Reference no: EM133633595

Question: Your client, Mr. Mike, has identified a real estate investment opportunity and has hired your real estate group to thoroughly analyze this opportunity and make an investment recommendation.

The building is 3 years old and located near the corner of Saint-Denis and Roy St East in the Plateau Mont-Royal district of Montreal. It is a three-story mixed-use building with four commercial retail units on the ground floor and 8 residential apartments on the 2 floors above. The basement has 8 interior parking stalls rented to the residential tenants.
The residential apartments are made up of 4 two-bedroom apartments and 4 three-bedroom apartments.
The commercial units include a coffee shop, a convenience store, a dry cleaner and a small dollar store. Last year the coffee shop recorded sales of $550,000, which the operator considers to be excellent. The dry cleaner and convenience store do not provide sales figures but have indicated that they are generally satisfied with the space. The dollar store, however, has been struggling with sales reaching only $175,000 last year. The operator has indicated that he does not intend to renew the lease when it comes due. The current owner of the building has told you that he does not anticipate any trouble in finding a new tenant given the excellent location of the building.
The seller has provided you with the current rent roll and the income statement of the building for the year that has just ended (see Excel file).
During your due diligence process, you ascertain the following facts:
• The asking price is $3,100,000 but you believe that it is negotiable.

• The mortgage, which is currently on the building, will be repaid by the seller from the proceeds of sale. It cannot be transferred to a purchaser.

• The building is in a good physical condition and will not require any significant capital expenditures over the next five years.

• The owner currently handles the property management himself but estimates that it would cost about 2% of base rent, on the commercial and residential spaces (excluding parking), if he hired a property management firm.

• Acquisition expenses (including taxes) are expected to be approximately 1% of the purchase price.

Your client wants to minimize the amount of cash he has to invest in the purchase of this property. He is confident that he could obtain a mortgage with a 5-year term, a maximum LTV of 70%, a minimum DSCR of 1.5 and an amortization period of 20 years. He has asked you to look into the potential financing as part of your analysis.
Mr. Mike is looking at several other possible investments and will only consider this one if its IRR exceeds his WACC of 5% and his required equity return of 12%

b) Perform a financial analysis of the investment. For simplicity, assume the purchase occurs on January 1, 2023. (Use the Excel template that will be supplied)

i. Calculate the projected NOIs and cash flows
ii. Determine the proposed purchase price based on your valuation of the property
iii. Determine the debt service payments and make a amortization table
iv. Calculate the levered and unlevered IRR and NPV
i. Most likely, pessimistic and optimistic scenarios (with changes in assumptions)