Your client, Mr. Mike, has identified a real estate investment opportunity and has hired your real estate group to thoroughly analyze this opportunity and make an investment recommendation.
The building is 3 years old and located near the corner of Saint-Denis and Roy St East in the Plateau Mont-Royal district of Montreal. It is a three-storey mixed-use building with four commercial retail units on the ground floor and 8 residential apartments on the 2 floors above. The basement has 8 interior parking stalls rented to the residential tenants.
The residential apartments are made up of 4 two-bedroom apartments and 4 three-bedroom apartments.
The commercial units include a coffee shop, a convenience store, a dry cleaner and a small dollar store. Last year the coffee shop recorded sales of $550,000, which the operator considers to be excellent. The dry cleaner and convenience store do not provide sales figures but have indicated that they are generally satisfied with the space. The dollar store, however, has been struggling with sales reaching
only $175,000 last year. The operator has indicated that he does not intend to renew the lease when it comes due. The current owner of the building has told you that he does not anticipate any trouble in finding a new tenant given the excellent location of the building.
The seller has provided you with the current rent roll and the income statement of the building for the year that has just ended (see Excel file).
During your due diligence process, you ascertain the following facts:
• The asking price is $3,100,000 but you believe there may be a bidding war.
• The mortgage, which is currently on the building, will be repaid by the seller from the proceeds of sale. It cannot be transferred to a purchaser.
• The building is in a good physical condition and will not require any significant capital expenditures over the next five years.
• The owner currently handles the property management himself but estimates that it would cost about 2% of base rent, on the commercial and residential spaces (excluding parking), if he hired a property management firm.
• Acquisition expenses (including taxes) are expected to be approximately 1% of the purchase price.
Your client wants to minimize the amount of cash he has to invest in the purchase of this property. He is confident that he could obtain a mortgage with a 5-year term, a maximum LTV of 70%, a minimum DSCR of 1.5 and an amortization period of 20 years. He has asked you to look into the potential financing as part of your analysis.
Mr. Mike is looking at several other possible investments and will only consider this one if its IRR exceeds his WACC of 6.0% and his required equity return of 12.5%
SEE 2020 INCOME STATEMENT AND 2021 RENT ROLL IN THE EXCEL FILE
It is to be completed in groups of four. Class time will be provided for some group work. Do not schedule in-person meetings with your group, but do continue to meet virtually, via teleconference, videoconference or another online format.
a) Using the elements of the case and some research, perform a market environment analysis (do not do a legal or tax environment analysis).
Clearly indicate your assumptions and their source and how they link to the financial analysis (once completed). (Word file (Times New Roman, doubled spaced, and Font 11): 5 to 8 pages, including charts and graphs).
b) Perform a financial analysis of the investment. For simplicity, assume the purchase occurs on January 1, 2021. (Use the Excel template that will be supplied)
i. Calculate the projected NOIs and cash flows
ii. Determine the proposed purchase price based on your valuation of the property
iii. Determine the debt service payments and prepare an amortization table
iv. Calculate the levered and unlevered IRR and NPV using the following scenarios:
i. Most likely, Pessimistic and Optimistic (with changes in assumptions)
c) Finally, based on your analysis, make a detailed investment recommendation (Include it in the Word file above)
The presentation (via Zoom), which should be prepared using PowerPoint, should not last more than ten (10) minutes and should include:
1. A description of the investment opportunity
2. An analysis of the market environment and how it supports the assumptions of your financial model
3. Your funding requirement
a. Asking and anticipated purchase price
b. Amount Mr. Mike will be investing himself
c. Anticipated funds from financing
4. Summary of the Financial Model
a. Key assumptions
b. Investment NOI and cash flow
c. Levered and unlevered IRR and NPV using the following scenarios:
i. Most likely, Pessimistic and Optimistic (with changes in assumptions)
5. Investment recommendation including the pros/cons of your decision.