Purchase Price Rounded To 000 Q2a Bp Chan

Q1 Purchase Price Rounded To 000 Q2a Bp Chan

The object of this analysis is to give you some experience in creating a pro-forma for analysing the attractiveness of an individual project. Assumptions necessary for the proforma analysis are attached; use them to examine a seven-year investment in a higher quality retail centre. The pro-forma should be in nominal dollars. Use the following rules: i) use a single discounting rate or IRR; ii) no carry forward of operating losses for use against future income; iii) assume year 0 as the year of acquisition followed by 10 full years of income, with sale at end of year 10, iv) the purchase includes the maximum allowable loan, and vi) unless otherwise indicated, all leases are 5 year net leases, vii) sale price based on estimated year 11 stabilized NOI, viii) passive owner & only one property. For stabilized income: i) Calculate gross potential rent using current average rent per occupied sq ft., ii) use actual operating costs, iii) vacancy allowance use the average occupancy rate in the building over the holding period years 1-10, iii) deduct estimated average Tis and leasing costs. Assume all TIs and leasing costs are deductible over the life of the lease.

Paper For Above instruction

The comprehensive evaluation of a real estate investment project, especially in a higher quality retail centre, necessitates a detailed pro-forma analysis. This analytical tool combines financial assumptions with project-specific data to predict the investment’s profitability and risks. The purpose of this paper is to develop such a pro-forma, incorporating the key assumptions provided, to demonstrate the investment's viability over a ten-year holding period, culminating in a sale at the end of year 10.

The starting point is the purchase price, which should be set to ensure a targeted unleveraged before-tax return of 600 basis points (bps) over the yield of a Government of Canada 10-year benchmark bond as of February 4, 2013. The maximum allowable first mortgage is assumed to be included in the purchase, financing the acquisition to the extent permitted, thus leveraging the investment. Operating under the assumption that the primary tenants renew their leases while others do so based on specified renewal probabilities, the initial gross potential rent is calculated according to the current average rent per occupied square foot. Operating expenses are derived from actual costs, while vacancy allowances are based on the average occupancy rates across years 1 to 10.

Revenue calculations account for vacancy allowances, bad debt allowances, and recoverable operating expenses. The effective gross income is obtained after deducting vacancy and bad debts from gross potential rent, then adding recoverable expenses. Leasing costs, including leasing fees and tenant improvements (TIs), are estimated and amortized over the lease terms. All these components inform the calculation of net operating income (NOI) and, subsequently, the cash flows (CFO) before taxes.

For the sale at the end of year 10, the projected NOI at year 11 is computed, and the sale price is based on a stabilized net operating income divided by the cap rate (assumed to be consistent with market conditions). The analysis includes the consideration of transaction costs, such as real estate commissions and legal fees, which diminish gross sales proceeds. The resulting sale price, net of costs, feeds into the residual cash flow calculations for the entire investment horizon.

To refine this baseline pro-forma, a sensitivity analysis is conducted. This involves altering key assumptions independently to observe their impact on the investment’s IRR and cash flows. Changes include a reduction in rent appreciation to 3.5%, an increase in expense appreciation to 4%, a cap rate increase to 9.5%, a vacancy increase to 6 months, a renewal probability decrease to 50%, and tenant TI costs rising by $5 per square foot. These modifications test the robustness of the investment’s attractiveness under different market conditions.

Further, the analysis considers downturn scenarios during years 3-6, where market rents decline by 5% annually for two years, then stabilize; or increase sharply by 13% annually for three years, then resume the original growth rate. The renewal probability is assumed to fall to 50% during the downturn, then revert to normal thereafter, while vacancy durations fluctuate accordingly. These scenarios evaluate the project's resilience to adverse market conditions.

Additionally, the impact of a primary tenant’s bankruptcy at the end of year 3 is examined. This involves reassessing cash flows from years 4 to 6, considering leasing out the vacated space to smaller tenants on 5-year leases. The analysis investigates the timeline to re-lease the space at the same or higher TI costs, and how this affects returns. It also assesses how increasing tenant TI costs impacts the cash flows and overall profitability.

The underlying assumptions encompass building size, stabilized NOI, rent levels, vacancy allowances, sale cap rates, operating costs, loan parameters, and lease terms. These assumptions guide the detailed calculations of revenues, expenses, financing, taxes, and ultimately, the project's internal rate of return (IRR). The goal of this comprehensive pro-forma is to encapsulate the essential financial parameters and project scenarios that influence the attractiveness and risks of investing in a higher-quality retail centre over a decade.

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