You are advising an investor, who is interested in purchasing a multi-tenant office building in Fort Lauderdale, which has an asking price of $120 per SF. Assume that, apart from 2% purchasing costs, there are no additional acquisition-related costs. Purchasing costs cannot be rolled into a mortgage and have to be paid out of pocket. The building size is 60,390 SF. It is currently leased to three tenants:

The first tenant is currently renting 24,156 SF for $24.5/SF/year. The lease will expire in 2 years (end of year).

The second tenant is currently renting 10,266 SF for $23/SF/year. The lease will expire in 4 years (end of year) and has an annual rent increase of 2.5%.

The third tenant is currently occupying the remaining space for $22/SF/year and the lease will expire in 6 years (end of year). Rental increases of $2 per SF will occur at the beginning of the 2^nd and 4^th year.

After the first lease expires, assume a V&C of 5% of the PGI each year, which will increase to 10% once the second lease expires. The market rent is currently $19.25/SF/year and is expected to decrease by 3% each year for the next 3 years and then increase again by 2.5% each year for the next 4 years.

Operating expenses for all leases are currently $9/SF/year and will increase annually by 2.5% (i.e. with inflation). The landlord covers 30% of operating expenses. No non-operating expenses occur. A capital expense reserve of $2 per SF is created for each year. At the point of sale, this reserve is eliminated and represents a cash inflow.

The building is depreciated over 39 years (mid-year convention for first and last year apply) and the value of improvements (building) is considered to be 80% of the purchasing price. The going out cap rate is 9% and the investor requires a return of 10%. Selling costs are 2% of the sales price. The investor expects to hold the building for 5 years. Assume an income tax of 35% and a capital gains tax of 15%. For simplicity, you can use the capital gains tax rate for depreciation recapture and pure capital gain at the time of sale.

Part 1: Assuming that the investor wants to hold the property for 5 years, conduct a discounted cash flow analysis (DCF) to calculate the after-tax IRR and NPV for this investment. The investor received a lender's offer for a 30year mortgage at 8% (compounded monthly) with a loan to value ratio (LTV) of 75%. No financing costs (e.g. origination fees) or discount points occur. Considering this FRM, what is the after-tax NPV and IRR? Is this investment worth undertaking?

question 1) struggling with part 1