shorenstein company llc real estate case study
DESCRIPTION
Shorenstein Company LLC Real Estate Case Study. Return Expectations Office Cap Rates versus Interest Rates. CBD Cap. Major Market CBD Cap. Ten-Year Treasury. 30-Day LIBOR. Park Avenue Building Base Case ProForma (10 Years). Park Avenue Building Base Case ProForma Summary (10 Years). - PowerPoint PPT PresentationTRANSCRIPT
Shorenstein Company LLCReal Estate Case Study
Return ExpectationsOffice Cap Rates versus Interest Rates
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1997 1998 1999 2000 2001 2002 2003 2004
CBD Cap Major Market CBD Cap Ten-Year Treasury 30-Day LIBOR
Park Avenue BuildingBase Case ProForma (10 Years)
$/SFPurchase Price* 226,900$ $394 Loan to Value Ratio 65.00% Year 11 NOI 24,231$
Loan Amount 147,485$ Residual Cap Rate 7.5%Equity 79,415$ 10-Year Treasury Rate 4.50% Resale Price 323,086$ Debt 147,485 10-Year Loan Spread 1.25% Less: Mortgage Balance (147,485) Total Investment 226,900$ All-in Interest Rate 5.75% Available Residual 175,601$
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
NET OPERATING INCOME 13,358 14,012 15,566 16,295 17,201 18,347 19,160 18,100 22,704 23,874
TOTAL CAPITAL EXPENDITURES (1,486) (2,423) (1,228) (2,243) (2,388) (3,754) (1,194) (5,902) (755) (239)
NET CASH FLOW 11,872 11,588 14,338 14,052 14,813 14,593 17,966 12,198 21,949 23,635
Cap Rate (on NOI) 5.9% 6.2% 6.9% 7.2% 7.6% 8.1% 8.4% 8.0% 10.0% 10.5%Cash Flow Yield 5.2% 5.1% 6.3% 6.2% 6.5% 6.4% 7.9% 5.4% 9.7% 10.4%
Interest Rate 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75%TOTAL DEBT SERVICE (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480)
CASH FLOW AFTER DEBT SERVICE 3,392 3,108 5,857 5,572 6,333 6,113 9,485 3,718 13,469 15,155
Leveraged Yield 4.3% 3.9% 7.4% 7.0% 8.0% 7.7% 11.9% 4.7% 17.0% 19.1%Debt Service Coverage Ratio Test 1.1x 1.1x 1.3x 1.3x 1.4x 1.5x 1.5x 1.5x 1.8x 1.9x
Unleveraged Cash Flow (226,900) 11,872 11,588 14,338 14,052 14,813 14,593 17,966 12,198 21,949 346,721 Unleveraged IRR 9.3%
Leveraged Cash Flow (79,415) 3,392 3,108 5,857 5,572 6,333 6,113 9,485 3,718 13,469 190,756 Leveraged IRR 14.0%
*Includes Closing Costs
Park Avenue BuildingBase Case ProForma Summary (10 Years)
Purchase Price $226,900,000
Unleveraged IRR 9.3%
Leveraged IRR 14.0%
Loan Terms
Loan-to-Value Ratio 65%
Term 10 Years
All-in Interest Rate 5.75%
10-Year Average Cap Rate 7.9%
10-Year Average Cash Flow Yield 6.9%
10-Year Leveraged Yield 9.1%
% of Value from Cash Flow / Residual Value 40% / 60%
Equity Multiple 3.1x
Park Avenue BuildingProForma 2: Value-Added Opportunity (10-Years)
$/SFPurchase Price* 226,900$ $394 Loan to Value Ratio 65.00% Year 11 NOI 26,719$
Loan Amount 147,485$ Residual Cap Rate 7.5%Equity 79,415$ 10-Year Treasury Rate 4.50% Resale Price 356,256$ Debt 147,485 10-Year Loan Spread 1.25% Less: Mortgage Balance (147,485) Total Investment 226,900$ All-in Interest Rate 5.75% Available Residual 208,771$
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
NET OPERATING INCOME 13,358 14,012 14,959 14,991 18,831 20,417 21,565 20,839 26,542 27,338
TOTAL CAPITAL EXPENDITURES (1,486) (2,423) (10,126) (2,288) (2,442) (3,902) (1,218) (6,162) (149) (239)
NET CASH FLOW 11,872 11,588 4,833 12,704 16,389 16,516 20,347 14,677 26,393 27,099
Cap Rate (on NOI) 5.9% 6.2% 6.6% 6.6% 8.3% 9.0% 9.5% 9.2% 11.7% 12.0%Cash Flow Yield 5.2% 5.1% 2.1% 5.6% 7.2% 7.3% 9.0% 6.5% 11.6% 11.9%
Interest Rate 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75%TOTAL DEBT SERVICE (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480)
CASH FLOW AFTER DEBT SERVICE 3,392 3,108 (3,648) 4,223 7,909 8,035 11,866 6,196 17,913 18,619
Leveraged Yield 4.3% 3.9% -4.6% 5.3% 10.0% 10.1% 14.9% 7.8% 22.6% 23.4%Debt Service Coverage Ratio Test 1.1x 1.1x 1.2x 1.2x 1.5x 1.6x 1.7x 1.7x 2.1x 2.2x
Unleveraged Cash Flow (226,900) 11,872 11,588 4,833 12,704 16,389 16,516 20,347 14,677 26,393 383,355 Unleveraged IRR 10.1%
Leveraged Cash Flow (79,415) 3,392 3,108 (3,648) 4,223 7,909 8,035 11,866 6,196 17,913 227,390 Leveraged IRR 15.2%
*Includes Closing Costs
Park Avenue BuildingProForma 2: Value-Added Opportunity Summary (10-Years)
Purchase Price $226,900,000
Unleveraged IRR 10.1%
Leveraged IRR 15.2%
Loan Terms
Loan-to-Value Ratio 65%
Term 10 Years
All-in Interest Rate 5.75%
10-Year Average Cap Rate 8.5%
10-Year Average Cash Flow Yield 7.2%
10-Year Leveraged Yield 9.8%
% of Value from Cash Flow & Residual Value 36% / 64%
Equity Multiple 3.6x
Lexington Avenue BuildingsBase Case ProForma (10-Years)
$/SFPurchase Price* 405,000$ $244 Loan to Value Ratio 75.00% Year 11 NOI 51,002$ Capital Reserve 111,482 $67 Loan Amount 387,362$ Residual Cap Rate 7.5%
Total Investment 516,482$ $311 10-Year Treasury Rate 4.50% Resale Price 680,030$ 10-Year Loan Spread 1.75% Less: Mortgage Balance (387,362)
Equity 129,121$ All-in Interest Rate 6.25% Available Residual 292,668$ Debt 387,362Total Investment 516,482$
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
NET OPERATING INCOME 33,243 6,662 34,003 42,803 43,388 44,019 46,938 50,315 49,699 50,708
TOTAL CAPITAL EXPENDITURES - (82,088) (21,638) (233) (193) (198) (204) (211) (3,419) (224) CAPITAL RESERVE - 75,427 - - - - - - - -
NET CASH FLOW 33,243 0 12,365 42,570 43,195 43,820 46,733 50,105 46,280 50,484
Cap Rate (on NOI) 6.4% 1.3% 6.6% 8.3% 8.4% 8.5% 9.1% 9.7% 9.6% 9.8%Cash Flow Yield 6.4% 0.0% 2.4% 8.2% 8.4% 8.5% 9.0% 9.7% 9.0% 9.8%
Interest Rate 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25%TOTAL DEBT SERVICE (24,210) (24,210) (24,210) (24,210) (24,210) (24,210) (24,210) (24,210) (24,210) (24,210)
CASH FLOW AFTER DEBT SERVICE 9,033 (24,210) (11,845) 18,360 18,985 19,610 22,523 25,895 22,070 26,274
CAPITAL RESERVE - 24,210 11,846 - - - - - - -
CASH FLOW AFTER DEBT SERVICE 9,033 0 0 18,360 18,985 19,610 22,523 25,895 22,070 26,274
Leveraged Yield 7.0% 0.0% 0.0% 14.2% 14.7% 15.2% 17.4% 20.1% 17.1% 20.3%Debt Service Coverage Ratio Test 1.0x 0.2x 1.0x 1.3x 1.3x 1.4x 1.4x 1.5x 1.5x 1.6x
Unleveraged Cash Flow (516,482) 33,243 0 12,365 42,570 43,195 43,820 46,733 50,105 46,280 730,514 Unleveraged IRR 8.7%
Leveraged Cash Flow (129,121) 9,033 0 0 18,360 18,985 19,610 22,523 25,895 22,070 318,942 Leveraged IRR 16.0%
*Includes Closing Costs
Lexington Avenue BuildingsBase Case ProForma Summary (10Years)
Purchase Price $405,000,000
Unleveraged IRR 8.7%
Leveraged IRR 16.0%
Loan Terms
Loan-to-Value Ratio 75%
Term 10 Years
All-in Interest Rate 6.25%
10-Year Average Cap Rate 7.8%
10-Year Average Cash Flow Yield 7.1%
10-Year Leveraged Yield 12.6%
% of Value from Cash Flow & Residual Value 49% / 51%
Equity Multiple 3.5x
Lexington Avenue BuildingsProForma 2: Aggressive Case (10 Years)
$/SFPurchase Price* 405,000$ $244 Loan to Value Ratio 75.00% Year 11 NOI 55,184$ Capital Reserve 102,685 $62 Loan Amount 380,763$ Residual Cap Rate 7.5%
Total Investment 507,685$ $305 10-Year Treasury Rate 4.50% Resale Price 735,787$ 10-Year Loan Spread 1.75% Less: Mortgage Balance (380,763)
Equity 126,921$ All-in Interest Rate 6.25% Available Residual 355,023$ Debt 380,763Total Investment 507,685$
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
NET OPERATING INCOME 33,243 10,340 45,858 46,398 46,970 47,640 52,705 54,055 53,613 54,853
TOTAL CAPITAL EXPENDITURES - (89,226) (182) (218) (193) (198) (204) (211) (3,042) (224) CAPITAL RESERVE - 78,887 - - - - - - - -
NET CASH FLOW 33,243 0 45,676 46,180 46,777 47,442 52,500 53,844 50,571 54,629
Cap Rate (on NOI) 6.5% 2.0% 9.0% 9.1% 9.3% 9.4% 10.4% 10.6% 10.6% 10.8%Cash Flow Yield 6.5% 0.0% 9.0% 9.1% 9.2% 9.3% 10.3% 10.6% 10.0% 10.8%
Interest Rate 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25%TOTAL DEBT SERVICE (23,798) (23,798) (23,798) (23,798) (23,798) (23,798) (23,798) (23,798) (23,798) (23,798)
CASH FLOW AFTER DEBT SERVICE 9,445 (23,798) 21,879 22,383 22,980 23,644 28,702 30,047 26,774 30,832
CAPITAL RESERVE - 23,798 - - - - - - - -
CASH FLOW AFTER DEBT SERVICE 9,445 0 21,879 22,383 22,980 23,644 28,702 30,047 26,774 30,832
Leveraged Yield 7.4% 0.0% 17.2% 17.6% 18.1% 18.6% 22.6% 23.7% 21.1% 24.3%Debt Service Coverage Ratio Test 1.0x 0.3x 1.4x 1.5x 1.5x 1.5x 1.6x 1.7x 1.7x 1.7x
Unleveraged Cash Flow (507,685) 33,243 0 45,676 46,180 46,777 47,442 52,500 53,844 50,571 790,416 Unleveraged IRR 10.6%
Leveraged Cash Flow (126,921) 9,445 0 21,879 22,383 22,980 23,644 28,702 30,047 26,774 385,855 Leveraged IRR 20.5%
*Includes Closing Costs
Lexington Avenue BuildingsProForma 2: Aggressive Case Summary (10 Years)
Purchase Price $405,000,000
Unleveraged IRR 10.6%
Leveraged IRR 20.5%
Loan Terms
Loan-to-Value Ratio 75%
Term 10 Years
All-in Interest Rate 6.25%
10-Year Average Cap Rate 8.8%
10-Year Average Cash Flow Yield 8.5%
10-Year Leveraged Yield 17.1%
% of Value from Cash Flow & Residual Value 57% / 43%
Equity Multiple 4.5x
Lexington Avenue BuildingsIRR Sensitivity (Base Case)
Leveraged IRR Purchase Price Increase in Price
10% $260,200,000 14.7%
12% $243,200,000 7.2%
14% $226,900,000 - - -
16% $211,300,000 (6.9%)
18% $196,700,000 (13.3%)
20% $183,000,000 (19.4%)
Park Avenue BuildingIRR Sensitivity (Base Case)
Leveraged IRR Purchase Price Increase in Price
10% $490,200,000 21.0%
12% $461,100,000 13.9%
14% $432,800,000 6.9%
16% $405,000,000 - - -
18% $377,800,000 (6.7%)
20% $351,000,000 (13.3%)
Positive LeverageLoan-to-Value Ratio and Debt Service Coverage Sensitivity
Property Price LTVInterest
Rate
10-Year Avg. CF
Yield IRR
10-Year Avg. DSCR
65% 5.75% 6.9% 14.0% 1.2x
Park Avenue $226,900,000 75% 6.25% 6.9% 15.2% 1.1x
85% 7.50% 6.9% 14.6% 0.9x
65% 5.75% 7.1% 14.6% 1.1x
Lexington Avenue
$405,000,000 75% 6.25% 7.1% 16.0% 1.0x
85% 7.50% 7.1% 15.6% 0.9x
125 Park Avenue
Closing Date
August 18, 2004
Price $225,000,000 ($391/sf)
Location Southeast corner of Park Avenue and 42nd Street
Debt Terms • Loan amount: $146,250,000• Loan term: 10 years• Loan-to-Value: 65%• Loan-to-cost (includes closing costs): 63%• Interest rate: 5.75% fixed• Amortization: None. Interest only
Asset Profile
• 95% leased with high-quality tenant roster• Majority of current leases below market• Potential retail redevelopment• Close proximity to Grand Central Terminal
Process • Significant investor demand• Pre-empted sales process with accelerated
due diligence period and assured closing • Acquired property at a price below highest
offer
125 Park Avenue
Proforma
Purchase Price ($PSF)
10-Year Average
Leveraged Yield
Unleveraged IRR
Leveraged
IRR Equity Multiple
Base Case$225,000,00
0($391)
8.6% 9.6% 13.4% 3.2x
Value-Add$225,000,00
0($391)
9.3% 10.6% 14.9% 3.6x
Lexington Avenue Buildings
Proforma
Purchase Price
($PSF)
Total Investment
($PSF) Unleverag
ed IRR
Leveraged
IRR
Equity
Multiple
Base Case$405,000,00
0($244)
$516,500,000($311)
8.7% 16.0% 3.5x
Buyer of Property Using Base Case
$480,000,000
($289)
$599,200,000($361)
6.8% 10.7% 2.4x
Buyer of Property Using Aggressive
Case
$480,000,000
($289)
$586,400,000($353)
8.6% 15.4% 3.3x