This is a 65,000 square foot office building. You purchased the building five years ago for $11,500,000. During that entire time the building was triple net leased to a tenant who was also responsible for all maintenance and capital upkeep. The net rent the tenant paid was flat at $12.50 per square foot per year. You have just negotiated a lease extension which will raise the rent to $14.00 per square foot for the next 10 years.

The new investor is considering a loan proposal for an interest only loan at 4.25% annual rate and no fees. The lender's constraints are a maximum LTV of 60% and a minimum DSCR of 1.5. The new investor believes the current tenant will again renew for 10 years and believes net rents will then be $17.00 per square foot. However, as the building will then be more than 25 years old, the investor anticipates the cap rate will rise.

Further, the functional age of the building is largely determined by its HVAC. While the tenant is obliged to maintain these, the tenant is not obliged to upgrade these to the most current technologies. At the end of the 10 year investment, the investor can bring all three systems up to the then current state of the art for a total cost of $1,500,000.

If the investor makes that investment, the cap rate should decrease to 8.5% from the anticipated 10.0%.

Does it makes sense for the investor to make this investment?

Note: You may not need all the information provided to answer this question. While considering all the variables focus on the net operating income (including the costs affected the HVAC upgrade) and the cap rate of 8.5%