You have to make a choice between three mutually exclusive property investments. Think of these as alternative long-term net leases for the same building that will start in one year. The tenant will pay all operating expenses. These are all 10-year non-renewable leases. The following information is provided about each investment: Lease 1

Initial net cash flow: $2,000,000

Cash flow growth rate: 3% per annum

Required rate of return (OCC): 6%

Lease 2

Initial net cash flow: $1,500,000

Cash flow growth rate: 5% per annum

Required rate of return (OCC): 5%

Lease 3

Initial net cash flow: $2,800,000

Cash flow growth rate: 2% per annum

Required rate of return (OCC): 7%

In each case, the initial cash flow (net rent) occurs in Year 1 and the rent payments on an annual basis thereafter. You must make an investment of $2,500,000 upfront (in Year 0) to pay for tenant improvements to customize the space for the tenants occupancy, in order to get the tenant to agree to the 10-year lease. Cash flow growth rates are simple annual rates with annual compounding.

1.3 The IRR of each potential lease acquisition is as follows:

Lease 1: 8.14%
Lease 2: 4.08%
Lease 3: 6.33%

Considering the OCC rates originally provided, which one of the three properties appears to be the best investment using the hurdle rate? Why is this the case? (Max. 40 words)