Fin 331 Homework Assignment 3 Due December 3, 2015 .docx
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Fin 331
Homework Assignment 3
Due December 3, 2015
You are to perform and investment analysis on the purchase of Del Norte Terraces
Medical Dental Center in Poway. Review the Broker Presentation that is attached.
Please only use the broker package and DO NOT DISTURB THE BROKERS.
You may complete this assignment as a team with members of our class. No
more than 4 members per team. In order to get credit for this assignment,
your name MUST appear on the answer sheet that is submitted for grading.
This broker has prepared a presentation package. You are to use the broker
assumptions and prepare a 5 year pro forma with revised assumptions. You are
also required to calculate the investment ratios and performance measures using
the revised assumptions that are provided.
Assumptions:
Offer/Purchase Price: $9,950,000
In addition to the down payment, you will pay closing costs at the time of
purchase of $20,000. Be sure to include these costs at the time of
acquisition.
Rents will grow at 3% per year.
Exit Cap Rate of 5.50% using the NOI for year 6.
Costs of sale at the end of year 5 are equal to 5% brokerage commissions,
based on your exit sale price, plus $15,000 for “Other Costs of Sale”.
Fixed operating expenses will increase 2% per year.
Other operating expenses will increase 3% per year.
Reserves/CapX Budget is constant.
Financing:
o Loan amount is determined as the lesser of 65% of the purchase
price or maximum Debt Coverage Ratio of 1.25.
o Assume 4.25% interest, 30 year amortization and loan origination fee
of 1.00%. Loan origination fees are paid at the time of purchase,
o Assume no prepayment penalties on either loan at the time of sale
at end of year 5.
Here is the Broker’s reconstructed annual property operating data [APOD]:
Assume that the total of $214,127 operating
costs consist of:
Fixed Expenses for the first year are property
taxes of $124,375, which are 1.25% of the
purchase price plus $25,000 for insurance.
Total Fixed operating expense are $149,375,
the total of these two items.
Capital reserves are $10,000 per year.
Other operating expenses are $54,752, the remainder of the total projected
operating expenses of $214,127 for year 1 of your pro-forma.
Requirements:
Use the assumptions provided to construct a pro forma for 6 years (since
you need the NOI for year 6 to calculate the Sale Price at the end of year
5).
o Start with Rental Income based on the current rent role. Rents will
increase by 3% per year.
Calculate the loan amount using DCR and LTV. What is the loan amount?
Lender will allow the lesser of the two loan amounts that you have
calculated.
Calculate the net sale proceed at the end of year 5. Include your calculation
of broker commissions and other sale costs of $15,000.
Calculate the effective cost of borrowed funds for the 5 year holding period.
Remember to adjust for the origination fee.
Yo ...
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Fin 331 Homework Assignment 3 Due December 3, 2015 .docx
1. Fin 331
Homework Assignment 3
Due December 3, 2015
You are to perform and investment analysis on the purchase of
Del Norte Terraces
Medical Dental Center in Poway. Review the Broker
Presentation that is attached.
Please only use the broker package and DO NOT DISTURB
THE BROKERS.
You may complete this assignment as a team with members of
our class. No
more than 4 members per team. In order to get credit for this
assignment,
your name MUST appear on the answer sheet that is submitted
for grading.
This broker has prepared a presentation package. You are to use
the broker
assumptions and prepare a 5 year pro forma with revised
assumptions. You are
also required to calculate the investment ratios and performance
measures using
the revised assumptions that are provided.
Assumptions:
2. at the time of
purchase of $20,000. Be sure to include these costs at the time
of
acquisition.
commissions,
based on your exit sale price, plus $15,000 for “Other Costs of
Sale”.
o Loan amount is determined as the lesser of 65% of the
purchase
price or maximum Debt Coverage Ratio of 1.25.
o Assume 4.25% interest, 30 year amortization and loan
origination fee
of 1.00%. Loan origination fees are paid at the time of
purchase,
o Assume no prepayment penalties on either loan at the time of
sale
at end of year 5.
3. Here is the Broker’s reconstructed annual property operating
data [APOD]:
Assume that the total of $214,127 operating
costs consist of:
Fixed Expenses for the first year are property
taxes of $124,375, which are 1.25% of the
purchase price plus $25,000 for insurance.
Total Fixed operating expense are $149,375,
the total of these two items.
Capital reserves are $10,000 per year.
Other operating expenses are $54,752, the remainder of the total
projected
operating expenses of $214,127 for year 1 of your pro-forma.
Requirements:
years (since
you need the NOI for year 6 to calculate the Sale Price at the
end of year
5).
o Start with Rental Income based on the current rent role. Rents
will
increase by 3% per year.
loan amount?
Lender will allow the lesser of the two loan amounts that you
have
4. calculated.
nclude
your calculation
of broker commissions and other sale costs of $15,000.
holding period.
Remember to adjust for the origination fee.
at will produce a
leveraged IRR
of 14% [Required Discount Rate]. What price would you offer
to get the 14%
IRR on equity? Assume that the loan amount does not change.
o The unleveraged IRR is calculated on the cash flows with a
loan
amount of $0 [no debt financing].
o There are no operating income or expenses during year “0”.
Rental
income, etc., begin at the end of year 1.
brokers rent
forecast is justified. Compare comparable properties to the
subject property
and make appropriate adjustments to your rental estimate.
Assume that the
property has an efficiency ratio of 95%. That means that the
market rent
5. you derive applied to 95% of the gross building area of 26,249
square feet.
What Gross Scheduled Income do you estimate? How will that
impact the
income?
Ken Rogers - (858) 334-8550
[email protected]
Dave Morris - (619) 962-2200
[email protected]
Horizon Resources, Inc.
2260 Rutherford Road, Suite 110
Carlsbad, California 92008
Office: (760) 692-5205
www.HorizonResourcesInc.com
For Sale - Prime Commercial Investment Opportunity • Call for
Offering Memorandum
26,249± Sq. Ft. Medical Dental Center
Del Nor te Terraces 15644 Pomerado Road, Poway, California
92064
Property Highlights
• Located in the Poway / North County medical/dental district
• Prime location across from Pomerado Hospital
• 18 suites with restrooms from 768± sq. ft. to 1,861± sq. ft.
• Leases include annual rent increases and NNN’s
6. • Fully leased with a mixture of medical and dental providers
• Nicely appointed suites with upgrades
• Prominent location with high traffic and high visibility
• Convenient parking and easy access for patients & tenants
• 5.21 Cap Rate and positive projected net income
• Easy access to Interstate 15 and Route 56 (Ted Williams
Parkway)
Offered at $9,950,000
Fully Leased
26,249± Sq. Ft. 18 Suites Cap Rate: 5.21
loang_000
Text Box
loang_000
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Horizon Resources, Inc.
2260 Rutherford Road, Suite 110
Carlsbad, California 92008
Office: (760) 692-5205
Ken Rogers Dave Morris
(858) 334-8550 (619) 962-2200
[email protected][email protected]
7. BRE #01244817 BRE #01969962
Prime Commercial Investment Oppor tunity Offered at
$9,950,000 Cap Rate: 5.21
26,249± Sq. Ft. Medical Dental Center
Del Norte Terraces Medical Dental Center 15644 Pomerado
Road, Poway, California
Disclaimer: This brochure is provided for the sole purpose of
allowing a potential investor to evaluate whether there is
interest in proceeding
with further discussion or a possible purchase of the investment.
Investors are urged to perform their own evaluations and
inspections
of the property and should rely solely on such examination in
determining to proceed with the purchase.
•100% leased with a stable rental income history
•Opportunity for increased rents including addition of core
factor
•Excellent demographics with positive growth
•High demand location within North County medical/dental
district
•Limited local land availability for new commercial
development
•Conveniently close to multiple affluent neighborhoods
•Low maintenance property design
•Multiple leases with varying expiration dates
•Opportunity for low risk value add return
•4.8 per1,000 parking ratio and easy access parking design
•Attractive property layout with low maintenance landscaping
•Historically well maintained with recent additional
enhancements
8. Purchase Price: $ 9,950,000
Gross Scheduled Income: $ 755,379
Less Vacancy Factor 3%: $ 22,661
Operating Expense: $ 214,127
Projected Net Income $ 518,591
Cap Rate: 5.21
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Homework Assignment 3
Answer Sheet
Purchase Price Vacancy & Credit Loss Exit Cap Rate
Maximum LTV Rental Growth Rate Sales Commission
Required DCR Fixed Expense Growth Rate Other Sale Costs
Interest Rate Other Expense Growth Rate Discount Rate
Amortization Term CapX/Reserves
Origination Fee
Other Acquisition Costs
9. Year Acquisition 1 2 3 4 5 6
Gross Scheduled Income
Vacancy & Credit Loss
Gross Operating Income
Fixed Operating Expenses
Other Operating Expenses
Reserves for Replacement
Total Operating Expenses
Net Operating Income
Annual Debt Service 1st
Cash Flows Before Taxes
Purchase Price Loan Amount Using LTV
Loan Amount Using DCR
Plus: Other Acquisition Costs
Plus: Loan Origination
Less: Balance of 1st Mortgage
Required Equity
Name (s):
Acquisition Operations Disposition
11. Less: Loan Balance 1st
Net Sale Proceeds
Equity Cash Flows
Leveraged IRR
Unlevered Cash Flows (Note 1)
Unlevered IRR
Note 1: Does not include financing. No loan points, no debt
service, no loan balances.
PV of Cash Flows
Less: Initial Investment
Net Present Value (NPV)
Offer Price to Get 14% IRR
12. Homework Assignment 3 Name (s):
First Mortgage Amount
Total Equity Cash Required at the Time of
Purchase
What is the “going in” cap rate (disregard
acquisition closing costs)
What is the Gross Income Multiplier? (use
gross schedule income)
Operating Expense Ratio
Equity Dividend Rate Year 1 = Cash on
Cash (Use Total Initial Equity Investment)
Debt Coverage Ratio Year 1
Effective Cost to Borrower for 5 Years
Unit Description Gross Building Area Net Rentable Area
13. Market Rent
Gross Building Area 26,249
Total Monthly Rent
Total Gross Schedule Rental Income
Summary of your market rents and Analysis
What is the impact on the investment if you use market rents?
What are your estimated market rents? Include 2 sources for
your estimates. Write a brief analysis
of your comparable rental income. Explain why some
comparables are superior or inferior. Metrics
can include size, location, condition of the property, parking
and other amenities. Remember that
rent is only collected on 95% of the gross building area.
Calculate the following ratio using your reconstructed pro
forma operating
data for year 1.
Answers