Alexander Barnett
F455 Final Exam
10/27/14

321 West 44th Street, straddling Midtown and the Lower Manhattan, this property is a great location in New York City, close to the world famous Times Square. There is a new movement of tech start-ups moving to the “Silicon Alley” area, the entrepreneurial bubble that emulates California’s Silicon Valley, noted the Green Oak presenter. This location is a great buy with flexible floor plans and a lot of “creative space”. Recently there have been major capital improvements in renovating the common area, upgrading window treatments and the modernization of all elevators. The building is 80 years old and therefor good to see the building upgraded. There is flexibility for tenants as well as floor plans; there are currently 3 retail tenants and 7 major office renters. By examining the stacking plan, I can see there is great variety in the arrangement of square footage as well as the lease terms. There is 86% occupancy and based on industry dynamics, I expect for this number to grow. Recent leases were completed at $40/square foot whereas prior leases were valued at $31/square foot. The Green Oak representative/speaker also noted in his presentation that there was potential for terraces as well as a plan to make a usable rooftop. This will increase the value of the property. After performing a financial and sensitivity analysis, despite the high leverage, I think it is a great opportunity for Green Oak The project, with an exit strategy of selling the property after 5 years, attains a positive rate of return and follows all reasonable assumptions. Green Oak can attain a profit of over $70MM. I created a spreadsheet to model and valuate the commercial property as well as determine the financial feasibility of the investment. The uncertainty in this model lies in the economic factors input as assumptions. One of the most important assumptions is calculating rent. We were able to determine the value of the property based on square footage, comparables in the area, as well as growth prospects. Other important assumptions include the capitalization rate at purchase. I assumed that due to growth prospects, Green Oak could charge a higher rent, thus could have a lower exit Cap Rate. To see which assumption had the greatest impact, I performed a Sensitivity Analysis using the “going in” Cap Rate as the output and “going out” Cap Rate as the input, displaying Equity Multipliers. To try and reduce the source of uncertainty, I changed the assumption parameters, ran a separate simulation and compared results. Financial Analysis: * Purchase Price: * To determine the Purchase Price, I annualized Year 1 Net Operating Income ($4,504,463) and divided it by the given “Going In” Cap Rate (4.7%). Purchase Price=$95,839,638.30) * From here, I subtracted the lenders investment to arrive at the firms Year 0 initial outlay. $95,839,638.30-$62,000,000=-$33,839,638.30 * Cost Square Foot: * To determine the cost/square foot, I divided the Purchase Price by the square footage (GIVEN). $95,839,638.3/254,811= $376.12 * If we anticipate selling the property after 5 years, we can use the REVERSION to arrive at a reversion price/sq foot. It turns out a lot of value is created * Reversion Price= Year 6 NOI/ Cap Rate; $7,296,461/0.47= $173,510,355.56 * Reversion Price/ Square Footage= 173,510,355.56/254,811= $680.94 * According to CBRE, we will buy the property for less than $400/ft which is in line with market comparables * I created an Amortization Table to calculate the principal repayment as well as interest expense. I made sure to leave out payment of principal in year 1, just charge interest payment. * The last cost I included in the calculation of cash flows was Lease Cost, which I annualized, based on Argus’ Cash flow model. * Levered/Unlevered IRR: * To determine Rate of Return on the project, I used the IRR function on Excel for the cash flows Year 0-5. * IRR= 25.65% Levered, * IRR= 15% Unlevered. * Because the property is highly levered (80%), you require a higher IRR to compensate for the extra risk * Equity Multiple: * I took the sum of all positive cash flows year 0-5 and divided it by the sum of all negative cash flows year 0-5 * Multiple= 3.01 Levered * Multiple= 1.98 Unlevered * Cash on Cash: * 5.36% Levered * -1.33% Unlevered * It is alarming that cash on cash is negative when unlevered; however I would not let that derail the project. It does mean that the initial investment is not covered by future generated cash flows. However, I believe that growth models and the sale of the property as an exit strategy is enough incentive to buy the building. * Debt Coverage Ratio: * Cash needed to ensure repayment of debt. The standard ratio is to maintain 1.22. * NOI/PMT; The building has DCR that ranges from 1.29-1.73 which fits industry standards * Debt Yield: * Safe markets have yields as low as 7% on average and go as risky as 20%. Since we are dealing in property in NYC it was safe to assume the Debt Yield would be low * For this building the Debt Yield ranges from 4.97%- 6.43% * NOI Yield: * Explains the return on your initial investment compared to the income it is generating on an annualized basis * Purchase Price/ NOI * Ranges from 5-7%

Waterfall Summary: * The waterfall model shows the obligation of payment in which the higher tiered creditors receive all interest and principal before the next tier creditor begins to see any dividends. * Here is a Diagram of the Waterfall Model and Assumptions based on the 80%/20% Equity Split with 12% IRR achievement: