Hi all,
I'm currently working on a case study as part of the recruiting process for an investment sales analyst role. They sent me an Excel with a rent roll and asked me to model it - no issues there. But the curveball is that there is heavy tax abatement in the early years, to the point where NOI is 30% lower in the reversion year, and the exit value is lower than the purchase price (given) at any reasonable cap rate. The IRR hovers around 0% but the cash-on-cash seems more reasonable. Is there anything I am missing or is that basically what these types of deals look like?
Don't quote me on this as I'm fairly new to the industry and have worked on one such project briefly. I believe the issue lies with the way you are calculating your exit value. First and foremost, you need to calculate unabated NOI and abated NOI. To determine your exit value, you take your unabated NOI (a year after exit) and divide that by your exit cap. This gives you the value of your unabated NOI (essentially, exit value based on unabated NOI). Then you need to have a line where you are determining how much tax is being abated on a yearly / monthly basis. You then calculate the value of this abatement through NPV and applying the appropriate discount rate for the tax abatement. Add together the value of your unabated NOI and the value of the abatement to determine your exit value. I hope this was helpful and if I am off any particular points, I hope others can correct as appropriate.
A few point I want to clarify -
- On the buy you would calculate you non-abated NOI and cap it and then take the NPV of your tax abatement which gives you your PP
- Your exit value is your NOI in the terminal year + 1 (w/o an abatement) capped at whatever you think prevailing cap rates will be at that time
To the OP, 0% IRR seems off unless this asset is super core and in EMEA. Otherwise maybe the curveball is they want you to say no don't do the deal because low IRR due to high PP?
Yeah that's what I'm guessing - that it's a no-deal scenario. The purchase price was given and the exit value (using the non-abated Yr 11 NOI, and the given cap rate) is below the purchase price.
Question for the group -
What kind of discount rate do you apply to your tax abatement? I am thinking it should be near the 10Y UST?
Why is it wrong to simply divide Abated NOI by exit cap?
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