Transaction Summary

    You are the senior acquisitions associate at a New York-based private equity fund with a “core” investment focus. You have reached an agreement to purchase a well-located, 185,000 square foot office building in a solid suburban market. It was built in 2017 and has no additional leasing since the pre-development leases were signed. The submarket is quite desirable with no new supply coming online, yet economic growth is uncertain. Income Summary It is currently leased to three tenants on a gross (full-service) basis: Tenant #1 occupies 50,000 square feet at $29 per square foot annually through 12/2029, Tenant #2 occupies 80,000 square feet at $28 through 12/2030, and Tenant #3 occupies 36,500 square feet at $32 per square foot through 12/2031. Other/ancillary income has added another $4 per total sf of revenue annually, which you don’t see changing after acquisition. Operating expenses have consistently been $14 per total sf annually but you expect to immediately reduce this by 14.3% at the time of closing. On a run-rate basis (stabilized), capital expenditures, leasing commissions, and tenant improvements are expected to cost you $0.65 per total sf annually. There is no growth expected from this investment (flat revenue, flat expenses, flat cap ex, TI’s/LC’s). Capitalization Summary You are purchasing this building for $227.00 per total square foot. You have lined-up a 10-year mortgage financing of 70% LTV at an interest rate of 6.5% with a 30-year amortization schedule (payments calculated monthly but paid annually, for modeling purposes). You have also lined up a 5-year mezzanine loan (treat as a second mortgage) for an additional 10% of the purchase price at an interestonly rate of 11.00%. Assume zero transaction costs for the sale/disposition of this investment. Investment Strategy You are purchasing the building on January 1, 2020 and plan on selling the building at the end of the year 2023. You believe your exit capitalization rate will be 75 basis points lower than your going-in capitalization rate. 1. A. What is your first-year NOI? B. What is your purchase price? C. What is the going-in capitalization rate (NOI based)? 2. A. What is the principal amount of your mortgage? B. What is the annual amount of your mortgage loan payment? C. What is the principal amount of your mezzanine loan? D. What is the annual amount of your mezzanine loan payment? E. What is your total leverage ratio? 3. What is the first-year cash flow available to the equity investor? 4. A. Assuming that buildings are bought and sold based on NOI, what is the exit price of your investment in December 2023? B. What is your loan balance at the time of sale? C. What are your net investment proceeds from this sale? 5. What is the IRR of your equity investment? 6. Assuming that your private equity fund has a hurdle rate of return (Re) of 15%, what is the PV of this equity investment? 7. What is the NPV of this equity investment? 8. What is the mortgage lender’s going in DSCR? What is the mortgage lender’s going-in Debt Yield? 9. Explain the difference between PV and NPV. 10. What happens to the market value (directionally) of a loan originated 2 years ago if current market interest rates are 200 bps higher? 11. Why would a lender require amortization? 12. Assuming the mortgage lender wanted a YTM of 6.75%, what amount of discount points would the lender need to charge to obtain such yield?