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Fin 331 Homework Assignment 3

Due December 3, 2015

You are to perform and investment analysis on the purchase of Del Norte Terraces Medical Dental Center in Poway. Review the Broker Presentation that is attached. Please only use the broker package and DO NOT DISTURB THE BROKERS. You may complete this assignment as a team with members of our class. No more than 4 members per team. In order to get credit for this assignment, your name MUST appear on the answer sheet that is submitted for grading. This broker has prepared a presentation package. You are to use the broker assumptions and prepare a 5 year pro forma with revised assumptions. You are also required to calculate the investment ratios and performance measures using the revised assumptions that are provided. Assumptions:

 Offer/Purchase Price: $9,950,000  In addition to the down payment, you will pay closing costs at the time of

purchase of $20,000. Be sure to include these costs at the time of acquisition.

 Rents will grow at 3% per year.  Exit Cap Rate of 5.50% using the NOI for year 6.  Costs of sale at the end of year 5 are equal to 5% brokerage commissions,

based on your exit sale price, plus $15,000 for “Other Costs of Sale”.  Fixed operating expenses will increase 2% per year.  Other operating expenses will increase 3% per year.

 Reserves/CapX Budget is constant.  Financing:

o Loan amount is determined as the lesser of 65% of the purchase price or maximum Debt Coverage Ratio of 1.25.

o Assume 4.25% interest, 30 year amortization and loan origination fee of 1.00%. Loan origination fees are paid at the time of purchase,

o Assume no prepayment penalties on either loan at the time of sale at end of year 5.

Here is the Broker’s reconstructed annual property operating data [APOD]:

Assume that the total of $214,127 operating costs consist of: Fixed Expenses for the first year are property taxes of $124,375, which are 1.25% of the purchase price plus $25,000 for insurance. Total Fixed operating expense are $149,375, the total of these two items. Capital reserves are $10,000 per year.

Other operating expenses are $54,752, the remainder of the total projected operating expenses of $214,127 for year 1 of your pro-forma.

Requirements:

 Use the assumptions provided to construct a pro forma for 6 years (since you need the NOI for year 6 to calculate the Sale Price at the end of year 5).

o Start with Rental Income based on the current rent role. Rents will increase by 3% per year.

 Calculate the loan amount using DCR and LTV. What is the loan amount? Lender will allow the lesser of the two loan amounts that you have calculated.

 Calculate the net sale proceed at the end of year 5. Include your calculation of broker commissions and other sale costs of $15,000.

 Calculate the effective cost of borrowed funds for the 5 year holding period. Remember to adjust for the origination fee.

 You will purchase this property at a price that will produce a leveraged IRR of 14% [Required Discount Rate]. What price would you offer to get the 14% IRR on equity? Assume that the loan amount does not change.

 Complete the attached Answer Sheet.

o The unleveraged IRR is calculated on the cash flows with a loan amount of $0 [no debt financing].

o There are no operating income or expenses during year “0”. Rental income, etc., begin at the end of year 1.

 Obtain 2 sources of market rental data to determine if the brokers rent forecast is justified. Compare comparable properties to the subject property and make appropriate adjustments to your rental estimate. Assume that the property has an efficiency ratio of 95%. That means that the market rent you derive applied to 95% of the gross building area of 26,249 square feet. What Gross Scheduled Income do you estimate? How will that impact the income?

Ken Rogers - (858) 334-8550 [email protected]

Dave Morris - (619) 962-2200 [email protected]

Horizon Resources, Inc. 2260 Rutherford Road, Suite 110 Carlsbad, California 92008 Office: (760) 692-5205 www.HorizonResourcesInc.com

For Sale - Prime Commercial Investment Opportunity • Call for Offering Memorandum

26,249± Sq. Ft. Medical Dental Center Del Nor te Terraces 15644 Pomerado Road, Poway, California 92064

Property Highlights

• Located in the Poway / North County medical/dental district

• Prime location across from Pomerado Hospital

• 18 suites with restrooms from 768± sq. ft. to 1,861± sq. ft.

• Leases include annual rent increases and NNN’s

• Fully leased with a mixture of medical and dental providers

• Nicely appointed suites with upgrades

• Prominent location with high traffic and high visibility

• Convenient parking and easy access for patients & tenants

• 5.21 Cap Rate and positive projected net income

• Easy access to Interstate 15 and Route 56 (Ted Williams Parkway)

Offered at $9,950,000

Fully Leased

26,249± Sq. Ft. 18 Suites Cap Rate: 5.21

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Horizon Resources, Inc. 2260 Rutherford Road, Suite 110 Carlsbad, California 92008 Office: (760) 692-5205

Ken Rogers Dave Morris (858) 334-8550 (619) 962-2200 [email protected] [email protected] BRE #01244817 BRE #01969962

Prime Commercial Investment Oppor tunity Offered at $9,950,000 Cap Rate: 5.21

26,249± Sq. Ft. Medical Dental Center

Del Norte Terraces Medical Dental Center 15644 Pomerado Road, Poway, California

Disclaimer: This brochure is provided for the sole purpose of allowing a potential investor to evaluate whether there is interest in proceeding with further discussion or a possible purchase of the investment. Investors are urged to perform their own evaluations and inspections

of the property and should rely solely on such examination in determining to proceed with the purchase.

•100% leased with a stable rental income history •Opportunity for increased rents including addition of core factor •Excellent demographics with positive growth •High demand location within North County medical/dental district •Limited local land availability for new commercial development •Conveniently close to multiple affluent neighborhoods •Low maintenance property design •Multiple leases with varying expiration dates •Opportunity for low risk value add return •4.8 per1,000 parking ratio and easy access parking design •Attractive property layout with low maintenance landscaping •Historically well maintained with recent additional enhancements

Purchase Price: $ 9,950,000

Gross Scheduled Income: $ 755,379

Less Vacancy Factor 3%: $ 22,661

Operating Expense: $ 214,127

Projected Net Income $ 518,591

Cap Rate: 5.21

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Homework Assignment 3

Answer Sheet Purchase Price Vacancy & Credit Loss Exit Cap Rate

Maximum LTV Rental Growth Rate Sales Commission

Required DCR Fixed Expense Growth Rate Other Sale Costs

Interest Rate Other Expense Growth Rate Discount Rate

Amortization Term CapX/Reserves

Origination Fee

Other Acquisition Costs

Year Acquisition 1 2 3 4 5 6

Gross Scheduled Income

Vacancy & Credit Loss

Gross Operating Income

Fixed Operating Expenses

Other Operating Expenses

Reserves for Replacement

Total Operating Expenses

Net Operating Income

Annual Debt Service 1st

Cash Flows Before Taxes

Purchase Price Loan Amount Using LTV Loan Amount Using DCR

Plus: Other Acquisition Costs

Plus: Loan Origination

Less: Balance of 1st Mortgage

Required Equity

Name (s):

Acquisition Operations Disposition