You are considering purchasing an investment property, a small office building of 100,000 square feet. You have a lead tenant that occupies 50% of the building and pays $15.50 per square foot with the lease expiring in 18 years with no increases in the rent. Due to their creditworthiness you do not charge any credit loss. The balance of the space is leased at market terms with an average rent of $21.50 per square foot and you anticipate rents will increase 3 percent annually. The overall market vacancy is 10 percent and the expenses total 28 percent of EGI. Your purchase price is based on a going in cap rate of 9 percent. You anticipate rents increasing by 4 percent per year and expense will continue at 28 percent of EGI. Angie's Bank is willing to loan $6,500,000 at 7¾ percent with a 20 year amortization schedule with monthly payments and a seven year call. Your investment horizon is seven years beginning January 1, 2011 and you anticipate selling the property based on a terminal cap rate of 9.5 percent at the end of the holding period with 4 percent selling expenses. The land value is well supported at $2,000,000.This investment requires a return of 12 percent.
What is the NPV?
What is the IRR
Do you purchase the property? Why or why not?