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You have been hired to perform an investment analysis for a high

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 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, Mortgage Bankers Association for $38 per square foot for the next 15 years. The rent will increase by 2 percent per year and there are expense stops of $8.25 per square foot and there is no risk of vacancy or credit loss. 30,000 square feet is leased to a law firm, DCH for $36 per square foot for the next three years with no rent increases and there is no risk of vacancy or credit loss. At the end of three yeas they will vacate the space and it will take nine months to lease the space at which time the market rent is project to be $42 per square foot with annual increases of 3 percent. The lease term on this space is 10 years and the vacancy and credit loss on this space is 3 percent. Office expenses for all tenants are $7.00 per square foot and increase by 3 percent per year.

Retail - 15,000 square feet is leased to Aldi for $45 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 $40 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. Starbuck leases 1,000 square feet for $70 per square foot with rent increases of 4 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 120 of one and two bedroom apartments that rent for $1,000 to $2,000 per month with the average rent of $1,500 per month. These rents increase by 4 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 net parking revenue is $250,000 per year with expenses of 15 percent. It is anticipated that the parking revenue will increase by 2 percent per year.

Financing - The Bank Mellon is providing 75 percent loan to value at 6.75 percent amortized over 25 years with a 10 year call. Taxes - Your investor has an ordinary income tax rate of 28 percent. The long term capital gain taxes are 20 percent and recapture is 25 percent.

Investment Criteria /Assumptions- The property is being offered for $80 million. The terminal cap rate is 8.50 percent and the discount rate is 10 percent. The holding period is 10 years.   Assume that the land value is $17 million. Use a 39 year depreciation period for the improvements.  Also assume that the cost of sale at the end of the holding period is 1 percent.  


What are the annual cash flows for periods 1 to 11; what is the terminal value; what is the before and after tax NPV and IRR (use end of period); what is the division of value between cash flows and resale? Do your recommend purchasing the property? Explain why or why not. Show all calculations - PGI, EGI, Expenses, NOI, Taxes, etc.

The following are summary income statement and balance sheet numbers for a firm (in millions

of dollars). The firm has a required return for operations of 9%. [5+2+1]

2012 2013 2014 2015

Sales 1,906 1,985 2,064 2,147

Core operating expenses 1,773 1,846 1,919 1,997

Core operating income 133 139 145 150

Unusual operating income ------ ----- (45) 60

133 139 100 210

Net financial expense 7 8 8 9

Comprehensive income 126 131 92 201

Net operating assets 945 983 1,022 1,063

Net financial obligations 150 155 175 120

Common equity 795 828 847 943

(a) Prepare a table giving the following for 2013- 2015. Use beginning-of-period balance

sheet numbers in denominators.

? Return on common equity (ROCE)

? Return on net operating assets (RNOA)

? Core return on net operating assets (Core RNOA)

? Free cash flow

? Net payments to common shareholders

? Net payments to net debt holders

? Asset turnover

? Core profit margin

? Growth rate for net operating assets

take place. three


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L represents units of labour used (input good




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