Now on the commercial side of Drabkin & Conway, we are asking you to evaluate an opportunity in the Pilsen Industrial Zone. We have found a building that has been vacated by the current owner and they are a distressed seller. We are excited about the investment because:

The area has become popular for contractors and tradesman.

The building itself has unique features including an ability to store a crane with its high ceilings

It is near public transportation

It has parking and a lot that could be expanded in the future, adding to our potential upside

We think it is underpriced, but would like you to do a thorough analysis. We have also tried to negotiate down the purchase price, but have been unsuccessful and if we decide to go forward, we would be paying the list price of $775,000.

The full listing can also be found here:

http://www.loopnet.com/Listing/ XXXXXXXXXX/1338-W-Cermak-Rd-Chicago-IL/

We have found a tenant that is willing to sign a lease with the following terms:

5 years

$7/square foot using the usable square footage of 9,600, increasing by $.10/sq ft per year

Assumed closing date for purchase and lease beginning: 12/1/17 (first year 12/1/17-11/30/18 is deemed FY18 throughout this document)

Tenant will pay for own build out

As far as our expenses, we anticipate:

Vacancy/collection allowance of 5%

Insurance/management costs of $205/month

Property taxes of $22,507 per year increasing by 3%/year

As tenant is handling build out, we do not anticipate any CapEx in the next five years

Initial Question:

Seller will pay commission for both their own broker and for ours, what would the total commission be if each broker makes 2% on the sale? (Commission is usually lower on commercial/industrial deals due to the larger deal size)

Valuation Questions:

What is the projected NOI each year for each of the next five years?

What is the projected sales price at the end of five years using FY22 NOI and assuming the cap rate stays at 7%?

Using the NOI of FY18 and the cap rate of 7%, what is the value of the property using the direct capitalization method?

Assuming a cost of capital of 8.75%, what would be a DCF value of this property?

Assuming we did not finance the property and paid all equity cash from our fund, what would the NPV of this investment be under both a) the direct capitalization method and b) DCF method?

Financing Questions:

We have found a source of financing for this project under the following terms:

75% LTV

5% interest rate

10 year term

25 year amortization period

Up front financing fees waived

What would be the initial size of the mortgage under these conditions (assume no closing costs)?

What would the monthly payment be?

Using the cash flows calculated (including the sale price) in the valuation portion above, what would the cash flows be each year after financing costs? Assume that we can pay off the mortgage at the end of five years with no prepayment penalty using the proceeds of the sale.

Do you think we should make this investment? Why or why not?

Answered Same DayNov 04, 2019RE350/FIN350

Solution

Name

Commission

Purchase Price 775000

Total commission percentage 4%

Commission 31000

Valuation

FY18 FY19 FY20 FY21 FY22

Sq. Ft 9600 9600 9600 9600 9600

Per Sq Ft Rate $7 $7.10 $7.20 $7.30 $7.40

PGI 67200 68160 69120 70080 71040

Vacancy 3360 3408 3456 3504 3552

EGI 63840 64752 65664 66576 67488

OpEx

Ins/Mgmt 2460 2460 2460 2460 2460

Taxes 22507 23182.21 23877.6763 24594.006589 25331.82678667

NOI 38873 39109.79 39326.3237 39521.993411 39696.17321333

Sale Price 567088.188761857

Unlevered Cash Flow 38873 39109.79 39326.3237 39521.993411 606784.361975187

Direct Capitalization Value

NOI 38873

Cap Rate 7%

Value 555328.571428571

DCF

Cash Flows 38873 39109.79 39326.3237 39521.993411 606784.361975187

Discount Rate 0.9195402299 0.8455542344 0.7775211351 0.7149619633 0.6574362881

42274.3875 46253.4375796875 50579.1057332443 55278.4559755802 922955.384405623

Total Present Value 1117340.77119414

NPV

Direct Cap DCF

Present Value 555328.571428571 1117340.77119414

Purchase Price 775000 775000

NPV -219671.428571429 342340.771194135

Financing

N 300

I 0.4167%

PV $ 581,250.00

FV ($4,047,080.82)

PMT $ 3,398.07

Cash Flows

FY18 FY19 FY20 FY21 FY22

Unlevered Cash Flow 38873 39109.79 39326.3237 39521.993411 606784.361975187

Financing Costs $ 40,776.78 $ 40,776.78 $ 40,776.78 $ 40,776.78 555652.080938411

Net Cash Flows $ (1,903.78) $ (1,666.99) $ (1,450.46) $ (1,254.79) $ 51,132.28

The investment can be done since NPV is positive in DCF method but financing proposal can be ignored since it has negative cash flows in first few years and the sale value at the end is not very certain.

Workings

Period/Month Opn Amt Interest EMI Principal...

Name

Commission

Purchase Price 775000

Total commission percentage 4%

Commission 31000

Valuation

FY18 FY19 FY20 FY21 FY22

Sq. Ft 9600 9600 9600 9600 9600

Per Sq Ft Rate $7 $7.10 $7.20 $7.30 $7.40

PGI 67200 68160 69120 70080 71040

Vacancy 3360 3408 3456 3504 3552

EGI 63840 64752 65664 66576 67488

OpEx

Ins/Mgmt 2460 2460 2460 2460 2460

Taxes 22507 23182.21 23877.6763 24594.006589 25331.82678667

NOI 38873 39109.79 39326.3237 39521.993411 39696.17321333

Sale Price 567088.188761857

Unlevered Cash Flow 38873 39109.79 39326.3237 39521.993411 606784.361975187

Direct Capitalization Value

NOI 38873

Cap Rate 7%

Value 555328.571428571

DCF

Cash Flows 38873 39109.79 39326.3237 39521.993411 606784.361975187

Discount Rate 0.9195402299 0.8455542344 0.7775211351 0.7149619633 0.6574362881

42274.3875 46253.4375796875 50579.1057332443 55278.4559755802 922955.384405623

Total Present Value 1117340.77119414

NPV

Direct Cap DCF

Present Value 555328.571428571 1117340.77119414

Purchase Price 775000 775000

NPV -219671.428571429 342340.771194135

Financing

N 300

I 0.4167%

PV $ 581,250.00

FV ($4,047,080.82)

PMT $ 3,398.07

Cash Flows

FY18 FY19 FY20 FY21 FY22

Unlevered Cash Flow 38873 39109.79 39326.3237 39521.993411 606784.361975187

Financing Costs $ 40,776.78 $ 40,776.78 $ 40,776.78 $ 40,776.78 555652.080938411

Net Cash Flows $ (1,903.78) $ (1,666.99) $ (1,450.46) $ (1,254.79) $ 51,132.28

The investment can be done since NPV is positive in DCF method but financing proposal can be ignored since it has negative cash flows in first few years and the sale value at the end is not very certain.

Workings

Period/Month Opn Amt Interest EMI Principal...

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