Case Study Master Post

Modeling Exercise 1

All inputs below should be flexible assumptions

Development Program
* 200,000 SF office building
* Land purchase price: $20M ($100 per FAR)
* Closing Costs: 1% of purchase price
* Hard Costs: $300 psf
* Soft Costs: (excluding TI's, LC's and Debt): 15% of hard costs
* TI's: $60 psf - paid at tenant occupancy
* LC's: $18 psf - paid six months before tenant occupancy

Construction & Lease-up
* 24 Month Construction Period, beginning at land close date
* Costs spent evenly over construction period
* 2 Tenant Lease-up of equal size (one tenant at construction completion; one 6 months after completion)
* Lease up to 95%
* Rent $4.25 NNN
* Free Rent: 3 months free
* Annual rental bumps: 3%
* Annual Operating Expenses during Lease-Up: $16 psf

Debt Assumptions
* 60% LTC
* Rate: 5% all-in interest rate
* All equity drawn first; then debt
* Use available cash flow to offset debt costs, as available

Hold Period:
* 5 years after stabilization
* Exit Cap Rate: 5.5%
* Transaction Fees: 1.5%

Joint Venture Structure
* LP invests 95% of required equity / GP invests 5%
* GP receives a 20% promoted interest over a 12% IRR to the LP

Required Output
* Required Project Equity, Net Profit, IRR and ROC (Return on Capital)
* Required LP (after promote) Equity, Net Profit, IRR and ROC (Return on Capital)

Instructions:

-        E-mail the responses no later than 4.5 hours after receiving the test.

Case Study:

Certain affiliates of [REPE Fund] are considering the acquisition of a 350,000 SF, Class A office campus in suburban Dallas, TX (the "Property").  Completed in 2002, the Property is comprised of 5 office buildings, each with 70,000 NRSF.  Only one of the five buildings is currently occupied, leased on a NNN basis to Tech Corp., a major credit rated tenant, with a remaining lease term of 15 years with an annual rent of $1.12 million ($16.00 per SF), escalating at 2.5% annually.

[REPE Fund]'s business plan is to lease the four remaining buildings and sell the property three to five years after the acquisition.  According to a market study prepared by a national research firm, it is likely to take 24 months to complete the lease-up. Today, average market rents are $13.50 per SF (NNN). Typical lease terms are for five ayears with tenant improvement allowances of $25 psf, leasing commissions of $5 psf and lease rates increase 3.0% annually. Local leasing brokers expect tenants to lease an entire building at a time. Assume expenses for the property of $8.0 psf and a property management fee of 3.0% of EGR. Market vacancy is 12.5%.

According to discussions with several local brokers, based on the age and quality of the building, likely tenant profile, and its location, the Property is likely to sell for a 7.50% cap rate and similar stabilized properties in the surrounding submarket generally trade in the $140 to $160 per square foot range.

The negotiated purchase price for the Property is $37.5 million.  In addition, [REPE Fund] is expected to incur closing costs (for legal counsel and third-party consultants) of $500k.  [REPE Fund] has obtained several loan quotes to finance the acquisition of the Property.  The most favorable quote was 65% LTV with 65% of future funding for TI / LC / Cap Ex, fixed rate of 4.50% (actual / 360), five year term, interest only for the first 30 months with a 25 year amortization thereafter.

Please create a monthly cash flow model, which reflects the assumptions and business plan outlined above and calculates the levered and unlevered returns of the proposed investment to [REPE Fund]. Create a summary page for key assumptions, annual cash flows, return metrics (Profit, IRR, Investment Multiple), any other metrics you would use to evaluate an investment, and a sensitivity analysis.