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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...

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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

David answered on Nov 30 2019
47 Votes
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...
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