Category Archives: Real Estate

Order# FE856, Real Estate Finance and Investment


 Order# FE856, Project for real estate
RE 7042: Real Estate Finance and Investment
University of Cincinnati Lindner

College of Business
Background
A
well estab
lished, non
profit organization
is
interested in a long
term, low
risk real estate investment
to help support
their
endowment.
The
organization is
targeting a
9% annual return on their equity of
$
4,000,000
.
The organization is
very interested in
the
multifamily housing
market around universities
and have identified
the area arou
nd
UC as a potential
area for acquisitions
.
The
organization
approached
a broker who told them that there was a
mixed
use
property for sale
near UC
. Using the
information provided below
you are to evaluate the suitability of this investment.
The Property
Clifton Castle
is a mixed
use project
, class A property,
which include
s
residential, retail, and parking
facilities. For the residential
component there are 45 one
bedroom, 45 two
bedroom, and 5 three
bedroom apartments. There are also 118 parking spaces available for the residential tenants
currently
leased at $600 per year per space to residential tenants. Rents in the market are highly
variable
,
you
should conduct your own re
search on current lease rates for rents
in the UC area
.
The building also
includes 18,000 square feet of retail space. For the retail space, 12,000 square feet is currently leased at
a rate of $1
2
per square foot (PS
F). In addition, there are 91 car parking spaces available for retail
customers;
rates for the parking are charged at $1 per hour, up to a maximum of $5 per day.
Annual
operating expenses for the property
(including property taxes)
are estimated to be $728
,000.
The broker indicated there are three potential tenants ready to sign a lease for the last 6,000 SF of retail
space:
A)
A
well
known local bar/restaurant willing to pay rent of $24.00 PSF year one and increasing a $1.00
PSF each year for a total of fiv
e years.
They require $60.00 PSF in tenant improvement allowance
from the owners.
They have $5,000,000 in equity on their c
ompany balance sheet;
B)
A
tenant with cool new retail concept of selling bourbon with a 24 hour gaming area but will need
free rent
for the first 12 months to offset the costs to purchase their FFE (fixtures, furniture and
equipment).
They are willing to pay $27.00 PSF in rent year two and
$0
.50 bumps each year in
years three four and five. They will require $35.00 PSF in tenant impro
vements from the
landlord.
Their cousin is going to help design and construct the space.
Their credit score is 689 and
they have no money so they are borrowing $500,000 from their rich uncle to help with the start
up
costs.
C)
A
n office tenant who is a 10
year old architectural firm moving from downtown to be closer to the
new construction activity.
They are willing to pay $19.00 PSF in rent with
$0
.50 annual bumps for a
total of five year term.
They will require $35.00 psf in tenant improvement allowanc
e.
Their credit
score is 950 and they have $500,000 of cash in the bank.
All te
nants can open by August 1, 2016
and all require the landlord to pay a 6% commission to the
broker.
The property can be financed using a
commercial mortgage
with a fixed
interest rate of 5.25%
up to 70%
of the value of the property
. The loan
will have a
term of ten years and loan amortization will
be
calculated on a 30 year basis
. Cap rates for selection of comparable properties currently average around
6.5%.
Would you b
uy this property and if so, which tenant would
you put in the vacant space?
Fully explain
your investment advice to the non
profit organization.
Clearly state any assumptions you make to
complete the analysis.
Deadline:
5pm, April 28, 2016
.
Word limi
t: Max 2
,
0
00 words in addition to any calculations shown.
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