What is the before-tax equity yield (internal rate of return [IRR]) for Plaza

Suites based on the following assumptions?

? Purchase price: $1,000,000

? Acquisition costs: $50,000

? Year one potential rental income: $145,000

? Potential rental income annual growth rate: 3 percent

? Annual vacancy and credit loss projection for the next six years: 8 percent

? Year one operating expenses: $45,000

? Operating expenses annual growth rate: 3 percent

? Projected end of year five sale price: Capitalize year six NOI at 8.5 percent

(Rounded to the nearest $1,000.)

? End of year five cost of sale: 4 percent of sale price

? Anticipated holding period: Five years

The following additional assumptions are needed for the "With

Financing/Before Tax" analysis:

? Maximum loan-to-value (LTV) ratio: 75 percent

? Minimum debt-service coverage ratio (DSCR): 1.2

(Calculate the maximum loan amount using LTV ratio and DSCR, and use

the lesser of the two amounts rounded down to the nearest $1,000 as the

loan amount for the analysis.)

? Interest rate: 8.5 percent

? Amortization period: 20 years

? Loan term: 10 years

? Payments per year: 12

? Loan costs: 2 percent of loan amount

Before determining the before-tax equity yield, it's necessary to find the loan

amount available. Available loan amounts can be calculated using the LTV

ratio or DSCR.

How would I determine the before-tax equity yield using Excel?

Guide

The models for each of the components for the "With Financing/Before Tax"

analysis are as follows:

Initial Investment

Purchase price

+ Acquisition costs

+ Loan costs

- Mortgage (amount borrowed)

Initial investment

Annual Cash Flows Before Tax

Potential rental income (PRI)

- Vacancy and credit losses

Effective rental income

+ Other income

Gross operating income

- Operating expenses

Net operating income

- Annual debt service

Cash flow before tax

Sale Proceeds Before Tax

Sale price

- Cost of sale

- Mortgage balance at time of sale

Sale proceeds before tax

Holding Period

The anticipated holding period for any of the types of analysis using the real

estate cash flow model usually is determined by the investor's objectives.

The component T-bar for the "With Financing/Before Tax" cash flow model is

illustrated below:

EOP WNHO (Initial investment) Cash flow before tax Cash flow before tax Cash flow before tax + Sale proceeds before tax