You are thinking of investing in a warehouse that has a 10-year lease outstanding at a fixed lease rent of $100,000 a year. The maintenance expenses on the warehouse average $15,000 a year, and the real estate taxes average $20,000 per year. You plan to own the warehouse till the lease expires 10 years from now.
After that, you plan to sell it, and you estimate you could sell it for about the same $800,000 value as it is selling today, less 6% sales commission. (You don't pay commission when you buy, but have to pay commission when you sell.)
Assume no depreciation is allowed for tax purposes, and you have to pay 30% tax on your net rental income.
If you are required to earn 10% rate of return on this purchase, will you create value or destroy value by buying this warehouse for $800,000 today?
How much value will be created or destroyed? Please also calculate the IRR of this investment.