Assume that you are a deal sponsor (General Partner or “GP”) in a JV (Joint Venture) that intends to acquire Stuyvesant Town – Peter Cooper Village for a purchase price of $2.750 billion. Also, assume the asset is purchased on December 31st, 2009 and sold on December 31, 2019 for a 5% Cap Rate.
Fees and deal structure outlined below:
Transaction Fees:
Fees and deal structure outlined below: Transaction Fees:
• Closing costs equals 2% of purchase price
• Selling cost equals 3% of gross sales price
Sponsor Fees:
• Acquisition fee equals 25 basis points of the purchase price (paid at closing)
• Disposition fee is 25 basis points of gross sales price
• Asset management fee equals 5 basis points of capital committed by the Limited Partner(s) and is not included in the NOI of the property. Paid annually from cash flow after debt service.
Proposed capital stack:
• First Mortgage Financing at 55% Loan to total Cost with a 10-year loan term of which the first 2-years are interest only with a 30-year amortization schedule thereafter at a 4.25% fixed interest rate. The loan is locked out of prepayment for 2 years with and open for pre-payment the last 90 days of the loan term.
• Mezzanine Loan that will bring the total debt financing to 75% Loan to Cost. The combined DSCR cannot be less than 1.15 times the NOI of the property at closing. The Mezzanine loan has an interest only rate of 7% and is co-terminus with the first mortgage. The mezzanine loan is locked out of prepayment for 2 years and then can be prepaid thereafter for a 1% Fee (charged on the outstanding loan balance).
• Equity JV (Joint Venture)
Money Going In –
a) Contributed equity at acquisition 95% LP / 5% GP
b) Additional equity is on a pro-rata basis if capital calls are needed to fund cash flow deficits
Money Distributed –
a) Pari-passu annual Preferred return (“Pref”) of 8% to GP/LP on contributed capital
b) Unpaid Pref is accrued and added to the capital account for each investor. Accrued cash flow is compounded at the preferred rate of return as it accumulates.
c) Pari-passu Return of Capital
d) Promote structure after 8% Pref is achieved:
- 85% to equity / 15% to promote until equity achieves 11% IRR (Equity portion of distribution flows pari-passu 95% to LP and 5% to GP)
- 75% to equity / 25% to promote until equity achieves 13% IRR
- 65% to equity / 35% to promote until equity achieves 15% IRR
- After 15% IRR split 50% equity / 50% promote
Using the assumptions noted above, please prepare a professional quality investment memorandum to convince your Limited Partner’s credit department to consider the investment in Stuyvesant Town – Peter Cooper Village. Your memo should be no more than 5 pages, include the following (at a minimum)
a. Transaction summary & Summary of ROI metrics (IRR, EM, CoC, Profit)
b. Sources & uses of Capital
c. Capital structure (senior debt, mezzanine, and JV equity)
d. Investment strategy and summary of notable underwriting assumptions
e. Exit sale price sensitivity analysis to IRR
f. Strengths, Risks & Mitigants
g. Investment metrics: Property Level, LP, Sponsor (with and without fees) - Property level IRR (levered & unlevered) please include an IRR Partition
- Sponsor & LP IRR, equity multiple, cash on cash yield, total profit (Note: Sponsor cash flow to include fees earned by sponsor)
h. Stress case scenario
i. Recommendation (Is a 10-year hold period reasonable?)