You are an investor and have the opportunity to purchase a commercial building in a productive business environment. The asking price is $8,000,000 and you are able to secure financing in the form of a 20 year fully amortizing fixed payment mortgage for 75% of the asking price. This mortgage has monthly payments and monthly compounding periods with an annual interest rate of 8% with the entire balance due in 5 years or at the time of sale, whichever occurs sooner. The building contains 180,000 square feet of leasable space and is situated on a 10 Acre lot. Rent in the area for comparable commercial space is $7.50 per square foot. Land prices in the area for lots in the 10 Acre range are $100,000 per acre. In addition, the following information and assumptions are available to aid your analysis: 8% 37% 3% 3% Vacancy and Collection Loss (% of PGI) Year 1 Operating Expense Ratio (% of EGI) Annual Inflation of Rents Annual Inflation of Expenses Commercial Depreciation Period Your Income Tax Rate Your Capital Gains Tax Rate Terminal Cap Rate(Applied to 5th year's NOI at sale) Selling Expenses as a percent of Gross Sales Price Your After Tax Required Rate of Return Planned Holding Period 39 years 38% 20% 10% 6% 14% 4 years 1) Complete a Pro Forma Cash Flow Statement based on the information given (This is the excel part you will need to turn in.) Should you invest in this property under the terms and assumptions outlined? Why or why not? ASSUMPTIONS: 2 3 4 # OF PERIODS 5 180 6 7 PAYMENT 8 10 180000 SQUARE FEET $7.50 RENT PER SQUARE FOOT 37% OPERATING EXPENSES % of EGI) $8,000,000 PURCHASE PRICE 75.00% LTV (Loan-To-Value) 8.00%|ANNUAL INTEREST RATE ON MORTGAGE $1,000,000 LAND COST 8.00% VACANCY AND COLLECTION (% of PGI) 39 DEPRECIATION PERIOD (IN YEARS) 38.00% INCOME TAX RATE 20.00% CAPITAL GAINS TAX RATE 3.00% ANNUAL GROWTH RATE OF RENTS 10.00% TERMINAL CAP RATE 6.00% SELLING EXPENSES AS A PERCENT OF GROSS SALES PRICE 14.00% AFTER TAX DISCOUNT RATE (FIRM'S REQUIRED RATE OF RETURN) 3.00% ANNUAL GROWTH RATE OF EXPENSES ANNUAL CASH FLOWS PERIOD 0 21 22 23 POTENTIAL GROSS INCOME 24 LESS VACANCY AND COLLECTION 25 EFFECTIVE GROSS INCOME 26 LESS OPERATING EXPENSES 27 NET OPERATING INCOME 28 LESS DEPRECIATION 29 LESS INTEREST PAYMENT A + $1,350,000 ($108,000) $1,242,000 ($459,540) $782,460 ($179,487) ($179,487) ($179,487) ($179,487) ($179,487) A G $782.460 ($179,487) ($179,487) ($179,487) ($179,487) ($179,487) 27 NET OPERATING INCOME 28 LESS DEPRECIATION 29 LESS INTEREST PAYMENT 30 TAXABLE INCOME 31 PLUS DEPRECIATION 32 LESS PRINCIPAL PAYMENT 33 BEFORE TAX CASH FLOW 34 LESS TAXES @ 35% ON TAXABLE INCOME 35 AFTER TAX CASH FLOW $179,487 36 37 38 REVERSION CASH FLOW 39 40 PERIOD 41 PURCHASE PRICE / DEVELOPMENT COST 42 LESS DEPRECIATION 43 ADJUSTED BASIS 44 45 GROSS SALES PRICE 46 LESS SELLING COST 47 ADJUSTED SALES PRICE 48 LESS ADJUSTED BASIS 49 GAIN ON SALE 50 MARGINAL TAX RATE ON CAPITAL GAIN 51 CAPITAL GAINS TAX 52 53 ADJUSTED SALES PRICE 54 LESS CAPITAL GAINS TAX 55 LESS OUTSTANDING MORTGAGE A (+ 49 GAIN ON SALE 50 MARGINAL TAX RATE ON CAPITAL GAIN 51 CAPITAL GAINS TAX 52 53 ADJUSTED SALES PRICE 54 LESS CAPITAL GAINS TAX 55 LESS OUTSTANDING MORTGAGE 56 AFTER TAX EQUITY REVERSION 57 59 TOTAL CASH FLOWS PERIOD 60 61 62 63 NET PRESENT VALUE @ 12% 64 INTERNAL RATE OF RETURN 65 66 68 70 71 72 73 75 You are an investor and have the opportunity to purchase a commercial building in a productive business environment. The asking price is $8,000,000 and you are able to secure financing in the form of a 20 year fully amortizing fixed payment mortgage for 75% of the asking price. This mortgage has monthly payments and monthly compounding periods with an annual interest rate of 8% with the entire balance due in 5 years or at the time of sale, whichever occurs sooner. The building contains 180,000 square feet of leasable space and is situated on a 10 Acre lot. Rent in the area for comparable commercial space is $7.50 per square foot. Land prices in the area for lots in the 10 Acre range are $100,000 per acre. In addition, the following information and assumptions are available to aid your analysis: 8% 37% 3% 3% Vacancy and Collection Loss (% of PGI) Year 1 Operating Expense Ratio (% of EGI) Annual Inflation of Rents Annual Inflation of Expenses Commercial Depreciation Period Your Income Tax Rate Your Capital Gains Tax Rate Terminal Cap Rate(Applied to 5th year's NOI at sale) Selling Expenses as a percent of Gross Sales Price Your After Tax Required Rate of Return Planned Holding Period 39 years 38% 20% 10% 6% 14% 4 years 1) Complete a Pro Forma Cash Flow Statement based on the information given (This is the excel part you will need to turn in.) Should you invest in this property under the terms and assumptions outlined? Why or why not? ASSUMPTIONS: 2 3 4 # OF PERIODS 5 180 6 7 PAYMENT 8 10 180000 SQUARE FEET $7.50 RENT PER SQUARE FOOT 37% OPERATING EXPENSES % of EGI) $8,000,000 PURCHASE PRICE 75.00% LTV (Loan-To-Value) 8.00%|ANNUAL INTEREST RATE ON MORTGAGE $1,000,000 LAND COST 8.00% VACANCY AND COLLECTION (% of PGI) 39 DEPRECIATION PERIOD (IN YEARS) 38.00% INCOME TAX RATE 20.00% CAPITAL GAINS TAX RATE 3.00% ANNUAL GROWTH RATE OF RENTS 10.00% TERMINAL CAP RATE 6.00% SELLING EXPENSES AS A PERCENT OF GROSS SALES PRICE 14.00% AFTER TAX DISCOUNT RATE (FIRM'S REQUIRED RATE OF RETURN) 3.00% ANNUAL GROWTH RATE OF EXPENSES ANNUAL CASH FLOWS PERIOD 0 21 22 23 POTENTIAL GROSS INCOME 24 LESS VACANCY AND COLLECTION 25 EFFECTIVE GROSS INCOME 26 LESS OPERATING EXPENSES 27 NET OPERATING INCOME 28 LESS DEPRECIATION 29 LESS INTEREST PAYMENT A + $1,350,000 ($108,000) $1,242,000 ($459,540) $782,460 ($179,487) ($179,487) ($179,487) ($179,487) ($179,487) A G $782.460 ($179,487) ($179,487) ($179,487) ($179,487) ($179,487) 27 NET OPERATING INCOME 28 LESS DEPRECIATION 29 LESS INTEREST PAYMENT 30 TAXABLE INCOME 31 PLUS DEPRECIATION 32 LESS PRINCIPAL PAYMENT 33 BEFORE TAX CASH FLOW 34 LESS TAXES @ 35% ON TAXABLE INCOME 35 AFTER TAX CASH FLOW $179,487 36 37 38 REVERSION CASH FLOW 39 40 PERIOD 41 PURCHASE PRICE / DEVELOPMENT COST 42 LESS DEPRECIATION 43 ADJUSTED BASIS 44 45 GROSS SALES PRICE 46 LESS SELLING COST 47 ADJUSTED SALES PRICE 48 LESS ADJUSTED BASIS 49 GAIN ON SALE 50 MARGINAL TAX RATE ON CAPITAL GAIN 51 CAPITAL GAINS TAX 52 53 ADJUSTED SALES PRICE 54 LESS CAPITAL GAINS TAX 55 LESS OUTSTANDING MORTGAGE A (+ 49 GAIN ON SALE 50 MARGINAL TAX RATE ON CAPITAL GAIN 51 CAPITAL GAINS TAX 52 53 ADJUSTED SALES PRICE 54 LESS CAPITAL GAINS TAX 55 LESS OUTSTANDING MORTGAGE 56 AFTER TAX EQUITY REVERSION 57 59 TOTAL CASH FLOWS PERIOD 60 61 62 63 NET PRESENT VALUE @ 12% 64 INTERNAL RATE OF RETURN 65 66 68 70 71 72 73 75