SECTION #1 Financial Statement

Answer the questions below based on the scenario. This section is worth up to 100pts.

You have been hired to advise Positive Alpha Investments to investigate the purchase of an income producing strip mall property
and you have to decide by Friday November 16, 2018 at midnight whether or not to purchase the property. If you choose to
invest, the transaction date will occur on Thursday February 7, 2019. The investment has the following project financials:

Financials:
 1 anchor tenant paying $37 per sq ft per year for 150,000 sq ft
 5 supporting tenants paying $44 per sq ft per year for 18,000 sq ft each
 10 kiosk tenants paying $56 sq ft per year for 1,000 sq ft each
 The 1 anchor tenant has a contract that expires 12/31/2018
 The 5 supporting tenants all have contracts expire 2/7/2019, 2/7/2020, 2/7/2021, 2/7/2022, and 2/7/2023
 The 10 kiosk tenant’s contracts are structured so that half expire at the end of even years and the other half
expire at the end of odd years (December 31st)
 The anchor tenant contract is renewable in five year increments at the cost of living adjustment rate minus 1%
 The supporting tenants have five year contracts that are renewable at the cost of living adjustment rate
 The kiosk tenant contracts have two year contracts that are renewable at the cost of living adjustment rate
 There are currently no vacant retail units, but your expectation is that you will lose 10% of kiosk tenants every
other year and 20% of supporting tenants in a five-year period. Kiosk tenants typically can be replaced in six
months once one has moved out, while it takes twelve months to replace a supporting tenant (30% Turnover
Ratio)
 There are vending machines that generate $600 per month in income and ATM machines that generate $300
per month in income
 Commercial:
o Utilities are currently running at high rates:
 Electric (avg.): $7,000 per month and are expected to increase by 1.5% per year
 Gas (avg.): $6,000 per month and are expected to increase by 2.5% per year
 Water (avg.): $5,000 per quarter and are expected to increase by 5% per year
 Sewer (avg.): $5,000 per quarter and are expected to increase by 5% per year
o Management Fees for maintenance, landscaping, snow plow removal, security, repairs (w/supplies),
etc is 15% of EGI (Retail Property only)
o Advertising and Legal Fees are $12,000 per month combined
 Total Property:
o Property Taxes are 3.5% of the property value and will increase every three years based on the
updated property value
o Insurance is $200,000 per year (increase by 1.5% per year)
 Residential: As part of the property in separate buildings you also have 100 residential units (175,000 sq ft) with
the following demographics:
o 20 1-bed/1-bath units, $780/month, rents increase at the cost of living
o 30 2-bed/1-bath units, $940/month, rents increase at the cost of living
o 30 2-bed/2-bath units, $1100/month, rents increase at the cost of living
o 20 3 bed/2-bath units, $1260/month, rents increase at the cost of living
 Expenses for the residential space are as follows:
o The tenants pay for their own electric and water/sewer, but the gas bill for the month is centrally
billed and averages $6,500 per month.
o Trash collection is centrally billed and is $1200 per month
o Telephone and Internet for the residential building is $300 per month
o All maintenance costs are $4750 per month
 o Landscaping and Snow Plow Services are $2000 per month (combined)
o Legal and Accounting Services are $12,000 per year (combined)
o Management and Administration Costs are 7% of EGI
 Other Income comes from the following sources:
o You have 150 parking spaces available per month at a rental rate of $65 per month per space and they
are always 100% purchased and occupied regardless of the vacancy level, which you estimate to be 8%
for the 1-bed, 5% for the 2-bed units, and 10% for the 3-bed units.
o You estimate that laundry will collect approximately 6 loads per month ($3.50 total per load wash and
dry) for each bedroom in the building
o Storage costs are not included in the rent and each storage locker belongs to each unit and the storage
lockers cost are estimated on the number of bedrooms per unit. The cost is $30 per month per unit.
These storage units are occupied when a unit is occupied and not used when a unit is vacant.
o Pets are not allowed in the building.
o A maintenance fee is assessed each month based on the number of bedrooms per unit at $30 per
bedroom per month.
 You currently have $30,000,000 in cash on hand.
 Estimate your 30 year income statement and assess the measures of risk and ratios and the IRR and NPV after
the holding period.
 For your debt service (mortgage) you have several options to choose from below:

Adjustable Rate Mortgage Second Line of Credit

30 year schedule 10 year schedule
5/5 ARM
Monthly Payments Monthly Payments
$100,000 in Fees $25,000 in Fees
LTV = up to 60% LTV = up to 85% LTV
DCR = 1.3 (in addition to primary loan)
LIBOR + 200bps 8.00%

LIBOR Year 1 = 1.75%

LIBOR Year 6 = 2.25%
LIBOR Year 11 = 2.75%
LIBOR Year 16 = 3.25%
LIBOR Year 21 = 3.75%
LIBOR Year 26 = 4.25%

Other Information:
 The LLC passes through to the individuals without a corporate tax and thus are only taxed and the individual
level (married filing jointly), this includes all federal, state and local taxes.
 Your clients have no other income than this property and would own 100% of the property if purchased
  You have no tax loss carry forwards from previous year’s and have no current projects that have losses that
would offset any gains from this project you are currently reviewing.
 Building Value is 80% of Total Property Value
 The property has a cap rate throughout of 8.75
 Sales Expense is 3.25%

Answer all of the following questions:

1. What is the LTV you decided to use for your investment? Why did you choose this level? Which Mortgage option did
you choose? Explain your answer qualitatively.
2. Show the cash flows for the 30-year holding period.
3. What is your financial return if you sell the property at full asking value based on the cap rate at the conclusion of your
holding period?
4. Illustrate the following financial measures for each year you hold the property (all measures from homework and class):
a. Debt Coverage Ratio (year 1)
b. Operating Expense Ratio
c. Breakeven Ratio
5. Should Positive Alpha Investments make this investment? Why or Why not?