Angus Cartwright IV Case

Group 2 REAL 5090 9:35

Blaney Hudson, Ben Gordon, Cy Roth, Charlie Goldstein
 Overview
After evaluating each of your needs as investors and the four properties that you have

visited, we have discovered that all four properties generate positive cash flows and result in a

positive net present value. Due to your financial circumstances, we also believe that any of the

properties are within your budget to help diversify your investments. However, according to your

instructions to locate “a” property, we have identified the individual properties that fit your

situations best. The two properties resulting in the greatest net present values are 900 Stony Walk

at $872,847 and the Fowler Building at $905,605. We hope this report gives you the support you

need to make an informed investment decision, and you will find our analysis of each property

below.

We used several assumptions that we deemed appropriate to analyze these properties

most accurately. The first of which being a 3% growth in cashflows. This number will likely be

higher in real life, but we wanted to keep a conservative estimate to account for inflation. We

also assumed each property would have a discount rate of 10% when calculating NPV for all

four properties. Additionally, we assumed that each property would be held for 10 years and then

sold. This is merely for calculation purposes. You may choose to sell earlier or hold the property

for longer and our opinion will remain the same.

Alison Green is a 100-unit garden apartment project located in Montgomery County,

Maryland. This project yields an NPV of $725,476 at 10% discount rate and an IRR of 11.39%

(Exhibit 5). While Alison Green does result in the highest before tax cash flows at $647,942

(Exhibit 2), the equity investment required is the second highest at $7,240,000 (Figure 1). With

the lowest pre-tax investment multiple of 2.98 (Exhibit 6), Alison Green would show the least
growth for the equity you put in. Additionally, this property is riskier because it is the oldest

property of the four and could require capital improvements before any of the other options.

900 Stony Walk is located nearby and is a five-story, 80,000 square foot office building.

We believe this property is one of the stronger investment opportunities. The property yields an

NPV of $872,847 with the highest IRR of 13.38% (Exhibit 5). Stony Walk also requires the

lowest equity investment of all four properties at $2,980,000 (Exhibit 1). Another benefit of this

property is that the seller has arranged the mortgage as a commercial mortgage-backed security,

meaning it will provide more proceeds and be nonrecourse. Therefore, the borrower’s personal

assets will be safe from the lender in case of default. While this property does have the highest

Break-even Occupancy rate at 83.36%, the projected occupancy is 95%, therefore we believe it

is unlikely that the occupancy will drop below the break-even rate. Additionally, this property

has a strong tenant mix of lawyers and accountants, which we believe to reduce risk compared to

the apartment buildings. Overall, we see this as a positive investment opportunity for our clients.

Ivy Terrace will be a 75-unit ‘garden’ apartment complex in Arlington. The complex is

currently under construction, but because of a building moratorium in the county there will likely

be little competition from other projects. We calculated an NPV of $746,964 and an IRR of

12.33% (Exhibit 5). The initial equity investment required will be $4,380,000 (Exhibit 1). This is

the second lowest of all the properties because the land is leased for 99 years. The lease

payments required for the land will be $100,000 for 10 years and will increase every 3 years after

that. Ivy Terrace has the second lowest Investment Multiple of 3.11 (Exhibit 6) making it not as

effective in growing wealth. Ivy Terrace has the highest cap rates; Purchase at 7.91% and Sale at

8.39%. (Exhibit 6). While this can be attractive for growth potential, the higher rates can hold a

higher risk.
 The Fowler Building is a two-story, 135,000-square-foot office building currently under

construction in Arlington. 110,000 square feet of the space is rentable, with 60% of this space

already in the leasing process. While this factor could pose risk because it is not fully leased yet,

we see this factor as a great benefit because the property is still under construction, but over half

of the space is already leased. We expect this to help drive more technology and consulting firms

to become tenants as well. This property yields the highest NPV at $905,605 with an IRR of

11.36% (Exhibit 5). The Fowler Building also has the second highest increase in capital value at

18.56% (Exhibit 6), meaning we can expect the value of this property to grow. One downside of

this property is that it requires the highest up-front equity investment at $8,100,000 (Exhibit 1),

but it yields the highest net cash from sale of all four properties at $16,779,002 (Exhibit 10).

Overall, the Fowler Building is an obvious investment choice due to its strong NPV, stable

leasing rate, and projected future growth.

 John DeRight Recommendation
John DeRight, we understand you recently retired after selling your business in exchange

for $35 million in the purchasing company’s stock and you wish to diversify your investments

and have expressed an interest in real estate. The dividends from that portfolio total to $750,000

annually on top of $250,000 from other income sources. You have committed to sell half of your

stock portfolio to finance the acquisition, for a maximum initial equity investment of $17.5

million.

Therefore, we recommend for you to purchase the Stony Walk property. Stony Walk is

the ideal investment for you, as the required equity investment of $2,980,000 falls within your

budget constraints of $17.5 million and yields a high positive NPV. We believe the Stony Walk

property is most suitable for you because it has the lowest equity investment required of any of

the four properties. If you sell enough Common Stock to make the equity investment necessary

for purchasing Stony Walk, your annual dividend payment will decrease to $686,142.86 per

year. (Exhibit: John DeRight) The annual income from Stony Walk will exceed $100,000

meaning that you will profit immediately from this investment and also build equity over time.

Exhibit: John DeRight

John DeRight
Common Stock $ 35,000,000.00
Equity Investment $ 2,980,000.00
Remaining Comm Stock $ 32,020,000.00
Annual dividend $ 750,000.00
Dividend /$ of Stock 0.021428571
Dividend After Stony Walk Purchase $ 686,142.86
 Judy DeRight Recommendation

Judy DeRight, as the president and stockholder for your chemical company that generates

$2.1 million in income each year, we know you plan to continue growing your business under

your leadership. We know you wish to diversify your investment portfolio and currently have

$45 million in various investments to commit to the purchase of real estate.

Therefore, we recommend for you to purchase the Fowler Building property. The Fowler

property would be in your best interest because it has the highest net present value out of the four

properties at $905,605, along with a 11.36% IRR. The property is also brand new and already

60% leased, making it a simpler acquisition because you do not need to worry about renovations

or spend as much time on initial leasing costs. Although the property requires a high equity

investment of $8.1 million, we believe this investment will be affordable due to your $45 million

through stocks, bonds, and securities. Buying the Fowler property would allow you to diversify

your portfolio which would ultimately lower exposure to any market risk. Along with

diversifying your portfolio, it would also protect against inflation because rents could rise or fall

with inflation. Overall, we believe that investing in the Fowler Building is the ideal addition to

your portfolio to diversify your wealth and mitigate risk.

 Appendix
Exhibit 1- List of Salient Facts
Alison Green Stony Walk Ivy Terrace Fowler Building
No. of Units/Square Ft of Rental 100 67000 75 110000
Space
Gross Purchase Price $ 21,240,000 $ 15,230,000 $ 11,380,000 $ 29,100,000
Depreciable Base $ 16,240,000 $ 11,730,000 $ 11,380,000 $ 22,600,000
Depreciable Life 27.5 39 27.5 39
Estimated Sales Price $ 24,000,000 $ 17,000,000 $ 14,000,000 $ 34,500,000
Expected Year of Sale 10 10 10 10
CFO or NOI $ 1,450,000 $ 1,050,000 $ 900,000 $ 1,865,000
Annual Increase in NOI 3% 3% 3% 3%
Leasehold Payments $ - $ - $ 100,000 $-
Equity Investment $ 7,240,000 $ 2,980,000 $ 4,380,000 $ 8,100,000
Amount of 1st Mortgage $ 14,000,000 $ 12,250,000 $ 7,000,000 $ 21,000,000
Interest Rate 4% 4.75% 4.25% 4.50%
1) Term 10 10 10 10
2) Amortization Period 30 25 30 25
3) Constant Loan Payments 5.73% 6.84% 5.90% 6.67%

Exhibit 2 – First Year Project Setup

Alison Green Stony Walk Ivy Terrace Fowler Building
Gross Rents $2,187,000 $1,820,000 $1,400,000 $3,020,000
Vacancy Rate 5% 5% 7% 7%
(Vacancies) ($109,350) ($91,000) ($98,000) ($211,400)
Net Rents $2,077,650 $1,729,000 $1,302,000 $2,808,600
Tax Rate 12% 12% 10% 10%
(Real Estate Taxes) ($262,440) ($218,400) ($140,000) ($302,000)
(Other Operating ($340,210) ($440,500) ($243,250) ($608,600)
Expenses)
Capital Reserves $250.00 $0.30 $250.00 $0.30
Allocation
(Capital Reserves) ($25,000) ($20,100) ($18,750) ($33,000)
Net Operating Income $1,450,000 $1,050,000 $900,000 $1,865,000
(Finance Payments) ($802,058) ($838,073) ($413,230) ($1,400,698)
(Lease Payments) $- $- ($100,000) $-
Before Tax Cash Flow $647,942 $211,927 $386,770 $464,302
 Exhibit 3 – Purchase and Operating Comparables
Alison Green Stony Walk Ivy Terrace Fowler Building
Price/Unit or Price/Rentable Square Foot $212,400 $227.31 $151,733 $264.55
Real Estate Taxes/Gross Revenue 12% 12% 10% 10%
Other OP Expenses/Unit or/Rentable SF $3,402 $6.57 $3,243 $5.53
Other OP Expenses/Gross Revenue 15.6% 24.2% 17.4% 20.2%
RE Taxes and Op. Ex. / Unit or /Rentable $6,027 $9.83 $5,110 $8.28
SF
Avg. Monthly Rents/Unit or Rent/SF for $1,823 $27.16 $1,556 $27.45
Office Space (Annual)
Actual or Projected Occupancy 95% 95% 93% 93%

Exhibit 4 – Break-even Analysis

Alison Green Stony Walk Ivy Terrace Fowler Building
Current or Projected Occupancy 95% 95% 93% 93%
Added Margin 29.63% 11.64% 27.63% 15.37%
Break-even Occupancy 65.37% 83.36% 65.37% 77.63%
Loan to Value 65.91% 80.43% 61.51% 72.16%
Debt Coverage Ratio 1.81 1.25 2.18 1.33

Alison Green Stony Walk Ivy Terrace Fowler Building

Equity Required $7,240,000 $2,980,000 $4,380,000 $8,100,000
Simple Return Measures
Cap Rate – Purchase 6.83% 6.89% 7.91% 6.41%
Cap Rate – Sale 7.88% 8.06% 8.39% 7.05%
Cash on Cash Return Y1 8.95% 7.11% 8.83% 5.73%
Increase in Capital Value 12.99% 11.62% 23.02% 18.56%
Pre-Tax Investment Multiple 2.98 3.92 3.11 3.29
Discounted Return Measures
IRR 11.39% 13.38% 12.33% 11.36%
NPV @ 10% $725,476 $872,847 $746,964 $905,605
Alison Green Stony Walk Ivy Terrace Fowler Building
Simple Return Measures
Cap Rate - Purchase 3 2 1 4
Cap Rate - Sale 3 2 1 4
Cash on Cash Return Y1 1 3 2 4
Increase in Capital Value 3 4 1 2
Pre-Tax Investment 4 1 3 2
Multiple
Discounted Return Measures
IRR 3 1 2 4
NPV @ 10% 4 2 3 1
Exhibit 6 - Financial Analysis

Exhibit 7 – Investment Ranking

Alison IRR 11.39%

Green
Cash Flow Income Tax Futures Total
Before Tax
Year Actual Discounted Actual Discounted Actual Discounted Actual Discounted
1 $647,942 $581,702 $(130,261) $(116,944) $0.00 $0.00 $517,681 $464,758
2 $691,442 $557,294 $(151,465) $(122,079) $0.00 $0.00 $539,978 $435,215
3 $736,247 $532,741 $(173,347) $(125,432) $0.00 $0.00 $562,900 $407,309
4 $782,396 $508,257 $(195,931) $(127,280) $0.00 $0.00 $586,466 $380,977
5 $829,930 $484,019 $(219,238) $(127,860) $0.00 $0.00 $610,692 $356,158
6 $878,890 $460,171 $(243,292) $(127,384) $0.00 $0.00 $635,597 $332,787
7 $929,318 $436,831 $(268,119) $(126,031) $0.00 $0.00 $661,199 $310,800
8 $981,259 $414,092 $(293,742) $(123,959) $0.00 $0.00 $687,517 $290,133
9 $1,034,759 $392,027 $(320,189) $(121,306) $0.00 $0.00 $714,570 $270,721
10 $1,089,863 $370,692 $(347,485) $(118,189) $10,991,882 $3,738,638 $11,734,261 $3,991,141
Total $8,602,048 $4,737,826 $(2,343,068) $(1,236,464) $10,991,882 $3,738,638 $17,250,862 $7,240,000
Percent 65.44% -17.08% 51.64% 100%
Exhibit 8a – Alison Green Internal Rate of Return

Exhibit 8b – Stony Walk Internal Rate of Return

Stony Walk IRR 13.38%
Cash Flow Income Tax Futures Total
Before Tax
Year Actual Discounted Actual Discounted Actual Discounted Actual Discounted
1 $211,927 $186,910 $(76,471) $(67,444) $0.00 $0.00 $135,457 $119,467
2 $243,427 $189,348 $(93,979) $(73,101) $0.00 $0.00 $149,449 $116,248
3 $275,872 $189,254 $(112,105) $(76,907) $0.00 $0.00 $163,767 $112,348
4 $309,291 $187,133 $(130,874) $(79,184) $0.00 $0.00 $178,417 $107,949
5 $343,712 $183,410 $(150,308) $(80,207) $0.00 $0.00 $193,404 $103,204
6 $379,165 $178,445 $(170,432) $(80,210) $0.00 $0.00 $208,733 $98,235
7 $415,682 $172,537 $(191,274) $(79,392) $0.00 $0.00 $224,409 $93,145
8 $453,295 $165,939 $(212,859) $(77,922) $0.00 $0.00 $240,436 $88,017
9 $492,036 $158,858 $(235,215) $(75,941) $0.00 $0.00 $256,821 $82,917
10 $531,939 $151,468 $(258,373) $(73,571) $6,955,553 $1,980,573 $7,229,120 $2,058,470
Total $3,656,348 $1,763,304 $(1,631,889) $(763,877) $6,955,553 $1,980,573 $8,980,012 $2,980,000
Percent 59.17% -25.63% 66.46% 100%

Exhibit 8c – Ivy Terrace

Ivy Terrace IRR 12.33%
Cash Flow Income Tax Futures Total
Before
Tax
Year Actual Discounted Actual Discounted Actual Discounted Actual Discounted
1 $386,770 $344,316 $(43,446) $(38,677) $0.00 $0.00 $343,324 $305,638
2 $413,770 $327,919 $(56,164) $(44,510) $0.00 $0.00 $357,607 $283,409
3 $441,580 $311,545 $(69,289) $(48,885) $0.00 $0.00 $372,291 $262,660
4 $470,225 $295,338 $(82,837) $(52,028) $0.00 $0.00 $387,388 $243,310
5 $499,728 $279,416 $(96,821) $(54,136) $0.00 $0.00 $402,908 $225,280
6 $530,117 $263,872 $(111,255) $(55,378) $0.00 $0.00 $418,863 $208,494
7 $561,418 $248,777 $(126,153) $(55,902) $0.00 $0.00 $435,264 $192,876
8 $593,657 $234,188 $(141,532) $(55,832) $0.00 $0.00 $452,124 $178,355
9 $626,864 $220,143 $(157,408) $(55,279) $0.00 $0.00 $469,456 $164,864
10 $661,066 $206,672 $(173,796) $(54,334) $6,917,928 $2,162,776 $7,405,199 $2,315,114
Total $5,185,196 $2,732,186 $(1,058,701) $(514,962) $6,917,928 $2,162,776 $11,044,423 $4,380,000
Percent 62.38% -11.76% 49.38% 100%

Exhibit 8d – Fowler Building

Fowler IRR 11.36%
Building
Cash Flow Income Tax Futures Total
Before Tax
Year Actual Discounted Actual Discounted Actual Discounted Actual Discounted
1 $464,302 $416,935 $(151,680) $(136,206) $0.00 $0.00 $312,622 $280,729
2 $520,252 $419,517 $(182,299) $(147,001) $0.00 $0.00 $337,953 $272,516
3 $577,881 $418,449 $(213,972) $(154,939) $0.00 $0.00 $363,908 $263,509
4 $637,238 $414,356 $(246,737) $(160,437) $0.00 $0.00 $390,501 $253,919
5 $698,376 $407,783 $(280,631) $(163,861) $0.00 $0.00 $417,745 $243,922
6 $761,348 $399,201 $(315,697) $(165,531) $0.00 $0.00 $445,651 $233,670
7 $826,210 $389,015 $(351,977) $(165,726) $0.00 $0.00 $474,233 $223,289
8 $893,017 $377,576 $(389,513) $(164,690) $0.00 $0.00 $503,504 $212,886
9 $961,828 $365,182 $(428,353) $(162,635) $0.00 $0.00 $533,476 $202,548
10 $1,032,704 $352,092 $(468,542) $(159,746) $16,779,002 $5,720,665 $17,343,164 $5,913,011
Total $7,373,156 $3,960,108 $(3,029,402) $(1,580,772) $16,779,002 $5,720,665 $21,122,756 $8,100,000
Percent 48.89% -19.52% 70.63% 100%
 Exhibit 9 – Percent of Total Benefits (Based on IRR)
Alison Green Stony Walk Ivy Terrace Fowler Building
Before Tax Cash 65.44% 59.17% 62.38% 48.89%
Flow
Tax Benefits -17.08% -25.63% -11.76% -19.52%
Future Value 51.64% 66.46% 49.38% 70.63%

Exhibit 10 – Breakdown of Futures

Alison Green Stony Walk Ivy Terrace Fowler Building
Return of Initial Cash $7,240,000 $2,980,000 $4,380,000 $8,100,000
Recapture of Mortgage $2,970,246 $3,271,277 $1,438,974 $5,741,720
Amortization
Increase in Sales Price $2,760,000 $1,770,000 $2,620,000 $5,400,000
25% Tax on $(1,476,364) $(751,923) $(1,034,545) $(1,448,718)
Depreciation
20% Capital Gains Tax $(502,000) $(313,800) $(486,500) $(1,014,000)
on Increased Sale Price
Appreciation
Total (Net Cash from $10,991,882 $6,955,553 $6,917,928 $16,779,002
Sale)