Student Name: Aaron Bomar*

Graded By :
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Chapter 11-Homework Problems

Stapled ? (Y/N)
Problem 11-2

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All Work on Form ? (Y/N)

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Attached Spreadsheet ? (Y/N)
No. Correct (of 16):

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You are an officer with University Realty Consultants and have

* By putting my Student Name to the above I hereby
been given the following consulting assignment:
You are to produce an investment analysis of a new small commercial (REV) income-producing
(rental) property for purchase by an investor. Key variables which youve determined via your
due diligence are as follows:
Asking (Purchase) Price is $1,250,000
Potential rents are estimated at $200,000 for year one and are expected to grow by 3%
each year thereafter
There is no Miscellaneous Income
Vacancy / collection losses are estimated at 10%
Operating Expenses (OPEX) are estimated at 35% of EGI
Youve chosen to ignore CAPX or CAPX reserves
Loan assumptions 70% LTV (of Purchase Price) at 11% interest for 30 years
Property value appreciation at 3% per year throughout hold period
Hold period assumed to be 5 years and there are no selling costs
Investor has a risk adjusted after-tax required yield / discount rate / opportunity cost
for this potential investment of 14%
Based upon the above assumptions;
a)
b)
c)
d)
e)

What is the investors BTIRRe ?

What is the lenders 1st year DCR
ANS: ?
15.04%
What is the terminal (going-out)
cap rateANS:
? 1.17
What is the potential investors initial equity dividend rate
ANS: ?
9.36%
Can we conclude from the cash-on-cash yield whether the investor might
ANS: 4.53%
achieve his
Y/N : Yes
required yield ?
f) The terminal cap rate and the going in cap rate are usually quite different. Is the
interesting relationship you see here in this problem coincidental ? Why or why not ?
Y/N : No
WHY / WHY NOT: No, I believe this relationship implies that the property may be overpriced or require t0o high of
an initial investment relative to the selling price.

As you have done on other homework, ATTACH YOUR COPY OF THE TEMPLATE (#1) WHICH
SHOWS YOUR WORK, AND HIGHLIGHT OR CIRCLE YOUR ANSWERS ON THE TEMPLATE
(ONE PAGE).

TEMPLATE INSTRUCTIONS: Use either your Revised Cartwright Template or the Chapter 11 ATIRR template from
the Course Templates (Blackboard) to answer the questions. Suggestion: before deciding which template to use, first review the
remainder of the homework problems. Note, should you choose to use the Course Template, it is structured to provide the answers to
these particular problems, BUT you are going to have to incorporate another spreadsheet to generate the Net Operating Incomes
for the years under consideration (attach or incorporate this separate spreadsheet if you choose to go this route). DO NOT try to use
the other Chapter 11 course templates to do this (generate the NOI). While it is feasible to do so, it is unduly complicated and will
likely take you 3-5 times longer. Should you choose to use the Cartwright Template, almost everything that you need is there PLUS
SOME. Therefore you will need to already be quite familiar with the Cartwright Template, its nuances, and how to adjust it for these
particular problems as well as those below. In other words, neither of these templates are pure plug and play. The templates and
this form can be copied in grayscale in lieu of color. This will be the case for all future template assignments as well (except
Cartwright).

Problem 9-3
After youve completed the before-tax analysis (per the above), you now want to consider the
effects of federal income taxation upon the potential investment. Here are some of the key
variables that you wish to incorporate in your analysis;

The building represent 90% of the Purchase

The property is considered by the IRS to be Commercial versus Residential
The potential investor is in a 30% Effective and a 36% Marginal tax bracket
The investor has other passive investments and can apply passive losses from this
investment (if any) against (positive) passive income from those other sources. Therefore
he / she would not be subject to PAL limitation rules.
The investors Long Term Capital Gains Rate is 20%
Recapture is at the current (2014) statutory rate

Again, use this same Revised Cartwright Template (#1) or the Chapter 11 ATIRR
template (#1) that you used in Problem 9-2 above and continue it with these taxation
assumptions to answer the questions listed below
ANS:
11.89%
a) What is the investors ATIRR
e ?
b) What is the Effective Tax Rate ?
ANS:
c) Note the effect of taxes and the reduction
in yield from the BTIRR to the ATIRR. Would you
20.96%
categorize the overall tax benefits to be nil minor or significant.
significant
d) Which template measure, or comparison between two ANS:
measures,
best quantifies this
categorization you expressed in c.) above ?
ANS:
e) What is the after-tax NPV
? _The difference in ordinary income tax rate and
effective
tax rate
f) Can we conclude from the NPV whether
or not the investorANS:
is likely
to achieve his
$15,986
Y/N : yes
required yield ?
Y/N : No
g) Will he ?
h) (New template #2). If you changed both the Capital Gains and the Recapture tax rates
to 5%, what is your revised ATIRR ?
ANS:
i) (New Template #3).
Restore the Capital Gains and Recapture tax rates to the original
14.50%
assumptions (ignore the changes in question h). above) Now, assume that the potential
investor CANNOT deduct any of the passive losses generated in the operating years, but
must instead suspend them until the property is sold at the end of the hold period. What
is the revised ATIRR ?
ANS:
11.89%

ATTACH YOUR COPY OF THE TEMPLATES WHICH SHOW YOUR WORK, AND HIGHLIGHT
OR CIRCLE YOUR ANSWERS ON THE TEMPLATE (ONE PAGE).
Rev. 3/19/15