7. Office Problem (Use the attached spreadsheets as a guide)

Property: Office One, Anytown, U.S.A.

Acquisition date: December 31, 1999

Purchase Price: 2000 NOI @ 10% CAP RATE

Deal Terms: 65% financed with debt, 9% interest-only, 10-year term 35% equity ownership

Base Year 1999:

Rental Income $1,600,000

Escalation Income $ 0

Less:

- Janitorial & Cleaning $ 330,000

- Labor $ 215,250

- Utilities $ 60,000

- Management Fee $ 80,000

- Real Estate Taxes $ 80,000

Assumptions:

- Vacancy Rate : 9%

- Growth Rates:

-- Rental Income 5% Annually

-- Janitorial & Cleaning 3% Annually

In 2001, Labor and Real Estate Taxes escalate by 13.07 and 10%, respectively, and remain at those levels for the remainder of the holding period. Tenant pays the increase over the stated Base Year.

Sell on December 31, 2004

Selling Expenses- 5% of sale price (2005 NOI @ 10% Cap Rate)

Depreciable Basis = 80% of cost (calculate depreciation using straight-line method)

Owners Ordinary Tax Rate: 39.6%

Use Post-1997 capital gains & recapture tax rates (20% & 25% respectively)

REQUIRED:

9A) Pro-forma Analysis for both Pre-Tax and After- Tax scenarios

9B) Calculations for:

1. Adjusted Basis
2. Capital Gains and Recapture Taxes
3. Net Sales Proceeds
4. Break Even Occupancy (2000 & 2004)
5. Cash-on-Cash Returns (annually)
6. Gross Rent Multiplier ((2000 & 2004)
7. Debt Service Coverage (2000 & 2004)
8. Before and After Tax IRR
9. Before and After Tax NPV @12%