D A B C E F G H 1 Problem #2: 2 A real estate investor is considering purchasing a small warehouse. Analysis has resulted in the following facts: 3 The asking price is $750,000. There are 22,000 sq. ft of leasable area. The expected rent is $3.75/sq ft per year 4 rents are expected to increase at 1.5% for first two years, 2% for the next two years and 3.5% in the final two years. 5 Since the property is leased to an AAA-grade tenant for 25 more years, no vacancy factor is deducted. 6 The tenant will pay all operating expenses except property taxes and insurance. These two expenses will be equal 7 to 18% of EGI each year. The investor can borrow 75% of the total cost for 20 years at an interest rate of 7.75% with monthly payments and up-front 9 financing costs equal to 3.5% of the amount borrowed. 10 80% of the total acquisition cost is depreciable over the useful life of 39 years using straight-line depreciation method. 11 The Investor expects to sell the investment at the end of the year 6 and investor's ordinary income tax rate is 35% 12 No capital expenditures have been made since acquisition. 13 14 Compute the after-tax cash flows from the annual rental operations over the six year period. 8 D A B C E F G H 1 Problem #2: 2 A real estate investor is considering purchasing a small warehouse. Analysis has resulted in the following facts: 3 The asking price is $750,000. There are 22,000 sq. ft of leasable area. The expected rent is $3.75/sq ft per year 4 rents are expected to increase at 1.5% for first two years, 2% for the next two years and 3.5% in the final two years. 5 Since the property is leased to an AAA-grade tenant for 25 more years, no vacancy factor is deducted. 6 The tenant will pay all operating expenses except property taxes and insurance. These two expenses will be equal 7 to 18% of EGI each year. The investor can borrow 75% of the total cost for 20 years at an interest rate of 7.75% with monthly payments and up-front 9 financing costs equal to 3.5% of the amount borrowed. 10 80% of the total acquisition cost is depreciable over the useful life of 39 years using straight-line depreciation method. 11 The Investor expects to sell the investment at the end of the year 6 and investor's ordinary income tax rate is 35% 12 No capital expenditures have been made since acquisition. 13 14 Compute the after-tax cash flows from the annual rental operations over the six year period. 8