Define appropriate interlease and reversion discount rate

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Question: The buildings in a certain warehouse market are characterized by net cash flow projections like the one shown in the following table, based on net leases of five years' duration. In this market, properties are typically evaluated using a going-in IRR of 10.50% (blended rate). Thus, the typical property sells for a cap rate of about 8.25%. You have the opportunity to purchase a property with these same typical cash flow projections, at the typical cap rate or going-in IRR. However, your building is entirely covered by a 10-year lease with a AAAcredit tenant who can borrow money at 6%.

a. How much is this lease worth (for example, if it could be sold into a LOBS pool)?

b. Assuming that the appropriate interlease and reversion discount rate is 12%, what is your NPV from this deal?

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Reference no: EM131734325

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