This is the third 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. Just the Facts puts you in the role of a direct real estate investor analyzing the feasibility of purchasing a retail sale-leaseback from a regional big box tenant.
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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You have been presented with the off-market opportunity to personally purchase a 40,000 SF, single-tenant retail store leased to Best Box, a regional leader in consumer electronics and appliances. You are a personal friend of the Best Box CEO, and she recently approached you about purchasing their flagship store.
Upon selling the store, Best Box would leaseback the property from you on a 20-year lease with 5% rent increases every five years. The proposed rent is $25/SF/Yr NNN.
You’ve been working hard the last few years at A.CRE Development and have banked several six-figure promotes. Those earnings have been sitting in a high-yield savings account, awaiting the right opportunity. This could be a great opportunity to put those funds to work for 5-10 years at a yield substantially better than your savings account.
Before making a decision, you decide to analyze the investment. You open up an Excel workbook and begin to model the cash flows.
Assumptions – Just the Facts
- RSF is 40,000.
- Income is $25 / RSF growing 5% every five years.
- Reimbursable expenses are $5 / RSF growing 1.5% per year.
- Asking cap rate is 6.25% on year 1 NOI.
- Disposition cap rate at the end of a 5-year hold period is 6.50%.
- The investment is financed by a loan at 70% LTV, 3.25% rate, and a 30-year amortization period.
Questions – Just the Facts
- What is the asking price amount?
- What is the unlevered IRR?
- What is the levered IRR?
- What is the year 3 free and clear return?
- What is the year 3 cash on cash return?
Extra Credit – Equity Capitalization
You approach your cousin about contributing 75% of the required equity. Your cousin is interested subject to understanding what his equity returns would be. You offer to split all cash flow pari passu and pro rata based on ownership share, but ask for a 1% acquisition fee, a 1% disposition fee, and a 0.50% of AUM annual asset management fee.
- What is your levered IRR, net of fees?
- What is your friend’s levered IRR, net of fees?