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You purchased an office building for $10,000,000 5 years ago. It was depreciated on a...

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Finance

You purchased an office building for $10,000,000 5 years ago. It was depreciated on a straight-line basis over 39 years. Assume 20% was assigned to land value, assume no real property.

Your expectations include:

Each year gross potential income of $1,700,000, 2% escalation

Vacancy & collection losses equal to 12% of PGI

Operating expenses = 40% of EGI, 3% escalation

Capital expenditures = 5% of EGI, 1% escalation

Mortgage: 70% LTV @ 6%

Mortgage will be amortized over 30 years

Total up-front financing costs = 2% of the loan amount. Since we are calculating the 5th year cash flow, recall that this component will be the remaining amortization balance.

Ordinary tax rate = 30%

Capital Gains tax = 15%

Depreciation recapture tax = 20%

Sale Proceeds in year 5 = 12,000,000

Selling expenses = 4% of sale proceeds

1. Calculate the NPV @ 7%, 9% and 12%

2. Calculate the IRR

3. Do a sensitivity analysis and compare the NPV of each scenario at a 10% discount rate:

a. Most Likely Scenario: Data given above

b. Best Case Scenario: PGI growth is 5%, Operating Expenses escalation is 2%

c. Worst Case Scenario: PGI growth is 1%, Operating Expenses escalation is 4%

**Please use the "above-line" treatment for capital expenditures to calculate the answer!

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