© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 1 CHAPTER FOURTEEN DISPOSITION AND RENOVATION OF INCOME PROPERTIES

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 2 Chapter Objectives Criteria by investors to determine whether a property should be sold or held IRR for holding vs. selling MRR Incremental cost of refinancing Renovation and the IRR

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 3 Disposition Decisions Anticipated holding period Periodically evaluate disposition Equity buildup Opportunity cost of not selling

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 4 Cash Flow Summary- Assuming Sale BTCF-50,000,8582,6383,4494,29397,738 ATCF-50,0004,5394,8595,1875,52376,842 BTIRR18.26% ATIRR14.83%

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 5 ATCF From Sale After Five Addition Years ATCF-7,9786,1566,6017,0547,514107,202 ATIRR=15.6% To justify sale investor most earn more than 15.6%

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 6 Marginal Rate of Return The return that would result from holding property one additional year MRR=ATCF s (yr t+1) + ATCF 0 (yr t+1)- ATCF s (yr t) ATCF s (yr t) Property should be sold when the MRR falls below the rate at which funds can be reinvested

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 7 Refinancing as an Alternative Incremental Cost of Refinancing Current balance Monthly payment Balance after five years New loan187,5001,975179,350 Existing loan142,4321,470129,348 Difference45, ,002 Incremental cost 14.93% The investor must be able to reinvest the proceeds earning more than 14.93%

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 8 Renovation as an Alternative Incremental analysis ATCF R ,585 ATCF ,202 ICF-50, ,382 IRR17.58

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 9 Rehabilitation Investment to Tax Credit CategoryCredit Before % Certified historic structures 20% 1 for $1 reduction in taxes Subject to recapture Low income housing credit