Phung Nguyen

5/3/2007
Real Estate Investment

ANGUS CARTWRIGHT CASE

INTRODUCTION

Mr. Angus Cartwright, a financial planner, needs to make recommendations for his two
long-time family clients, the DeRights. John and Judy DeRight are coming to Cartwright
at different stages in their life and both are interested in diversifying their investment
portfolio to include investments in real estate. Cartwright has four properties he believes
to be perfect for his clients however he needs to narrow them down to just one property
to each client. In this short paper, I will briefly analyze the investors, the investments,
and will recommend which investment to which client.

INVESTORS & INVESTING PROFILE

John DeRight is a retiree and has all of his wealth in securities; primarily in common
stock of a company that bought his startup company. John currently has $6 million in
stocks. Dividends from these stocks provide John his main source of income. Not
diversifying but having all his net-worth in one basket can be very risky and especially in
common stocks. John wants to diversify his portfolio by taking approximately $3 million
out of securities to invest in real estate. Again, John is a retiree looking to balance his
portfolio by including real estate investments. His investing profile can be stated as low-
risk investor looking for periodic income payments (steady income stream) in which John
can use for daily living expenses.

Judy DeRight is a much younger investor. She owns and operates her own company as
President. The company performs well with annual income of $800,000 before taxes and
$500,000 after taxes. Judy was able to accumulated $3.5 million and also wants to
diversify her investments to include real estate. Judy presumably is in a high-income
bracket and does not necessarily need immediate cash-flows from her investments. Her
investing profile can be characterized as higher-risk, higher return, no immediate income
from investment is necessary, high potential gains in later years (targeting appreciation),
and currently would like investments with tax shelter capabilities due to current high
ordinary income from other sources.

TWO LIKELY INVESTMENT PROPERTIES AND THE MATCH

Alison Green is an existing 100-unit garden apartment in Montgomery County,

Maryland. This property can be said to be the safest investment because of its existing
occupancy of 97%. In comparison with real estate office sector, the apartment sector is
less volatile according historical data. Being an existing building, the investor can
immediately recieve positive cash-flows. There is no waiting time for the building to be
built and no time to wait to lease up the space. With existing tenants in the property, the
investor does not have to worry about the initial drain on cash like many properties with
high vacancy. The fact that Alison Green provides steady streams of positive cash flows
from the get go, this makes the investment less risky. Alison Green’s value is comprised
of 54.58% from rent and a 45.42% from appreciation. Alison Green has a very good IRR
of 16.51% meeting and surpassing the investors required rate of return of 12%.
These qualities make Alison Green a perfect match for our low-risk, steady income
stream investor, John DeRight. The after tax income from Alison Green can substitute
half of the dividends coming from John’s securities. Ivy Terrace also provides after tax
income higher than Alison Green but however, Ivy Terrace can be categorized as a riskier
investment because it is currently under-construction. The pro forma for Ivy Terrace
states a 3% vacancy but to achieve this level of vacancy upon completion can be time
consuming and in the process the investment can potentially have negative cash flow.

900 Stony Walk is an existing office building in Montgomery County Maryland. The
property is currently leased up at 97% occupancy, which is great for an office building!
The property has the highest IRR of the four properties of 16.36% and at the same time
not the riskiest investment. The building’s value comes from 21.58% rents and 79.42%
from appreciation. To compensate for the low rental income, the property was able to
achieve a massive return from reversion. The property has the highest profitability index
of 37% with the closest property being at 31%.
Taking taxes into consideration, the property provides the best investment. Stony Walk
can be characterized as having high appreciation value in later years and mostly fit into
Judy DeRight’s investing profile. Judy does not need income now since she is already
in a high tax bracket. Ten years or so from now, Judy might fall into a lower tax bracket
and can then tap into the property’s gains. The appreciated value can help Judy in later
years whereas income now will only move Judy up the tax brackets if she hasn’t already
been there.