You have been presented with the off$-$market opportunity to personally purchase a $40,000$ SF$,$ single$-$tenant Links to an external site. retail store leased to Best Box, a regional leader in consumer electronics and appliances. You are a personal friend of the Best Box CEO, and she recently approached you about purchasing their flagship store.

Upon selling the store, Best Box would leaseback the property from you on a $10-$year lease beginning at $$25$psf with an annual rent step of $$1\mathrm{.}00$psf for years $1-10.$

You$$ve been working hard the last few years at A$.$CRE Development and have banked several six$-$figure promotes. Those earnings have been sitting in a high$-$yield savings account, awaiting the right opportunity. This could be a great opportunity to put those funds to work for $5-10$ years at a yield substantially better than your savings account.

Before making a decision, you decide to analyze the investment. You open up an Excel workbook and begin to model the cash flows.

Assumptions

RSF is $40,000.$

Income is initially $$25$psf with an annual step of $$1\mathrm{.}00$psf

Asking cap rate is $6\mathrm{.}25\%$ on year $1$ NOI Links to an external site..

Disposition cap rate at the end of a $5-$year hold period is $6\mathrm{.}50\%$ based on Year $6$ Rent.

The investment is financed by a $10-$year loan at $70\%$ LTV Links to an external site., $3\mathrm{.}25\%$ rate, monthly pay, and a $30-$year amortization period. The loan has call protection from month $25$ to month $117$ in the form of yield maintenance. Assume reinvestment rates are $2\mathrm{.}75\%$ at the time of sale.

Questions

What is the asking price amount?

What is the unlevered IRR?

What is the levered IRR?

What is the year $3$ free and clear return Links to an external site. $($i$.$e$.$ Return as if there is NO leverage$)?$

What is the year $3$ cash on cash return Links to an external site. $($i$.$e$.$ Return after leverage on the investment$)?$

Equity Contribution

You approach your cousin Vinny about contributing $75\%$ of the required equity. Your cousin is interested subject to understanding what his equity returns would be$.$ You offer a $4\%$ non$-$cumulative preferred return and then to split all cash flow pari passu Links to an external site. and pro rata based on ownership share. You also ask for a $1\%$ acquisition fee based on his equity contributed, a $1\%$ disposition fee of net sale proceeds allocated to him, and a $0\mathrm{.}50\%$ of an annual asset management fee based on his equity invested.

What is your levered IRR, net of fees?

What is your cousin$$s levered IRR, net of fees?