This is the six 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. Hamilton Park VIII puts you in the role of a development associate at an international industrial development firm, tasked with assessing the fair value of land allocated to a given phase of industrial development.

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HAMILTON PARK VIII – THE BACKGROUND

You are a Senior Development Associate at Eastern Development Corp, a privately held real estate development firm specializing in the ground-up development of Class A logistics, fulfillment centers, and data centers throughout Europe, the United States, and Mexico. You have been with the company just shy of four years, starting as an analyst at the firm straight out of university.

Eastern Development currently has offices in London, Frankfurt, Madrid, Los Angeles, Chicago, and Mexico City. Since the company’s inception in 2001, Eastern has built over 13 million square metres of industrial real estate across its target markets. The company’s tenant base consists largely of multi-national corporations, third-party logistics firms, e-commerce subsidiaries of large retailers, internet-only retailers, and cloud-focused technology firms.

In 2014, Eastern Development acquired a 55-hectare parcel of land with the intention of developing 185,000 square metres of class A industrial across eight buildings. The project has moved along smoothly, with six buildings built and stabilized to date. Building seven recently broke ground as a build-to-suit for e-commerce giant Sahara, Inc. And so it’s time to begin analyzing building eight.

HAMILTON PARK VIII – THE DETAILS

With the first seven buildings underway or completed, it’s time to begin planning for the last and final building – Hamilton Park VIII. Eastern Development has partnered with a large pension fund (i.e. the “Venture”)to develop phase VIII. A life insurance company will provide a 60% LTC construction loan, and the pension fund partner will provide 95% of the required equity. Eastern will provide the remaining 5% of required equity.

As part of the financial analysis, one of the first steps is to assign a price to the proportion of land allocated to this phase. Because Eastern Development purchased the land solely back in 2014, it’s not appropriate to assign the cost basis of the land to the Venture. Instead, an analysis must be done to determine a fair value for the land; a value at which the venture will purchase the land from Eastern Development.

HAMILTON PARK VIII – THE ASSUMPTIONS

Below find the relevant assumptions to use in your analysis.

Property Description

  • Land size: 66,750 m2
  • Building size: 23,104 m2 (152 m2 x 152 m2)
  • Clear height: 11 metres
  • Column spacing: 16 metres
  • Cross-dock building design
  • Dock doors: 72
  • Parking spaces: 210 automobile, 60 trailer
  • 5% office

Timing

  • Land purchase: Month 0
  • Construction: 9 months
  • Tenant rent commencement: Month 13
  • 1st stabilized month per JV agreement: Month 16 (3 months following rent commencement)
  • Sale month: Month 24
  • Analysis period: 2 years (Month 0 – Month 24)

Development Costs

Operating Assumptions

  • Tenant base rent: 65/m2
  • Tenant responsible for taxes, insurance, common area maintenance, building structure, and roof
  • Annual bumps: 2%

Valuation Assumptions

  • Market cap: 5.00%
  • Selling cost: 2%

HAMILTON PARK VIII – THE TASK

Assuming the Venture targets a Development Spread of 150 bps, what is the fair value you would assign to the land?

Recent land comps in the area have shown entitled land in comparable industrial parks to trade in the 65/m2 – 70/m2 range (Per m2 of land). Is your fair value supported by comparable sales?

HAMILTON PARK VIII – EXTRA CREDIT

Assuming a land purchase price that results in a Development Spread of 150 bps, what is the unlevered IRR of the investment over the two-year hold period? What is the unlevered equity multiple?

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