You are advising a group of investors who are considering the purchase of a shopping center complex. They would like to finance $75$ percent of the purchase price. A loan has been offered to them on the following terms: The contract interest rate is $4$ percent and will be amortized with monthly payments over $20$ years. The loan also will have an equity participation of $40$ percent of the cash flow after debt service. The loan has a $$lockout$$ provision that prevents it from being prepaid before year $5.$

The property is expected to cost $$5\mathrm{.}5$ million. NOI is estimated to be $$400,000,$ including overages, during the first year, and to increase at the rate of $2$ percent per year for the next five years. The property is expected to be worth $$6\mathrm{.}25$ million at the end of five years. The improvement represents $80$ percent of cost$,$ and depreciation will be over $39$ years with no mid$-$month convention for year $1$ to keep it simple. Assume a $35$ percent tax bracket for ordinary income, a $25$ percent for depreciation recapture, and $20$ percent for capital gains taxes and a holding period of five years.

Required:

a$.$ Compute the BTIRR and ATIRR after five years, taking into account the equity participation.

b$.$ What would the BEIR be on such a project? What is the projected cost of the equity participation financing?

c$.$ Is there favorable leverage with the proposed loan?