You are considering purchasing a small office building for $2,375,000. The expected first-year…

You are considering purchasing a small office building for $2,375,000. The expected first-year potential gross income is $440,000 with a vacancy & collection loss equal to 15% of the PGI. Operating expenses and Capital expenditures are expected to be 40% and 5% of the EGI respectively. The mortgage on the property is 75% LTV at a 6% interest rate with a 25 year term with monthly compounding. The up-front financing cost of this mortgage is 2% of the loan amount. Consider the same information, and that you expect to hold this property for 5 years. For simplicity consider that there is no growth in market, and that the expected selling price at the end of the holding period will be $2,600,000 with a selling expense of 4%. Consider that the original depreciable basis is 90% of the purchase price. The cost recovery of the building is 39 years. Ordinary tax rate is 30%, Capital gain tax is 15%, and depreciation recapture tax is 25%. You must show your work for full credit.

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