciation recapture tax from sale, capital gains tax from sale, after tax cash flow from sale.

Consider the possible purchase of an office building for $6 million that will be sold at the end of 5 years. The lead tenant is a bank that signed a five-year lease, which started when the building was completed three years ago. A law firm signed a five-year lease one year ago and a mortgage broker just signed a five-year lease on the remaining space. A summary of the existing leases is shown below. Lease Term no. years Remaining Years 2 4 Tenant Square FeetRent Base Rent Bank Law Firm Mortgage Broker10,000 (per sq. ft.) $13.50 14.50 75,000 11,000 1,012,500 159,500 145,000 14.50 The leasable square feet area is 96,000. The current market rent (per square foot) for this type of building is $15. When a lease expires, follows: your tenants will renew the lease at the prevailing market rent. Projected market rents are as Year Rent$15 2 15.25 16.00 16.75 17.00 17.75 Based on information from previous years, you expect to incur management costs of6% of potential gross income (PGI). You have also decided to allow for some risk that tenants will not renew by incurring a vacancy cost of 5% of PGI (note that this cost will not be applied until the year when the oldest lease renews) You also believe that property taxes will be $150,000 in the first year and then grow 3% per year after that. Insurance will be $14,400 and grow 4% pe 4% per year. Janitorial services will be $76,800 will be $68,200 and grow 4% per year r year. Utilities will be si 22,600 and grow and grow 3% per year. Maintenance expenses You will be reimbursed for all expenses, excluding management and vacancy costs, in excess of 0 per square foot beginning in the first year. When a lease renews, the expense stop will be set equal to the base year expense stop 4. The discount rate has been set at 15% and you believe that the terminal cap rate will be one percentage point less than the going-in cap rate Investment Analysis with Debt and Taxes Return to the scenario above. Suppose that the investor can obtain a loan for 70 percent of the property value at an 11 percent interest rate to be amortized over 20 years with monthly payments It has also been determined that of the total value of the property, about 16% is the cost of the land, and the building will be depreciated straight-line over 39 years. The income tax rate that you expect to pay is 30%. The capital gains tax rate is 15% while the depreciation recapture rate is 25%. You further anticipate selling the property with the help of a commercial real estate broker that will result in selling costs of 7% of the sale price. Finally, since there is now debt financing, your discount rate is 18%