You are an employee of University Consultants, Ltd$.$ and have been given the following assignment. You are to present an investment analysis of a small income$-$producing office property for sale to a potential investor. The asking price for the property is $$1,250,000$; rents are estimated at $$200,000$ during the first year and are expected to grow at $3$ percent per year thereafter. Vacancies and collection losses are expected to be $10$ percent of the rents. Operating expenses will be $35\%$ of effective gross income. A fully amortizing $70$ percent loan can be obtained at an $11$ percent interest for $30$ years. The loan requires constant monthly payments and is a fixed rate mortgage. The mortgage has no prepayment penalties. Interest accrues on a monthly basis. The property is expected to appreciate in value at $3$ percent per year and is expected to be owned for three years and then sold.

You determine that the building represents $90\%$ of the acquisition price. The building should be depreciated using the straight line method over $39$ years. The potential investor indicates that she is in the $36$ percent tax bracket and has enough passive income from other activities so that any passive losses from this activity would not be subject to any passive activity loss limitations$.$

Capital gains from price appreciation will be taxed at $20$ percent and depreciation recapture will be taxed at $25\%.$ Please assume that any information that is not given or cannot be calculated is $0.$

Now

Now assume the investment is financed with a $70\%$ loan$-$to$-$value ratio interest$-$only mortgage. The interest rate on this mortgage will remain at $11\%.$

e$)$ Find the IRR under this alternative assumption?