You are considering purchasing this building. From the broker’s brochure, you think Walmart is a….
You are considering purchasing this building. From the broker’s brochure, you think Walmart is a pretty good tenant and think there is an 80% chance that Walmart is in fact going to renew its lease. You are preparing some financial analysis to help you decide whether this is indeed a good investment. To simplify your analysis, you can assume all rent payments are made at the end of the year and that you are considering purchasing the property at the end of June 2021.
-
What is the annual effective rent psf on this building for July 2021-June 2022?
-
What is the annual effective rent psf in 2023 if Walmart exercises its renewal option?
-
Suppose Walmart indeed renews its lease. What would the property sell for at the end of June 2024 if it can be sold at the going-in cap rate?
-
What is the IRR on your investment (in percent) if you buy the property for the asking price, Walmart exercises its renewal option, and you sell the property at the end of June 2024 at the going-in cap rate? Assume that you finance your purchase with 100% debt, i.e., you do not get a mortgage.
-
Continue to assume that you buy the property at the asking price, that Walmart renews its lease, that you can sell at the going-in cap rate, and that you sell the property at the end of 2024. However, you’ve looked up what Walmart bonds of similar maturity to your holding period and they are yielding a mere 1.3%. Thus, you conclude that the right discount rate for Walmart’s lease payments is 1.3% but, given the uncertainty surrounding what you can sell the property for, that you should use a 5.0% discount rate to discount the reversion value. Continue to assume that you finance your purchase with 100% equity.
What is the NPV of your investment under these assumptions?
You are considering purchasing this building. From the broker’s brochure, you think Walmart is a…
