You have been hired to perform an investment analysis for a high net worth individual to determine if they should purchase a commercial real estate investment. The investment includes office, retail, and a ground lease for a bank.

The following are the income characteristics:

Office - 80,000 square feet is leased to a national tenant, Grier Head for $42 per square foot for the next 15 years. The rent will increase by 3 percent per year and there are expense stops of $10.00 per square foot and there is no risk of vacancy or credit loss. 30,000 square feet is leased Mouse Wear for $35 per square foot for the next three years with 3 percent annual rent increases and there is no risk of vacancy or credit loss. At the end of three yeas they will vacate the space and it will take six months to lease the space at which time the market rent is project to be $50 per square foot with annual increases of 3 percent. The lease term on this space is 10 years and the vacancy and credit loss on this space is 2 percent. Office expenses for all tenants are $8.25 per square foot and increase by 3 percent per year.

Retail - 15,000 square feet is leased to Woolworth for $42 per square foot with 4 percent annual rent increases for the next 20 years and there is not risk of default. 30,000 square feet is leased to BestBuy Express for $38 per square foot for the next 15 years with rents increasing by 4 percent a year and there is no risk of vacancy or credit loss. Jackie Juice Bar leases 2,500 square feet for $80 per square foot with rent increases of 4 percent per year for 15 years and there is no risk of credit loss. There is an unrecoverable expense ratio of 15 percent of EGI on all retail tenants.

Ground Lease - BB&T leases a parcel for a branch bank on a triple net bases. The lease started five years ago for$200,000 per year with 3 percent annual rent increases and has 40 years remaining on the lease.

Financing - The Bank of Virginia is providing 75 percent loan to value at 7.5 percent amortized over 18 years with a 10-year call. Use annual payments not monthly.

Taxes - Your investor has an ordinary income tax rate of 28 percent. The long-term capital gain taxes are 20 percent and recapture is 25 percent.

Investment Criteria /Assumptions- The property is being offered for $65 million. The terminal cap rate is 8.5 percent and the discount rate is 11 percent. The holding period is 10 years. Assume that the land value is $15 million. Also assume that the cost of sale at the end of the holding period is 1 percent.

Questions:

What are the annual cash flows for periods 1 to 11; what is the terminal value; what is the before and after tax NPV and IRR (use end of period); what is the division of value between cash flows and resale? Do you recommend purchasing the property? Explain why or why not. Show all calculations - PGI, EGI, Expenses, NOI, Taxes, etc. If unclear about something, clearly state your assumptions. Assume end of year cash flows.