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?