Consider a property that is projected to have a first year NOI of $120,000 and will be purchased today at a going-in cap rate of 8%. 10% of the purchase price is attributable to land value. You intend to hold the property for 5 years and expect to sell at it at a cap rate of R(out) = 8% (base case) with no selling costs. The NOI is expected to grow at a rate g(NOI) = 2% (base case). A lender will give you a 90% LTV loan with an amortization period of 25 years at a note rate of 5% MEY, but also participates in the 40% of the NOI above $120,000, and in 40% of the appreciation of the property value at sale. The lender does not pay the borrower anything in cases where the participation is negative. You are in the 30% ordinary tax bracket, 15% capital gains tax bracket, and the 20% depreciation recapture tax bracket, and improvements are depreciable straight-line to zero over 30 years.

Assume any potential passive activity losses limitations are not applicable (negative taxes will be a credit toward other property taxes). All participation operating cash flows are not taxable to the owner, and the total capital gain also excludes the participation due on sale. Also assume that your cash flows are annual, and that debt service is 12 the monthly payment.

A. [19pts] Compute the BTIRRE and ATIFFE for the owner in the base case (i.e., as outlined above).

B. [1pt] Compute the owners effective tax rate for the base case.

C. [1pts] Partition the ATIRRE into operating cash flows and equity reversion for the base case. Comment o the risk for this investment.

D. [2pts] Suppose you project the following (33 = 9) scenarios probabilities for g(NOI) and R(out):

Probabilities	g(NOI) = 0%	g(NOI) = +2%	g(NOI) = +4%
R(out) = 10%	6%	15%	9%
R(out) = 8%	10%	25%	15%
R(out) = 6%	4%	10%	6%

Compute the corresponding ATIRRE table. Note: if you are using What-If > Data Table, you may want to create this table at the end of Part A, and transfer the results to this tab.

E. [2pts] Compute the mean and standard deviation of the ATIRRE. Answer this question in the tab for part D.