You want to purchase an office building in Brooklyn. The property contains 27,500 square feet of rentable space and is currently occupied by multiple tenants each with differing maturities on their respective leases. No lease is currently shorter than 1 year.

You want to purchase an office building in Brooklyn. The property contains 27,500 square feet of rentable space and is currently occupied by multiple tenants each with differing maturities on their respective leases. No lease is currently shorter than 1 vear The annual rent in the 1st year of ownership is $42.50/sq ft The vacancy rate is 6.5% You expect to incur collection losses (from tenant default) on 1.5% of the square feet during your first year 1) Suppose you buy the property at the asking price of $7,000,000 and own it for exactly 1 year The biggest loan you can get is $4,900 You make the down-payment of $2,100,000 You collect the NOI of $645,150 You make the annual mortgage payment of $306,250 In two years, the NOI is expected to be the same. You sell the property at the end of year 1, at a cap rate of 50 basis points below the cap rate of 9.22% and you pay off the loan balance when you sell Compute the IRR on this investment Cap rate during the sale 0.0922-0.005-0.0872 Cap NOI Asking price 0.0872-645,150/asking price>Asking Price 645,150/0.0872-7,398,509.1743 FV: 7,398,509.1743-4,900,000-2498509.1743 PV: -2,100,000 PMT: 645,150-306,250-338,900 1-35.11%