Before
and After Tax Cash Flow – Mixed Use Project
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 is includes office, retail apartments, and a parking
deck.
The
following are the income characteristics:
Office
–70,000
square feet is leased to a national tenant, Dewey, Cheatham and Howe that pays
$45 per square foot for the next 15 years. The rent will increase by 3 percent
per year and there are expense stops of $8.00 per square foot and there is no
risk of vacancy or credit loss. 30,000 square feet is leased to a boutique
accounting firm, Waite and Higgins for $40 per square foot for the next three years
with no increases. 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 4 percent. The lease
term on this space is 10 years and the vacancy and credit loss on this space is
3 percent. Office expenses are $7.50 per square foot and increase by 3 percent
per year.
Retail
–15,000
square feet is leased to Walgreens for $65 per square foot with no rent
increases on a triple net basis for the next 20 years and there is not risk of
default. 30,000 square feet is leased to Best Buy for $60 per square foot
triple net basis for the next 15 years with rents increasing by 2 percent a
year and there is no risk of vacancy or credit loss. Starbucks leases 1,000
square feet for $80 per square foot with rent increases of 5 percent per year
on a triple net basis for 15 years and there is no risk of credit loss.
Multi-Family
–
There is a mixture 80 of one and two bedroom apartments that rent for $3,000 to
$5,000 per month with the average rent of $3,800 per month. These rents
increase by 5 percent a year and the unrecoverable expense ratio is 30 percent.
The market vacancy and credit loss for the apartments is 4 percent.
Parking
Deck–
There is a combination of parking for each of the property types. Some of the
parking spaces are rented on a monthly basis where others are rented on a daily
or hourly basis. The annual parking revenue is $300,000 per year with expenses
of 15 percent. It is anticipated that the parking revenue will increase by 6
percent per year.
Financing
-The Bank of Mellon is providing
65 percent loan to value interest only financing for 10 years at 7 percent.
Income
Taxes– Your investor has an ordinary
tax rate of 36 percent. The long term capital gain taxes are 20 percent and
recapture is 25 percent.
Investment
Criteria –The going in cap rate is 6.5 percent, the
terminal cap rate is 7 percent and the discount rate is 8 percent. Assume that
the purchase price is based on the first year NOI and the land value is 20
percent of the purchase price. Also assume that the cost of sale at the end of
the holding period is 1 percent.
Questions:
What
is the before and after tax NPV and IRR? Show all calculations – PGI, EGI,
Expenses, NOI, Taxes, etc. If unclear about something, clearly state your
assumptions.
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