Case Study #1 – Presidio (Case + Solution)
This is the first in a series of commercial real estate case studies shared by A.CRE. These case studies are meant to help you practice to master real estate financial modeling. Presidio puts you in the role of an acquisitions professional needing to assess the viability of a value add apartment acquisition opportunity.
Practice makes perfect!
Each case study shared in this series mirrors real world situations, either in terms of the types of deals you will look at in various roles or the types of modeling tests you’ll be required to perform as part of the interview process. You can browse this and other case studies in the A.CRE Library of Real Estate Case Studies.
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Presidio – The Background
You are an acquisitions professional working for Presidio Real Estate Partners, a regional apartment operator based in California. Presidio’s investment strategy typically involves acquiring poorly managed class A and B apartment projects across the United States, reposition the assets through some combination of capital improvements and management improvement, and then hold the assets for up to seven years.
Presidio targets a minimum levered IRR of 15% on its investments.
Presidio – The Details
You’ve recently been presented with an opportunity to acquire Franklin’s Tower, a 150-unit, luxury apartment building with 150,000 gross square feet and 120,000 net rentable square feet.
The property is currently 60% occupied due to mismanagement with comparable properties fully, or almost fully occupied. Presidio is looking to purchase the property for $315k/unit with all equity, lease up the remaining units, refinance at stabilization, and sell in 7 years from acquisition. In-place rent in year 1 is anticipated to be an average of $3.75 per square foot per month for occupied units and operating expenses are anticipated to be $2MM for the year and both operating expenses and rent growth are projected to be 3% per annum. Please assume 5% vacancy upon stabilization and closing costs of $200k.
The proposed strategy is to lease up the property at 5 units per month and refinance at the end of year 2. The debt terms are as follows:
- Interest rate – 3.5% per annum but calculated for monthly payments
- Payments are made monthly
- 30-year amortization period
- 7-year term with no prepayment penalty after year 4
- Max loan to value is 70% at a 5% cap rate on NOI
- Minimum Debt Service Coverage ratio is 1.2x
- Closing fees are 1.0%.
At the end of year 7, Presidio will sell the properly at a going out cap rate of 5.5% with $200k in fees.
Presidio – The Task
Please calculate the levered and unlevered internal rate of return and equity multiple. Based on your analysis, does this investment meet Presidio’s target return?
Presidio – Extra Credit
Presidio brings in a Limited Partner (“LP”) and they agree on an equity contribution at a 90/10 split for the LP and Presidio, respectively. They will split distributions pari-passu until the LP achieves a 9% preferred return. Presidio then receives a 20% promote and the partnership splits the remaining proceeds pari-passu. Build a waterfall model to demonstrate the partnership cash flows.
Please calculate the rate of return and equity multiple for the Presidio and the LP.
Download the Case PDF + Solution XLS
In addition to the web-based case, we’ve created a PDF version to download and use offline. Additionally, we’ve added a solution created by Spencer and Michael. Note that the solution may contain errors – if you spot an error, please let us know and we’ll roll out an update.
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Version Notes
v1.0
- Initial release
