Renewal probabilities related to lease renewal

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1. A proposed acquisition of a multifamily ‘value add’ project has a capitalization rate of 7%, and project Un-levered IRRs of 10% over five years. However, you are told that the acquisition could be done with the following capital structure: 60% 1st mortgage debt at an 8% rate, 10% mezzanine debt at an 11% rate, and 30% equity. With the new capitalization, the levered returns are projected to be 15% over five years. Given that the first mortgage debt and mezzanine debt rates are higher than the capitalization rate, why is the levered IRR (15%) higher than the unlevered IRR (10%)?

A. Amortization B. Flipping the property in a quick sale C. Growth D. Insufficient information.

2. Renewal probabilities related to a lease renewal can affect which of the following:

A. Market rent paid after the existing lease ends B. Vacancy after the existing lease ends C. Tenant improvements invested after the existing lease ends D. All the above.

Reference no: EM132049779

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