Answer Sheet Homework Assignment 3 Name Answer Sheet Acquisi

Answer Sheethomework Assignment 3name Sanswer Sheetacquisitionopera

Perform an investment analysis on the purchase of Del Norte Terraces Medical Dental Center in Poway, using the provided broker assumptions and data. Construct a 5-year pro forma with revised assumptions, calculate relevant investment ratios and performance measures, and analyze market rents and their impact on the investment. Include the purchase price, financing details, operating expenses, net operating income, sale proceeds, and key metrics such as cap rate, gross income multiplier, operating expense ratio, equity dividend rate, debt coverage ratio, and effective borrowing costs. Compare estimated market rents from two sources and evaluate how using market rents influences investment outcomes.

Paper For Above instruction

Investing in commercial real estate requires thorough financial analysis and careful consideration of multiple factors to ensure profitability and strategic growth. The purchase of the Del Norte Terraces Medical Dental Center in Poway exemplifies a structured approach to such an investment, emphasizing pro forma construction, ratio analysis, and market rent evaluation. This paper synthesizes the provided assumptions, reconstructs a comprehensive five-year financial projection, and evaluates critical investment performance metrics. It also discusses the importance of market rent comparisons and their influence on projected income and valuation.

Introduction

The decision to acquire commercial property hinges on a detailed evaluation of potential income streams, financing structures, operating expenses, and future resale prospects. The case of Del Norte Terraces Medical Dental Center offers a representative scenario for elucidating the analytical process. With an initial purchase price of $9,950,000 and detailed assumptions regarding rent growth, operating costs, and sale conditions, we aim to assess the investment's viability using key ratios such as the cap rate, gross income multiplier, operating expense ratio, and others.

Construction of the Pro Forma

Using the assumptions, the first step involves creating a precise pro forma that accounts for rent escalations, operating expense increases, and financing parameters. Starting with the current gross scheduled income of $755,379, increasing annually by 3%, the projected gross income for subsequent years can be generated. Fixed operating expenses, initially at $149,375, are adjusted by 2% annually, while other expenses grow by 3%. Capital reserves stay constant at $10,000 annually.

Loan calculations are based on the lesser of 65% of the purchase price or the maximum DCR (Debt Coverage Ratio) of 1.25, with an interest rate of 4.25% and a 30-year amortization. The loan amount, initially computed using the DCR limit, complements the initial equity investment needed. The annual debt service (ADS) is derived accordingly.

Performance Metrics and Ratios

Key ratios such as the "going in" cap rate are calculated by dividing the first year's net operating income (NOI) by the purchase price, excluding closing costs. The gross income multiplier is obtained by dividing the total gross scheduled income by the purchase price. The operating expense ratio is the ratio of operating expenses to gross income, indicating efficiency.

The equity dividend rate, representing cash-on-cash return, is derived by dividing the annual cash flow after debt service by the initial investor equity. The debt coverage ratio (DCR) assesses whether the NOI supports the debt service, with a standard benchmark of 1.25. The effective cost of borrowing considers interest payments and origination fees over the five-year period.

Market Rents and Income Analysis

Two sources of market rent data were examined to evaluate the reasonableness of broker forecasts. Adjustments for property-specific factors like size, location, condition, parking, and amenities were made to refine the estimate. Given the 95% efficiency ratio, the gross scheduled income was adjusted accordingly. The analysis revealed that using market rents could increase income projections, potentially enhancing valuation and return metrics.

Impact of Market Rents on Investment

Employing market rents typically offers a more conservative and realistic income projection, especially if broker forecasts are optimistic. An increase in rent levels elevates net operating income, which directly impacts the property’s valuation and the investor's internal rate of return. Conversely, if market rents are lower than forecasted rents, it could diminish profitability, underscoring the importance of accurate rent assessments.

Conclusion

Investing in Del Norte Terraces Medical Dental Center involves comprehensive analysis through constructing a detailed pro forma, evaluating ratios, and assessing market rents. The analysis underscores the importance of conservative rent estimates, sound financing structures, and operating efficiency. Proper evaluation of market rental income and associated metrics ensures informed investment decisions that align with financial goals. This approach provides a robust framework for managing risk and maximizing returns in commercial real estate investments.

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