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Commercial Investment Property Analysis
Term Paper ID:36319
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Financial analysis of a proposed commercial property investment in Los Angeles Includes assessments based ...... More...
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Paper Abstract:
Financial analysis of a proposed commercial property investment in Los Angeles. Includes assessments based on investor assumptions and projected financial performance over a 7-year period.
Paper Introduction:
commercial real estate investment analysisPackage Setup The property selected is an Auto Service Center located in LosAngeles California The sales price for the property is Theproperty is fully leased and generates an annual income of Theseller\'s projected internal rate of return IRR is percent Assumptions associated with the proposed investment are as follows First year expenses including management Projected annual increase in expenses percent Projected annual increase in income percent Cash down payment required percent of sales price Financing costs Due diligence
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1st year cash flow: $36,554 . The values are as follows: . Thus, the proposedinvestment is acceptable within these contexts.Cash Flows Pre-tax cash flows and IRR were calculated based on the offercharacteristics of the property (the results of the calculations areattached to this document). 2nd year cash flow: $43,3 4 . 7th year cash flow: $82,86 . The FMRR data are as follows: Pre-Tax FMRR: 14.62% After-Tax FMRR: 1 .13%[pic][pic] In this case, however, FMRR data are provided basedon both pre-tax and after-tax cash flows. 2nd year cash flow: $3 ,313 . 3rd year cash flow: $35,265 . IRR: 9.62%FMRR The financial management rate of return (FMRR) typically is based onafter tax cash flows. These determinations were as follows: > Rate of return (ROR) on loan portion of investment = percent of mortgage to property value / loan constant for mortgage o ROR loan portion = 85 / 5.69 = 14.94% > ROE = percent of equity to property value / cash-on-cash return o ROE = 85 / 1 .15 = 8.37 As the above data indicate, the ROR on the loan portion of theinvestment is higher than the IRR for the proposed investment, and the ROEis higher than the assumed minimum acceptable IRR. Theproperty is fully leased and generates an annual income of $199, . 5th year cash flow: $65,571 . The values are as follows: . 4th year cash flow: $57,796 . 6th year cash flow: $73,72 . IRR: 13.88% After-tax cash flows and IRR also were calculated based on the offercharacteristics of the property. 7th year cash flow: $58, 2 . 4th year cash flow: $4 ,457 . 3rd year cash flow: $5 ,379 . The sales price for the property is $2, 5 , . 6th year cash flow: $51,6 4 . 1st year cash flow: $25,588 . 5th year cash flow: $45,9 . Theseller's projected internal rate of return (IRR) is 15.6 percent.Assumptions associated with the proposed investment are as follows: > First year expenses (including management): $63, > Projected annual increase in expenses: 3.5 percent > Projected annual increase in income: 4.5 percent > Cash down payment required: 15 percent of sales price > Financing costs: $18, > Due diligence costs: $13,5 > Appraisal feels $6,75 > Legal fees: $14, > Title cost: $45 > Mortgage rate: 4.9 percent > Mortgage term: 48 months > Cap Rate at end of 7 years: 9.5 percent > Cost of Sales price at end of 7 years: 4.75 percent > Desired minimum return on investment (ROE): 7.5 percentEvaluation of the Project as Offered The elements of the offer for the property appear to be reasonable.The IRR may be somewhat over estimated considering the sales price of theproperty and the initial annual income. commercial real estate investment: analysisPackage Setup The property selected is an Auto Service Center located in LosAngeles, California. Calculation of the investment characteristics of the property based onthe assumptions stated in the preceding section indicated that the IRR is13.88 percent and the Cap Rate for the first year of ownership will be 6.63percent (the results of the calculations are attached to this document).Each of these measures is acceptable for the investment contemplated.Based on the information provided by the seller and the calculations basedon the assumptions established for this investment, the asking price forthe property makes financial sense.Assessing Return on Equity Using the Band of Investment Approach The band of investment approach was applied to assess both the (a)probable rate of return on the loan portion of the investment and (b) theROE on the investment.
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