Reference no: EM132720030

We are considering an acquisition of an existing medical office building (MOB) to our portfolio. There are 4 tenants. Tenants 1 and 2 occupy 15,000 and 8,000 square feet respective, at $19.00 per square foot. Tenant 3 has 10,000 at $20.00 and tenant 4 has 4,000 at $22.00. All the leases are presently expected to continue through the 4 year holding period and have CPI increases estimated at 2% per year. The asking price for the property is $3,000,000 of which 75% of the value would be allocated to the building; and vacancy and collection losses are projected at 10% of rents. First year operating expenses include $120,000 (i.e. taxes, insurance, utilities, maintenance, etc.) and management estimated at 5% of EGI. Our tax rate is 36% and all loses are recognized in the year they are incurred. Capital gains and depreciation recapture are both taxed at 15%. A 70% loan can be obtained at 9.5% for 25 years. Both the property value and operating expenses are expected to grow 4% per year and our projected holding period is 4 years. Selling expenses are projected at 4% of the gross sales price. The reinvestment rate for cash flows is 7% and the discount rate is 12%.

Problem 1: What is the before tax IRR and MIRR to the investor under the proposed mortgage arrangement? Comment on the differences for the investor yield estimates you just calculated.

Problem 2: What is the after tax IRR, and the effective tax rate under this scenario?

Problem 3: Calculate the terminal cap rate based on the information above.

Problem 4: What is the NPV to the equity of the project?

Problem 5: Assume the 12% discount rate holds. Examine the equity BTIRR under the following sample of LTVs and interest charges

@ 65%         7%
@ 70%       10%
@75%        12%
@80%          15%

Does this project have positive or negative leverage at the given LTV levels?