Case Problem $-$DrugSmart $($please type out all answers and calculations $)$James$$Scheidt$$is looking at a free$-$standing retail center that is subject to a triple net lease to$$DrugSmart$.$The property$$s lease payment$$for the first three years is $$250,000$ per year. $$In lieu of percentage rent, the rent contractually$$increase$2\%$ per year starting in year$-$four. $$James investment period is five years and$$he intends to$$sell the property at market$$rate pricing$$at the$$end of year$-$five. $$The market requires a real rate of return$$of $7\%$ on similar real estate investments.$$Question $1.$Assuming that there is no$$vacancy or credit$$risk associated with expected NOI stream, what is the terminal cap rate $($associated with year $6$ NOI$)$ for the property? $(2$pts$)$Question $2.$How much should James be expected to sell the property at the end of year five?$(2$ pts$)$At the end of year three,$$DrugSmart$$announced$$on its earning call, that it has been$$struggling with increased drug prices$$and$$that$$it$$would material$$affect its financial health going forward.$$It$$s$$corporate bonds were$$immediately$$downgraded to BB and the market risk premium increased by $300$ bps from $7\%$ to $10\%.$Question $3.$What effect, if any, does the increased credit risk have on the sale price of the property James was expecting and why? $(2$pts$)$Question $4.$How does this effect the terminate cap rate? Calculate the terminal cap rate. $(2$pts$)$In an effort to keep$$DrugSmart$$from filing bankruptcy, landlords including James$$Scheidt$,$ agreed to lower the contractual rent increases to $1\%.$Question $5.$Under this scenario, what is the expected sales price of the property at the end of year five? $(2$ pts$)$