Tranquil Manor is a $33,000$ square foot apartment complex. The location is fully built$-$up and well established with multi$-$ family housing. The prevailing capitalization rate in this area for properties such as this is $11\%.$ You are contemplating the purchase of this property on January $1,2021.$

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The building is brick, about $50$ years old and has been well$-$ maintained. There is no evidence of deferred maintenance or of the need to replace the roof or mechanicals at any time in the near future. $75\%$ of the value of the property lies in the building and $25\%$ in the land.

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The building has $48$ apartments. Every apartment is occupied and all leases expire within a year or less. The owner has presented us with the following rent roll information:

$10$ studio apartments @ $$700$ each

$301-$bedroom apartments @ $$950$ each $82-$bedroom apartments @ $$1,150$ each

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Your research shows that these rents are realistic in this market and also that rents have been increasing at about $2\%$ per year. Although there are no vacancies now, you will estimate a $2\%$ loss of revenue as a credit allowance $($i$.$e$.,$ uncollectable rent$).$

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You estimate of first$-$year operating expenses are as follows:

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Accounting

$2,500$

Insurance $($fire and liab.$)$

$29,300$

Lawn$/$Snow

$7,400$

Legal

$6,200$

Miscellaneous

$3,200$

Property Management

$38,400$

Repairs and Maintenance

$29,300$

Supplies

$7,400$

Real Estate Taxes

$42,600$

Trash Removal

$18,600$

Electricity

$12,200$

Sewer and Water

$29,500$

Telephone

$800$

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You believe that each of these expenses will increase at $3\%$ per year except insurance $(5\%)$ and real estate taxes $(4\%).$

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The seller$$s asking price is $$3$ million. You believe you can obtain financing for $70\%$ of the purchase price. The terms are $7\%$ annual rate, fully amortizing, $20-$year term, monthly pay.

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The seller will also take back secondary financing in the amount of $$300,000.$ The terms are $8\mathrm{.}5\%$ annual rate, fully amortizing, $10-$year term, monthly pay.

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You expect to sell the property at the end of Year $2025$ based on the NOI capped at $11\%.$ Assume selling expenses are $3\%$ of the sales price.

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$1.$ Prepare a six year cash flow.

$2.$ What is the levered IRR of the transaction?