This is the second 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. Renovo Tower puts you in the role of an acquisitions professional needing to assess the viability of a value-add office 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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Renovo Tower – The Background

You are a VP of Acquisitions at A.CRE Capital Advisors, an investment advisor representing large institutional investors. Your team is responsible for sourcing and managing office and industrial investments on behalf of a separate account vehicle with a large pension fund client.

The pension client would like to deploy $100 million to value add office investments this year, and mid-way through the year you’ve laid an egg on that objective. And so you’re anxious to get a deal done.

In an effort to be more proactive (and protect your annual bonus!), you call your favorite broker to subtly express frustration with deal flow this year. In talking with her, she mentions an office acquisition opportunity that is coming to market in the coming weeks.

Renovo Tower – The Details

Renovo Tower is a suburban office building with a likely offer price at $183/sf. The building is 310,000 rsf with one tenant in place who leases 50% of the building at a full-service rental rate of $32/rsf for 10 years, with a 3% rent bump every 2 years. The operating expenses at the building are $17.00 psf.

Research has market lease terms for this building at $35/rsf full service for a 5-year lease. TIs and LCs are $18.00 and 8%, respectively. Buildings of this quality should trade at a 9% cap rate based on the forward twelve months NOI.

Assume that the remaining space will be leased to two equal sized tenants at market rates. The first lease will start 8 months and the second lease 15 months after purchase.

The building has some initial capex needs valued at $300,000 and there is a plan to spend an additional $55,000/year on deferred capex for 3 years. The building has a parking ratio of 3 stalls per 1,000 sf and the market rate for parking is $110/month.

Renovo Tower – The Task

Using a 5-year hold and selling the building at the end of the year, using the XIRR formula, what is your unleveraged IRR?

Assume A.CRE Capital Advisors closed with a loan that is 65% of the purchase price. The terms of the loan are 5 years with a 4% interest rate, one point origination fee, and a one point exit fee on the remaining outstanding loan balance. The loan amortizes on a 25-year schedule. What is the leveraged IRR?

Based on the analysis and your own knowledge of real estate, what are some other issues to be considering when evaluating whether or not you should buy this building?

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