Real Estate Finance
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860 LEXINGTON AVENUE – PROPOSAL
REAL ESTATE FINANCE I
THURSDAYS 5:50-7:50PM
December 15, 2005
Presented by:
Table of Contents
Executive Letter
Proposed Action
Static Attributes
Physical Attributes
Locational Attributes
Comparative Evaluation
Economic Base
SWOT Analysis
Lease Structure
Investment Analysis
Appendix
Section 1 – Executive Letter
The purpose of this report is to present Mr. Bb Uu and Mr. Ss RR with a recommendation on their proposal to purchase the five-story building with 3 apartment units and 4 retail spaces located at 860 Lexington Avenue. Their intent is to purchase the building as is and if necessary, make only the necessary minimum maintenance and repairs to the apartment units and retail spaces, while retaining the current tenants.
Mr. Uu and Mr. RR are relative newcomers to the real estate investment market. They are seeking to form a partnership to eventually acquire a substantial income producing portfolio. 860 Lexington Avenue is the first property that would be potentially part of their portfolio. They are looking to acquire the property for tax shelter, equity and investment income purposes and are seeking a minimum of after tax yearly returns of 6.0%. The investors are taking a passive role with this property, outsourcing a management company to oversee the maintenance of the building.
In providing a recommendation, a multi-step analysis of the property and its attributes was performed. The process included an overview of the buildings static, physical, and locational attributes. A comparative analysis of its attributes was then made to similar properties within a 10-mile radius. Current market and economic conditions were also reviewed to determine short and long-term prospects for the building as an investment. The buildings strengths, weaknesses, opportunities and threats were summarized succinctly in a table and financial investment analysis was conducted to determine if the investment is viable in helping the young investors meet their objectives.
Following this process, we are comfortable advising Mr. Uu and Mr. RR against proceeding with the acquisition of such a property. Our investment analysis has suggested that the proposed transaction cost of $5.9M is overvalued. 860 Lexington Avenue is an investment incapable of achieving the investment objectives and required returns of the partnership and should not be considered a candidate for their portfolio.
Section 2 – Proposed Action
Mr. BB Uu and Mr. SS RR have recently contacted WW for her advisory services. They proposed the idea of forming an LLC partnership interested in purchasing a property for investment purposes. They have asked Joanne to evaluate whether the property in question, 860 Lexington Avenue, would be a sound investment and to provide a report detailing her analysis.
The acquisition of 860 Lexington Avenue will be Mr. Uus and Mr. RRs first foray into commercial real estate. Both investors are in their mid 30s, own their own apartments, and have well diversified personal portfolios. Their reasons for purchasing the piece of commercial real estate are three fold: to build equity, to produce income, and to create tax benefits to offset their substantial yearly incomes.
The partnership has established the following minimum criteria for the property:
6% yearly return on down payment
20% Return on Equity upon sale of property (15 year holding period)
Maximum tax savings possible
Investor Snapshot
BB Uu
SS RR
Yearly Income
$250,000
$225,000
Net Worth
$1,500,000
$1,500,000
Current Debt
300,000 (Mortgage)
$200,000 (Mortgage)
Portfolio Allocation
70% Stock / 30% Cash
80% Stock / 20% Cash
Alternative Investments
The above investment criteria were determined to fall in line with the investors profile.
Risk Tolerance: Minimal
Holding period: 15 years
Management Style: Outsourced to a management company
The investors are looking for a stable, long-term investment to complement their high growth portfolio.
The investors do not intend to make any major renovations to the building or its apartment and retail spaces. Renovations to the apartments will be evaluated if a tenant decides to terminate their current lease. If renovations are made, apartments will be rented out at rates adjusted for upgrades. However, at this time, the investors wish to retain the current tenants due to their strong tenant records. Investors intend to make minor maintenance repairs to the buildings exterior and interior upon acquisition. An area of focus for repair is the broiler,