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A common type of real estate investment vehicle used by institutional investors is known as a ''unit fund'' or ''open-end'' commingled fund (CREF). Investors can put capital into, and withdraw capital out of, such funds on the basis of the appraised value of the assets in the fund, which are regularly and frequently reappraised. Thus, if the assets are appraised at $10 million, and you invest $100,000, you have a 1% share, entitling you to 1% of the net cash flow and proceeds from sales within the fund. Now consider a ''passive'' buy-and-hold strategy over a three-year period in such a fund. Suppose you invest $200,000 in the fund at the end of 2004, to obtain two ''units'' (i.e., shares). During 2005, the fund pays $5,000 per unit from net rental income, and at the end of 2005 is reappraised to a net asset value of $98,000 per unit. During 2006, the fund pays $10,000 per unit in net rental income, and the appraised value at the end of 2006 surges to $112,000 per unit. Finally, during 2007, the fund pays out $7,000 in net income and at the end of 2007 the assets of the fund are sold in the real estate market and liquidated for net cash proceeds of $118,000 per unit. Use your calculator or a computer spreadsheet (the latter will be faster and more reliable) to answer the following questions, reporting your answers to the nearest basis point. a. Assuming that appraised value accurately reflects market value (opportunity cost) of the assets at intermediate points in time, what are the period-by-period total returns for each of the three years the investment was held (2005, 2006, and 2007)? b. Based on these period-by-period returns, what is the geometric average annual total return during the three-year holding period of the investment (2005-2007)? c. What is the internal rate of return (IRR, per annum) of the investment over its three-year holding period?

Template for Q5 year 2004 Given Data Unit value beginning of year Unit value end of year income paid out per unit (end of year) 2005 100,000 98000 5000 2006 98000 112000 10000 2007 3-year total 112000 118000 7000 Calculated Data Capital gain per unit Capital return Income return a. total period by period return (HPR) 1+HPR Compound value (beginning of year) Compound value (end of year) b. time weighted geometric mean return (2005-2007) 2 2 2 investors actions and cash flow results: units of CREF held (beginning of year) cash to investor from income distribution units bought at the end of year cash from inveestor to purchase units units sold at end of year cash to investor from liquidation of units units held (end of year) 0 2 200000 2 total net cash flow strem for Maxwell - 200000 c. IRR for investor Template for Q5 year 2004 Given Data Unit value beginning of year Unit value end of year income paid out per unit (end of year) 2005 100,000 98000 5000 2006 98000 112000 10000 2007 3-year total 112000 118000 7000 Calculated Data Capital gain per unit Capital return Income return a. total period by period return (HPR) 1+HPR Compound value (beginning of year) Compound value (end of year) b. time weighted geometric mean return (2005-2007) 2 2 2 investors actions and cash flow results: units of CREF held (beginning of year) cash to investor from income distribution units bought at the end of year cash from inveestor to purchase units units sold at end of year cash to investor from liquidation of units units held (end of year) 0 2 200000 2 total net cash flow strem for Maxwell - 200000 c. IRR for investor

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