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You are analyzing a 1 1 , 0 0 0 square foot office property for potential acquisition. The property is currently being used as a

You are analyzing a 11,000 square foot office property for potential acquisition. The property is currently being used as a small animal veterinary clinic. The three veterinary doctors who run the clinic have just renewed the lease for ten years at $14.50 psf/yr gross rent. The lease calls for a rent increase of $0.50 psf per year for the term of the lease.
Although the property is fully occupied by a single tenant, your lender and your investors will demand that you impute a 5% vacancy rate.
Purchase price: $1,100,000
Acquisition costs: $20,000
Year one operating expenses: $4.50 psf/yr
Operating expenses annual growth rate: 3 percent
Projected end of year five sale price: Capitalize year six NOI at 9.25 percent
End of year five cost of sale: 4 percent of sale price
Anticipated holding period: Five years
Assessed land value: $160,000
Assessed improvement value: $640,000
Ordinary income tax rate: 39.6 percent
Capital gains tax rate: 20 percent
Cost-recovery recapture tax rate: 25 percent
Following are the loan terms from Wells Fargo Bank:
Maximum loan-to-value (LTV) ratio: 75 percent
Minimum debt-service coverage ratio (DSCR): 1.2
Interest rate: 8.5 percent
Amortization period: 20 years
Loan term: 10 years
Payments per year: 12
Loan costs: 2 percent of loan amount
Answer
1.2.3.
the following:
What is the IRR Before Tax on Equity for a 5 year hold? ____________________(5 points) What is the IRR After Tax on Equity for a 5 year hold? _____________________(5 points) Assuming the $20,000 in acquisition costs remain constant, how much can you pay for this property (purchase price) to get a 10% After Tax IRR. ______________________(5 points)

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