- It is estimated that $362,022 in new funding is required to finish the project (see Exhibit 4). Suppose that the Cousins decide to raise more equity from limited partners (i.e., equity investors) to close the funding gaps, the total amount of equity in the project would increase from $563,885 to $925,907, all of which are raised from the limited partners.
Suppose that limited partners will receive 6% preferred return based on the beginning balance of equity if CFAF turns positive, and in addition require 70% of excess cash flow, up from 50% in the original deal after the equity has been fully repaid.
The cousins only receive 20% of excess cash flows after the equity has been fully repaid and the developer fees of $125,000 in 2008 Q4.
The hedge fund receives 15% loan interest on $600,000 bridge loan (interest only loan), and in addition, it receives 10% of the excess cash flows after the equity has been fully repaid. The hedge fund also receives $75,000 loan application fees.
In other words, the excess cash flows will be 70/20/10 split among limited partners, the cousins and hedge funds after the equity of $925,907 has been fully repaid.
Please consider the following scenarios and compute the returns for limited partners, cousins and hedge fund.
- Assuming the leasing assumptions hold from Exhibit 4 – that is, the Cousins are able to get $15 psf for all leasable space by 2011. Based on the 5 year pro forma in Exhibit 4, please re-build the cash flows and compute the returns to investors using the following the excel table.
Remember that the equity investors received 6% preferred return based on the beginning balance of equity if CFAF turns positive; the cousins and hedge fund only receive 20% and 10% profits after the equity of $925,907 is fully repaid.
- Suppose that the project faces worsening demand or construction challenges, now the rent rolls will be based on the following assumptions:
- 2008Q4, 2009 remain as in Exhibit 4 pro forma;
- 2010, only 1st floor is rented at higher rent rates, as in Exhibit 2, for $186,660; all other floors are empty.
- 2011, 1st floor is rented as in 2010 for $186,660, and 2nd – 4th floors are rented at $12.5 per sq. ft; 5th and 6th floor are empty.
- 2012, 1st floor is rented as in 2010 for $186,660, and 2nd – 4th floors are rented at $12.5 per sq. ft; 5th and 6th floor are rented at $15.00 per sq.ft.
- 2013 continues as in 2012.
Please re-build the cash flows and compute the returns to investors as part a. With this downside scenario, would equity investors make an adequate return?
- Combine your analysis in part a and b, do you think this project is salvageable?