Students to demonstrate an understanding that the IRR is made up of two parts yield (cash flow) and appreciation/depreciation (via sale.)
Directions
To complete this assignment, download theIndividual Homework Questions and Readings [PDF]
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The following documents associated with the Woodland Apartments Case will also be required in order to complete this assignment:
Individual Assignment Woodland Avenue Apartments, Southwest Philadelphia, PA Goals - Learning Objectives The overarching goal for this individual assignment is to allow the students to demonstrate their comprehension of the learning outcomes for the real estate finance course and in addition to improving technical (XLS), written and oral presentation skills. In particular the student should employ critical thinking when answering the questions and to bend the mechanics of the financial math with judgement which should be intuitive even for students without a strong real estate finance background. Case Background It’s Fall 2019 and a recent graduate from the Georgetown University Graduate Real Estate program, has decided to apply her knowledge gained from the program and invest in real estate. Sally came across a for sale listing of a multi-family property located in Southwest Philadelphia that could be a good starter property to buy and renovate. She contacted the selling broker and requested information on the property. After signing a confidentially agreement, the broker provided the following information on the property. Address7000 Block of Woodland Avenue, Philadelphia, PA 19142 Listing Price $420,000 “as is” with no representations Units5 Lot Size0.04 acres Gross Building Size 3,850 SF Stories 3 Year Built1915 Year Renovated1991 ZoningC-2 Walk Score84 (very walkable to public transportation, services, retail, etc.?) Transit Score74 (excellent transportation) All units are separately metered for gas and electric and the landlord is responsible for water/sewer, common electric and heat in the hallways, real estate taxes, insurance, repairs and maintenance and property management. Property has a rear yard that’s not presently used and full basement access from inside and outside. The property is conveniently located on main Woodland thoroughfare, close to transportation, restaurants, banks, shopping, grocery stores and much more. Within minutes to the airport, I-95, Route 13, and major roads. Rent Roll Unit Number Net Rentable SF Monthly Rents A – Basement - 2 Bedroom 1.5 Bath 900 sf $600.00 /mth B – 1st Floor Studio 1 Bath 450 sf $450.00 / mth C – 1st Floor Studio 1 Bath 450 sf $450.00 / mth D – 2nd Floor 2 Bedroom 1.5 bath 900 sf $500.00 /mth E – 3rd Floor 2 Bedroom 2 Bath 900 sf $600.00 /mth Underwriting Sally estimated real estate taxes based on the current assessment of the property “as is” in its current state. For insurance she looked online for property coverage to arrive at an annual premium. For repairs and maintenance, she looked at the prior financials and figured that historical perspective was a good indicator of future performance. For property management she estimated what she wanted to earn per month as a % of collected revenues. She knew that properties were appreciating in the neighborhood and looked at national surveys for multi-family exit cap rates when estimating an exit cap rate for this project. Unit Amenities 1. Walk-up units with common hallways (via a wood staircase). Access to the building is provided via mechanical key. No security system. Each unit and hallways include smoke alarms. 2. Range and Refrigerator 3. Carpeted Floors – stained and partially missing. 4. Eat-In Kitchen 5. Tub/Shower/Vanity 6. Window AC Units 7. Central heat via an old boiler unit in the basement Physical Condition of the Asset The current owner purchased the asset in 1991 as a single-family home and renovated the property into multi-family units at that time. Interior of the units are original and dated. The carpet and appliances are in need of replacement and residents expects central heating and air conditioning vs what is currently provided which is box air conditioning units and heat via radiator. The roof leaks and needs a full replacement. Parking is on the street. The rear yard may be used as a common area for residents. As part of her due diligence Sally ordered a physical needs assessment for the property. The following is a summary of that report and includes both deferred maintenance and cosmetic enhancements for the property to remain safe and competitive. Add “ductless” Heating and Cooling Units - $3,200 per unit includes electrical – total $16,000 1. Upgrade Plumbing - $4,600 total – new lines to the public water and sewer system 2. Replace carpeting and rehab the original wood flooring - $7,700 total 3. Replace Appliances (range, refrigerator, add microwave) - $4,200 total 4. Replace Roof (rubber membrane) - $6,500 5. Replace Tub/Shower/Toilet/Vanities - $12,000 total 6. Contingency – 10% of total Market Rents Sally having excelled in the Georgetown market study class, conducted a trade area study for the area which is southwest Philadelphia and narrowed down her search for the community known as Elwood. Based on this research she determined that with upgrades to Woodland that rents could be increased as follows: Unit Number Market Rent if Renovated A – Basement - 2 Bedroom 1.5 Bath $900.00/ mth B – 1st Floor Studio 1 Bath $750.00/ mth C – 1st Floor Studio 1 Bath $750.00/ mth D – 2nd Floor 2 Bedroom 1.5 bath $950.00/ mth E – 3rd Floor 2 Bedroom 2 Bath $925.00 / mth Based on his market research it was determined that rents will grow 2.5% per year and operating expenses will grow at 2% per year. Vacancy for apartment units in the neighborhood average 12%. Lender Sally also excelled in the GT Real Estate Finance class was able to run the numbers on the overall feasibility of the project using the feasibility XLS model. She valued the property at stabilization and put together the renovation plan with costs. She went to a local bank who provided a construction and permanent loan quote. Terms are as follows: 80% loan to value, 6% interest rate, 25-year amortization and a 10-year balloon term. Sally would guaranty 100% of the loan. Zoning Sally discovered during due diligence on the property that one the units was added by the former owner without a building permit. That additional unit exceeds the maximum permitted units per zoning. Sally has a friend in the Philadelphia building permit department who noted that any renovation to the property will involve dealing with a maze of inspectors and new regulations. Sally feels the contingency factor she added to her model will cover any fees and unknown costs. Investment Since Sally is just starting out in the real estate business she has limited equity to invest. She decided to reach out to a few family members and friends to help raise the required equity needed for the project. It is expected that a minimum leveraged return of 10% is needed and that her investment group plans to sell the asset once it is stabilized. She projected an exit cap rate of 8% with a 10% cost of sale for a broker to find the buyer. Personal Background Sally wants to save money and act as the GC for this project despite not having any experience in this area. She also likes the area and is considering occupying the 3rd floor unit as an owner. This will save her from having to buy a home and she can keep an eye on the operations. She also plans to do all the leasing and repairs at the property. This is a bit of concern in that she works full time at a local appraisal firm but given the nature of this business she could work from the unit while overseeing the renovations and later property management and leasing. Rubric – Instructors will review the submission in the context of the following: 1. Did the student demonstrate an understanding of how to prepare a feasibility model in XLS? 1. Did the student demonstrate an understanding of how to identify he risks associated with this investment? 1. Did the student articulate and then quantity two risks with the asset that could result in a project that loses money? 1. Is the paper spell checked, grammar checked? 1. Is the math correct in the XLS model? 1. Are the conclusions noted in the memo clear, concise and to the point and based on an interpretation of the numbers but not reciting the numbers? Memo Format Please answer the following questions in the order shown below. Please also paste the completed XLS model(s) as an addendum in that Word doc. Name the file as follows: LAST_NAME_WOODLANDS.doc. Scenario One Using the XLS file recreate the analysis based on Sally’s assumptions. 1. How did Sally go about searching for the property (positives and negatives) and what was her investment criteria? 1. As a friend of Sally, she asks for your input. How would you approach evaluating this investment? 1. How would you evaluate Sally’s approach to underwriting and sourcing the mortgage? 1. Based on Sally’s underwriting, experience and lifestyle, does the investment and her role make sense for her? Scenario Two Sally was impressed with your thoughts and asks that you join her in this investment as a 50/50 partner. Prepare your own XLS analysis with a summary investment memo that outlines the returns, strengths, weaknesses and risks associated with the project. An outline of that memo is as follows: Executive Summary – Two Pages Max 1. Provide a summary (chart format) of the financial returns, strengths and weaknesses with the investment. 1. Summarize the “downside” scenario of what could result in the investment losing money. 1. Summarize a recommended new offering price for the property “as is” including the study period, deposit and when the deposit becomes non-refundable. 1. Risks – How might the current Philadelphia’s zoning of this asset impact its renovation and its valuation? 1. What capital reserve might be appropriate for this investment? How do you distinguish between a) maintenance, b) repairs and c) capex? Also, is there a need for working capital? 1. How does the concept of “loss to lease” apply in context to this investment? Does it impact value? 1. Describe the submarket in the content of rent vs. buying a home…is there a clear preference? Financials – Two Pages Max 1. Insert the new Feasibility XLS model 1. Explain two key variables that if not met could result in a loss of return / money. Next test the variables against your cost. Can you live with the worse-case? Management Plan – One Page Max 1. For the scope of renovation work noted herein, how much will be self-performed by your group vs. bid out. Explain why. 1. Who will manage the asset? The group or 3rd party? Explain why. Scenario Three Now that you arrived at a JV deal with Sally (both of you are thrilled with this new partnership), Sally came up with a twist. Given the area is changing into a more diverse community and residents are moving into the