ARGUS Project: Investing in a Trophy Office Building

Jessica Shoemaker
November 18, 2009

Section I: Additional Assumptions

Miscellaneous Revenues:
Parking
Given:
• 2 parking spaces/1,000 SF of net rentable area included in each lease
• Total leased area: 460,823 SF
Assumed:
• Total parking spaces currently leased: 460,823/1,000=460.823 →
460.823*2= 921 leased
• Total parking spaces: (536,000/1,000)*2= 1,072 total
• Spaces not leased: 1,072-921= 151 spaces
• Additional parking revenue: 151 spaces * $100/space/month= $15,100
additional revenue per year
➢ 0% fixed as it is based on the occupancy of the building and not a fixed
amount

Reimbursable Expenses:
Insurance / CAM / Real Estate Taxes
Since we do not have access to historical operating statements to determine the
appropriate amount per square foot for insurance, CAM and real estate taxes, I
decided not to break out these expenses as separate line items.

Assumed: $6.78/SF
• Used the expenses in Schedule E to determine appropriate level of
reimbursable expenses per square foot:
➢ Converted the expenses/gross SF → expenses/net SF by multiplying by
1.22015, which is the ratio of the Subject Property’s gross to net
square footage.
➢ After converting the expenses of each comparable to net SF, I
calculated the average of all the expenses ($6.99/SF). I then reduced
this number by 3% to remove the management fee, which is already
its own line item. The new amount equals $6.78/net SF.
Tenants:
Vacant Tenants
• Assuming one new tenant signed per year for the next three years. This
assumption is based on the Schedule F absorption data for the CBD
submarket:
➢ 120,000 SF absorption / 8,125,000 total submarket SF = 1.5%
absorption per quarter.
➢ 1.5% absorption * 4 quarters = 6% absorption per year.
➢ 536,000 net rentable SF * .06= 32,160 SF absorbed/year
• Assuming all new tenants signed will be credit tenants

Market Leasing Assumptions:

Credit Tenant, New Market
• New market rate: $32.03/net SF
 ➢ Converted the gross SF market rental rates for credit tenants in
Schedule C to net SF rental rates by multiplying by 1.22015
➢ Averaged the net SF market rental rates for credit tenants, which
equals $32.03/SF
• Term length of 10 years

Credit Tenant, Renewal Market

• Renewal rate: $28.82
➢ Tenants are sometimes offered a 10% discount off the market rate to
entice them to stay. 90% of $32.03= $28.82/SF
• Term length of 10 years

Non-Credit Tenant, New Market

• New market rate: $37.01/SF
• Converted the gross SF market rental rates for non-credit tenants in Schedule
C to net SF rental rates by multiplying by 1.22015
• Term length of 10 years

Non-Credit Tenant, Renewal Market

• Renewal rate: $33.30/SF
➢ Tenants are sometimes offered a 10% discount off the market rate to
entice them to stay. 90% of $37.01= $33.30
• Term length of 10 years

Section II: Answers to Questions

1) Estimate the highest price you can bid for this Class A trophy office
building in the CBD district.
Purchase Price:
• Year 1 NOI / Typical market cap rate →
➢ Cap rate determined using Schedule E
• $6,449,583 / .09 = $71,662,033

Resale Price:
• 8% cap rate
• Capitalize net operating income

1) What is your unlevered and levered IRR at this price?

• Unlevered IRR: 17.51%
• Levered IRR: 34.16%

1) What is the total equity investment required to carry the project to

year 7? $55,272,604
• Discounted each year’s “Total Uses of Capital” line item in the Schedule of
Sources & Uses of Capital by 12%.
• Subtracted 75% of Property Purchase Price from Year 1
1) Suppose your bank is willing to refinance the property if LTV drops
below 67%. Estimate the year that this will occur. According to the
Individual Loan & Debt Service Summary report, the loan to purchase price
ratio will not drop below 67% at any point during the analysis.