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

2. © 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

3. © 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

4. © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 4 Cash Flow Summary- Assuming Sale 012345 BTCF-50,000,8582,6383,4494,29397,738 ATCF-50,0004,5394,8595,1875,52376,842 BTIRR18.26% ATIRR14.83%

5. © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 5 ATCF From Sale After Five Addition Years 5678910 ATCF-7,9786,1566,6017,0547,514107,202 ATIRR=15.6% To justify sale investor most earn more than 15.6%

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

7. © 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 Difference45,06850550,002 Incremental cost 14.93% The investor must be able to reinvest the proceeds earning more than 14.93%

8. © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 8 Renovation as an Alternative Incremental analysis 5678910 ATCF R 5545657876328707218,585 ATCF6156660170547514107,202 ICF-50,000-611-235781193111,382 IRR17.58

9. © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 9 Rehabilitation Investment to Tax Credit CategoryCredit Before 193610% Certified historic structures 20% 1 for $1 reduction in taxes Subject to recapture Low income housing credit