Arco Apartment Building Acquisition Analysis
Budget: $250 – $750 USD
X is seeking to acquire an existing apartment building called The Arco and as an Analyst, you must prepare a cash flow model to evaluate the acquisition. The Arco is a high-end, market-rate apartment complex featuring 300 apartment units, totaling 300,000 net rentable SF. The complex has been under-managed by existing ownership, and as a result, occupancy currently stands at 50%. The business plan is to acquire the property, invest $6 million in capital expenditures in year 1, and ratably lease the vacancy over a 3-year period. Please assume a stabilized vacancy allowance of 5% in your analysis.
Rents are $75.00 PSF per annum on average for the occupied units. X believes these rents are at market today, and projects rents to grow by 3% per annum for occupied units and vacant units being leased. Annual operating expenses currently total $30.00 PSF with 3% annual expense growth expected going forward. Rent and expense growth should commence in year 2.
Unlevered closing costs are equal to 1.0% of purchase price and in addition to that, levered closing costs are 2.0% of loan proceeds. X intends obtain acquisition financing at 65% loan to initial cost with a floating interest rate of LIBOR + 3.50%, interest only (no amortization). Please assume LIBOR is 50bps in year 1, growing by 25bps per annum. X will enter into a LIBOR cap at closing with a strike rate of 1.0%. At the end of year 3 X will refinance the existing loan, sizing proceeds at 65% LTV based on a 4.5% valuation cap rate on forward-twelve month NOI, at a 3.5% fixed rate, interest only, with refinancing costs equal to 2.0% of refi proceeds. Your analysis should assume a 5-year hold period with a sale at a 4.50% exit cap rate with 1.50% disposition costs.
Please prepare a cash flow model which includes the following:
1. Please determine the X acquisition price required to achieve an 18.0% levered IRR and use that as the purchase price input
2. Annual net operating income
3. Annual unlevered cash flows and returns (unlevered IRR and cash flow multiple) 4. Annual levered cash flows and returns (levered IRR and cash flow multiple) 5. Annual debt service coverage ratio and debt yields.
Model a simple waterfall based on the cash flows you prepared. X is the Limited Partner (90% pro rata share) and an operating partner serves as General Partner (10% pro rata share). The LP and GP will split all cash flow contributions and distributions pari-passu (90/10) until the LP achieves a 10% levered IRR. The cash flows are then split 80% to LP, 20% to GP. Please model the cash flow waterfall for the LP and GP and calculate net returns (IRR and cash flow multiple) to the LP.
Rents are $75.00 PSF per annum on average for the occupied units. X believes these rents are at market today, and projects rents to grow by 3% per annum for occupied units and vacant units being leased. Annual operating expenses currently total $30.00 PSF with 3% annual expense growth expected going forward. Rent and expense growth should commence in year 2.
Unlevered closing costs are equal to 1.0% of purchase price and in addition to that, levered closing costs are 2.0% of loan proceeds. X intends obtain acquisition financing at 65% loan to initial cost with a floating interest rate of LIBOR + 3.50%, interest only (no amortization). Please assume LIBOR is 50bps in year 1, growing by 25bps per annum. X will enter into a LIBOR cap at closing with a strike rate of 1.0%. At the end of year 3 X will refinance the existing loan, sizing proceeds at 65% LTV based on a 4.5% valuation cap rate on forward-twelve month NOI, at a 3.5% fixed rate, interest only, with refinancing costs equal to 2.0% of refi proceeds. Your analysis should assume a 5-year hold period with a sale at a 4.50% exit cap rate with 1.50% disposition costs.
Please prepare a cash flow model which includes the following:
1. Please determine the X acquisition price required to achieve an 18.0% levered IRR and use that as the purchase price input
2. Annual net operating income
3. Annual unlevered cash flows and returns (unlevered IRR and cash flow multiple) 4. Annual levered cash flows and returns (levered IRR and cash flow multiple) 5. Annual debt service coverage ratio and debt yields.
Model a simple waterfall based on the cash flows you prepared. X is the Limited Partner (90% pro rata share) and an operating partner serves as General Partner (10% pro rata share). The LP and GP will split all cash flow contributions and distributions pari-passu (90/10) until the LP achieves a 10% levered IRR. The cash flows are then split 80% to LP, 20% to GP. Please model the cash flow waterfall for the LP and GP and calculate net returns (IRR and cash flow multiple) to the LP.