John wants to purchase a new apartment complex for $2 million. An 80% loan can be obtained at 8.50% interest for 25 years.
NOI is expected to be $190,000 per year and increase 3% annually, the same exact rate at which the property is expected to increase in value.
The building and improvements represent 80% of value and will be depreciated over 27.5 years. The project is expected to be sold after 5 years. Assume a 36% tax bracket for all income and capital gains taxes.
QUESTION: What is the break-even interest rate (BEIR) for the project?