Hold/Sell Analysis? - AM Analyst Interview Question

I’ll also add, assuming this is a monthly model: roll it up to annual leveraged net cash flows and check the IRR and Equity Multiple for a hold for 1 year, 2 years, 3 years, 4 years, 5 years, etc. until a 10 year hold. This will show you where the IRR peaks and than begins declining. This is a good start to say, I should hold until the IRR is the highest, and than sell. Now, zoom out to 30,000 feet and think about the deal. If you sell in this specific year, will there be large capex items or lease payments (TI/LC) in the following year? If so, does it make sense to potentially hold the asset 1 or 2 more years to work through the capex item or TI/LC? Alternatively, you could offer the seller a ‘credit.’ So if the following year TI/LC is $3MM, and the sale price of the asset would be $100MM in the year you want to sell it, the sale price would be $97MM due to the credit. Now go see how this effects IRR compared to holding 1-2 more years. 

Perhaps unnecessary for an interview case, but for a close-end fund, does the hold/sell analysis approach differ from above?

Let's say you have a 3 or 5 year hold period, do you consider other factors besides IRR peak and major CapEx? 

You might consider equity multiple or if you sell, can you reinvest that capital? But for the most part, for a closed end fund, this is what you’ll look at as IRR and equity multiple are what matters. 

Thanks! 

For this instance, while Ricky Sargulesh's comment is accurate, I would probably see more value (for a modelling test, at least) in throwing a 10-yr data point of the IRR / MOIC at various exit years, which will allow you to see how the sale is impacted under instances w/ long lease term still in effect vs. at the end of lease term right before capital or deferred maintenance needs to be spent - or, moreso importantly to see if the value you get from rolling upcoming vacant space to market offsets the value in selling before taking any of this into account well before a lease expires.  All important metrics to be mindful of.

I would also say while doing these analyses' it is important to have a 'next buyer' mindset in mind, and look at see where the realistic entry point your buyer will come in at to accurately predict if your sale values are reasonable in certain years.  For example, the above methodology is only useful if you think you can obtain the desired sale prices you used for inputs in those analysis...if the 'next buyer analysis' shows the new buyer will be getting a 0.5% IRR over 5-7 yr hold on your sale price, then obviously you need to re-adjust those assumptions if there isn't some specific type of buyer you are holding out for - also, obviously take into account the cash on cash, etc. for REITs/longer term holders if the asset will yield that interest.

This may be overkill for an interview..but I think this is more along the lines of how a dedicated AM professional would look at a situation like this.