A very wealthy client contacts you to discuss purchasing a potential investment property. He has already prepared a cash flow model and has provided it to you for review. The property is stabilized, mixed use building with residential and commercial tenants. The project is located in a very stable area with a solid list of tenants. Though the project was built within the last 5 years, there are some signs of deferred maintenance and a need for $100,000 in capital expenditures right away. Commercial leasing commissions are 6.00% and begin in Year 2. Leasing commissions are calculated based on the prior years rent. Your client intends on purchasing the property for $70,000,000 all cash and will sell it in Year 5. His Discount Rate is 8.00%. He believes the project will generate a NPV of $15,412,074 and an IRR of 13.60%.

4. Your client is determined to generate an 11.00% return. What is his maximum purchase price?

Discount Rate Terminal Cap Rate Residential Income Growth Rate 8.00% 10.00% 3.50% Selling Expenses Expense Growth Rate Commercial Income Growth Rate 3.00% 3.00% 2.50% Year 2 3 4 5 6 Residential Income Commercial Income POTENTIAL GROSS INCOME $ $ 4,800,000 $ 6,000,000 $ 10,800,000 $ 4,968,000 $ 6,150,000 $ 11,118,000 $ 5,141,880 $ 6,303,750 $ 11,445,630 $ 5,321,846 $ 6,461,344 $ 11,783,190 $ 5,508, 110 $ 6,622,877 $ 12,130,988 $ 5,700,894 6,788,449 12,489,344 Vacancy & Collection - Residential Vacancy & Collection - Commercial 2.00% 5.00% $ $ $ (96,000) $ (300,000) $ (396,000) $ (99,360) $ (307,500) $ (406,860) $ (102,838) $ (315,188) $ (418,025) $ (106,437) $ (323,067) $ (429,504) $ (110,162) $ (331,144) $ (441,306) $ (114,018) (339,422) (453,440) EFFECTIVE GROSS INCOME $ 10,404,000 $ 10,711,140 $ 11,027,605 $ 11,353,685 $ 11,689,682 $ 12,035,903 Expenses $ (3,000,000) $ (3,090,000) $ (3,182,700) $ (3,278,181) $ (3,376,526) $ (3,477,822) NET OPERATING INCOME $ 7,404,000 $ 7,621, 140 $ 7,844,905 $ 8,075,504 $ 8,313,155 $ 8,558,081 6.00% 387,681 Leasing & Capital Costs Leasing Commissions Capital Expenditures/Reserves Total Leasing & Capital Costs $ $ $ $ $ $ 360,000 $ $ 360,000 $ 369,000 $ $ 369,000 $ 378,225 $ $ 378,225 $ 387,681 Cash Flow Before Debt Service Residual Value Total Cash Flow $ $ 7,404,000 $ $ 7,404,000 $ 7,261,140 $ $ 7,261,140 $ 7,475,905 $ $ 7,475,905 $ 7,697,279 $ $ 7,697,279 $ 7,925,475 83,131,552 91,057,027