You are analyzing a $11,000$ square foot office property for potential acquisition. The property is currently being used as a small animal veterinary clinic. The three veterinary doctors who run the clinic have just renewed the lease for ten years at $$14\mathrm{.}50ps\frac{f}{y}r$ gross rent. The lease calls for a rent increase of $$0\mathrm{.}50$ psf per year for the term of the lease.

Although the property is fully occupied by a single tenant, your lender and your investors will demand that you impute a $5\%$ vacancy rate.

Purchase price: $$1,100,000$

Acquisition costs: $$20,000$

Year one operating expenses: $$4\mathrm{.}50ps\frac{f}{y}r$

Operating expenses annual growth rate: $3$ percent

Projected end of year five sale price Capitalize year six NOI at $9\mathrm{.}25$ percent

End of year five cost of sale: $4$ percent of sale price

Anticipated holding period: Five years

Assessed land value: $$160,000$

Assessed improvement value: $$640,000$

Ordinary income tax rate: $39\mathrm{.}6$ percent

Capital gains tax rate: $20$ percent

Cost$-$recovery recapture tax rate: $25$ percent

Following are the loan terms from Wells Fargo Bank:

Maximum loan$-$to$-$value $($LTV$)$ ratio: $75$ percent

Minimum debt$-$service coverage ratio $($DSCR$)$: $1\mathrm{.}2$

Interest rate: $8\mathrm{.}5$ percent

Amortization period: $20$ years

Loan term: $10$ years

Payments per year: $12$

Loan costs: $2$ percent of loan amount

Answer the following:

What is the IRR Before Tax on Equity for a $5$ year hold?

$(5$ points$)$

What is the IRR After Tax on Equity for a $5$ year hold? $(5$ points$)$

Assuming the $$20,000$ in acquisition costs remain constant, how much can you pay for this property $($purchase price$)$ to get a $10\%$ After Tax IRR.

$(5$ points$)$