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Need help with only A B and C!

Need help with only A B and C!
1 860 Washington Street Case Study Rea l Estate Primary Markets, Spring 20 23 Setting : Thursday , March 30, 20 23. Jon Tarrow is the new Chief Investment Officer (CIO) of the Eastland University Endowment Fund (the “Fund ”), which is located in the eastern United States. The Fund provides a permanent source of capital to support the University’s mission and programs . The Fund is managed by a professional investment staff within the Eastland University Investment Office. The Fund’s objective is to support University students and faculty in the present and in the future, by providing current financial support to the University’s operating budget while also preserving the Fund’s long -term purchasing power. The value of the Fund is currently $7 billio n, which makes it a relatively mid -sized institutional investor. Historically, the Fund has invested capital based on the Norway Model, which is characterized by a 60%/40% equity/fixed -income allocation and largely passive investments. In his new role as CIO, Tarrow seeks to change the Fund’s investment strategy by shifting a large amount of assets from traditional investments to alternative investments in order to increase portfolio diversification and the risk -adjusted return of the Fund . Specifically, Tarrow wants to adopt the Yale University Endowment Model as an investment approach, which is characterized by high alternatives exposure, active management and using external managers. The Fund’s current and proposed asset allocation s are presented in Exhibit 1: Exhibit 1 – Current Asset Allocation vs Proposed Asset Allocation Asset Current Asset Allocation Proposed Asset Allocation Public Equity 60% 40% Fixed -Income 40% 15% Private Equity 0% 10% Real Estate 0% 20% Hedge Funds 0% 10% Timber 0% 5% Total 100% 100% Tarrow recently hired Jane Lee , Senior Vice President, as the new head of real estate for the Fund. During a recent internal meeting, Tarrow and Lee conclude d that the current real estate investment strategy is to source core Class A office investments in urban infill locations in gateway (i.e., primary) and Sunbelt markets . Lee and her investments team ha ve been analyzing the potential acquisition of the leas ehold interest of 860 Washington Street, a 10 – story, Class A office building located in the Chelsea submarket of the Midtown -South Manhattan Office market. The investment opportunity is a Joint Venture (JV) equity transaction that was presented to Lee by Saturn Office Properties (“Saturn”) , a NYC -based 2 owner and operator of Class A office buildings in the New York City metro area. Saturn and Lee have transacted numerous times in the past when Lee ran the real estate group at her prior employer, a large As ian sovereign wealth fund. These prior transactions included the acquisition of seven Class A CBD/downtown office buildings located in gateway and Sunbelt markets in the US over the past four years . Cushman and Wakefield , the 860 Washington Street sales broke r, is marketing the sale of the leasehold interest to prospective buyers. Saturn was one of several prospective buyers contacted by Cushman and Wakefield for this sale due to their prior relationship . The Property /Investment : The property is a 10 -story, 1 20, 413 sf ( gross sf) Class A office building with two stories of retail located at 860 Washington Street in the heart of the Meatpacking District of Manhattan . Adjacent to the High Line and across the street from The Standard (848 Washington Street ), 860 Washington Street was built in 2017 and is one of the most prominent boutique office buildings built in NYC over the past f our years. The property is currently 9 6.5 % occupied and includes notable tenan ts, such as Tesla Inc., Alibaba Group , Social Finance (SoFi) , and Delos. Office rents range from $1 37 psf – $1 77 psf modified gross while the ground floor Tesla rent is at $ 495 psf NNN . The current property owner s and original developers , Romanoff Equities and Property Group Partners , ha ve recently created a ground lease structure and will seek to sell the building while retaining ownership of the land. This strategy will allow Romanoff Equities to stay in the deal by retaining ownership o f the land , and allow Property Group Partners to exit the deal through the sale of the leasehold interest. The ground lease will have a term of 99 years, an annual ground lease payment of $3,350,000 , and ground lease payment growth rate of 3.50% every 10 years. The original developers acquired the land for $81,000,000 in January 2013 and valued the land for $80,000,000 in December 2020 for internal purposes . The Fund and Saturn have agreed to allow Lee’s investments team to lead the valuation efforts since the Fund w ould be contributing the vast majority of equity to acquire the leasehold interest. Lee’s investments team recently prepared a fee simple interest cash flow pro forma and valuation of 860 Washington Street after completing initial underwriting due diligence, which included a detailed review of the leases, site inspection with tenant interviews, review of the Offering Memorandum , and discussions with local leasing and sales brokers. The fee simple valuation is $ 255.4 MM ($2, 121 psf), which equates to a year 1 implied NOI cap rate of 6.56 %. This valuation assumed a 6.00% terminal cap rate (exit cap rate) and 7.00% discount rate. Market: 860 Washington Street is located in the Meatpacking District of the Chelsea office submarket, wh ich is part of the larger Midtown -South office market. Lee and her investments team h ave 3 reviewed several recent CBRE market reports on the Midtown -South office market as part of their due diligence. Underwriting: Lee and her investments team need to revise certain underwriting and valuation assumptions to reflect the acquisition of the property’s leasehold interest as opposed to the fee simple interest. Lee reminds her analyst that ground rent is not a recoverable expense (i.e., the tenants will not reimburse the building owner for any portion of ground rent) , and that she needs to correctly reflect this in the revised leasehold interest pro forma cash flow and valuation . Lee’s analyst presents a summary of the re vised underwriting and valuation assumptions in Exhibit 2: Exhibit 2 – Summary of Revised Underwriting and Valuation Assumptions Assumption s for Fee Simple Interest Pro Forma CF and Valuation ($ 255.4 MM valuation) Assumption s for Leasehold Interest Pro Forma CF and Valuation (valuation is TBD) Ground Lease Payment (Ground Rent) $0 The ground lease will have a term of 99 years, an annual ground lease payment of $3,350,000 and ground lease payment growth rate of 3.50% every 10 years. Terminal Cap Rate 6.00% 6.50 % Discount Rate 7.00% 7.50 % All other assumptions from the fee simple interest pro forma cash flow and valuation ($255.4 MM) will remain the same. Lee’s investments team will value the leasehold interest of the property using the Building NOI DCF method while assuming a 10 -year holding period and sale at the end of year 10. Financing : In the event that the Fund and Saturn are the winning bidde r of the leasehold interest , they will obtain a Wells Fargo CMBS senior mortgage loan and debt fund mezzanine loan to facilitate this acquisition. Lee contacted her prior lending relationships on Wall Street and received the following indicative loan terms tha t are presented in Exhibit 3: 4 Exhibit 3 – Financing Terms Wells Fargo CMBS Senior M ortgage Loan: Loan Term 10 years Amortization Schedule 30 years Interest Rate 5.75 % Maximum LTV/LTPP 50 .0% Minimum Underwritten Debt Yield 10.75 % Minimum Underwritten DSCR 1.50 x Debt Fund Mezzanine Loan: Loan Term 10 years Amortization Schedule Interest -Only Interest Rate 11 .00 % Maximum Last Dollar LTV/LTPP 55 .0% Minimum Underwritten Last Dollar Debt Yield 9.00 % Minimum Underwritten Last Dollar DSCR 1.25x Both lenders will use the same underwritten cash flow , which is based on the current Fund’s fee simple year 1 cash flow of $1 6,757,778 with only the following adjustments shown in Exhibit 4 : Exhibit 4 – Derivation of Lenders’ Underwritten Cash Flow Variable Fund Assumption s for Year 1 Underwrit ten Cash Flow Assuming Fee Simple Interest Lenders’ Assumption s for Underwritten Cash Flow Assuming Leasehold Interest Ground Lease Payment (Ground Rent) $0 Year 1 ground lease payment of $3,350,000 (no t re imbursable by any tenan t) Vacancy Allowance 5.00% March 202 3 Midtown -South vacancy rate per CBRE report Tenant Improvements and Leasing Commissions $0 Assume normalized TI/LC of $5.75 psf based on building’s leaseable sf Cash Flow Before Debt Service $1 6,757,778 TBD 5 Equity Cash Flow Waterfall /Return Distribution : As part of the JV equity partnership agreement, the Fund and Saturn have agree d to combine funds in order to acquire 860 Washington Street. The Fund will fund 87.5 % of the required equity and Saturn will contribute 1 2.5 % of the equity. In order to incentivize Saturn to maximize the project’s return, the Fund w ill receive a pro -rata split ( 87.5 /1 2.5 ) of the returns up to 6. 50 % IRR, and then they will offer Saturn 25.0% of the additional earned money up to 8. 00 % IRR and then 3 7.5 % of any earned money over a n 8.00% IRR. Assignment : Prepare a written presentation, ideally in PowerPoint but you can use whateve r tool you prefer, organized in sections no longer than 7 pages. A. Executive Summary . Based on the case study, what price do you recommend to acquir e the investment (i.e., leasehold interest in property) ? B. Market Analysis. Provide a brief summary of the current Midtown -South Office Market, including any market risks. C. Property Analysis. What are the key property risk issues and mitigants ? D. Debt Analysis. What is the lenders’ underwritten cash flow? Calculate the underwritte n DSCR and debt yield at the senior mortgage and mezzanine loan levels. Calculate the weighted -average cost of debt. E. Financial Analysis. Present your cash flow forecast, a valuation consistent with your investment recommendation, equity cash flow waterfall, and any other supporting written materials you wish to add. What are the unlevered and levered project returns for the Fund and Saturn ? What is the total leverage on the fee simple value (i.e., (Loans on Building + Land Value )/Fee Simple Value)?

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