Just reviewing a case study, and was curious if I could get some input. There were two questions that I could not get the right answer to as they were modeling questions with multiple choice. They were really basic and I want to understand what I'm missing. Any input would be great. These are the two questions:
- There is a new 10 year NNN lease in 3,000 SF with the first 5 years paying a flat monthly base rent of $5,000 and a one-time 10% increase in year 6 then flat for the remainder of the term. The deal requires a $10/SF Tenant Improvement Allowance and $6/SF Leasing Commission. The cap rate for the asset is 7.0%. Calculate the Net Present Value of this lease deal (round to the nearest dollar).
2.Assume the above building was purchased for $1,000,000. The purchase was financed at an 80% LTV. Calculate the average cash on cash return for the previous lease deal.
I've done these types of questions all the time, and never had a problem, but for some reason I'm not getting what they want. I forgot the multiple choice answers, but I can reflect on the answers here to see if they are close to what hey had.
For 1 all you do is use the NPV formula in excel for the cash flows, I am assuming they gave you a required return to use as the discount rate. 2 assume you invested 200k and just the yearly cash flow after debt service divided by 200k averaged.
They didn't give a discount rate, and it was multiple choice which mean assumptions were going to be wrong. This is what I did, but was not able to find what they wanted me to use. The questions are copy pasted from the case, they were short.
For the second one, did the same as you suggested, but was coming out with 20%+ CoC because from year 2-10 FCF would be $60K or $66K and the given answers were 10-12%. I got both of these wrong and it's worth 10% each.
That's a poorly done case study unless they gave some high level assumptions at the start. For #2 the interest rate, any I/O, and amortization period of the debt will change your answer.
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