Angus Cartwright Case Study Solution
Conclusion
From the analysis conducted above it can be concluded that Fowler building is a better option for investment due to its better financial position. Its equity requirement are lower with comparatively higher capital gains at the end of 10 years. With the opportunity of growing property prices, Fowler Building would be profitable. In addition, the net present value of Fowler at the end of 10 years is about three times to that of Stony Walk. Its IRR is also 24%, which is way above to 3% of Stony Walk, making it more desirable to undertake. Furthermore, Fowler’s LTV ratio is lower, making it easier for them to take loans.
Exhibits
Exhibit 1: List of Salient Features
| List of Salient Facts |
900 Stony Walk |
The Fowler Building |
| -Constant Loan Payments (Annual Constant*) |
6.84% |
6.67% |
| -Amortization Period |
25 |
25 |
| -Term of Loan |
10 |
10 |
| -Interest Rate |
4.75% |
4.45% |
| -Amount of 1st Mortgage |
12250000 |
21000000 |
| -Equity Investment |
7000000 |
6500000 |
| -Cash Flow from Operations (CFO) |
1050000 |
1865000 |
| -Expected Year of Sale |
10 |
10 |
| -Estimated Sales Price |
17000000 |
34500000 |
| -Depreciable Life |
39 |
39 |
| -Depreciable Base |
11500000 |
21000000 |
| -Gross Purchase Price |
15000000 |
27500000 |
| -Leasehold Payments |
0 |
295000 |
| - Units or SF of Rentable Space |
67000 |
135000 |
| -Annual Increase in CFO |
3% |
3% |
Exhibit 2: First year project setups
| First Year Project Setups |
900 Stony Walk |
The Fowler Building |
| Potential Gross Income (PGI) |
1,050,000 |
1,865,000 |
| -Vacancies |
52,500 |
93,250 |
| Effective Gross Income (EGI) |
997,500 |
1,771,750 |
| -Real Estate Taxes |
126,000 |
186,500 |
| -Other Operating Expenses |
382,570 |
337,598 |
| -Capital Reserves (aka Replacement Reserves) |
25,000 |
25,000 |
| Cash Flow from Operations (CFO) (aka NOI) |
463,930 |
1,222,652 |
| -Finance Payments |
448,350 |
75,348 |
| -Lease Payments |
- |
295,000 |
| BTCF |
912,280 |
1,593,000 |
Exhibit 3: Purchase and operating comparable
| Purchase and Operating Comparable |
900 Stony Walk |
The Fowler Building |
| Actual or Projected Occupancy |
95% |
95% |
| Average Monthly Rents per unit |
26.12 |
10.5 |
| RE Taxes and Op Exp/Unit or SF |
8 |
4 |
| Other Operating Exp/Gross Rev |
36.44% |
18.10% |
| Other Operating Exp/Unit or SF |
5.71 |
3 |
| Real Estate Taxes/Gross Revenue |
12% |
10% |
| Price/Unit or Price/Rentable SF |
224 |
204 |
Exhibit 4: Break-even Analysis
| Break-even Analysis |
900 Stony Walk |
The Fowler Building |
| Debt Service Coverage Ratio (DSCR) |
0.04 |
0.06 |
| Loan to Value Ratio (LTV) |
82% |
76% |
| Break-even Occupancy |
81.667% |
69.545% |
| Added Margin |
13.33% |
25.45% |
| Current or Projected Occupancy |
95% |
95% |
Exhibit 5: Analysis
| Financial Analysis |
900 Stony Walk |
The Fowler Building |
| Required Equity |
7,000,000 |
6,500,000 |
| Simple Return Measure |
|
|
| Capitalization Rate Purchase |
3.09% |
4.45% |
| Capitalization Rate Sale |
3.44% |
4.79% |
| Cash on Cash Return (1st year) |
8.60% |
22.99% |
| Capital Value Increment |
13% |
25% |
| Pre-tax investment multiple |
1.76 |
4.80 |
| Discounted Return Measure |
|
|
| IRR |
3.18% |
24.07% |
| 12% NPV |
$4,565,127 |
$10,231,411 |
Exhibit 6: Percentage of total benefits
| Percent of total benefits |
900 Stony Walk |
The Fowler Building |
| Before Tax Cash flows |
62.75% |
82.68% |
| Tax Benefits |
-15.10% |
-11.71% |
| Future Value |
47.65% |
70.97% |
Exhibit 7: Breakdown of Futures
| Breakdown of Futures |
900 Stony Walk |
The Fowler Building |
| Total net cash from sale |
11,256,410 |
17,323,077 |
| 20% capital gain tax on increased |
(1,230,769) |
(3,230,769) |
| 25% tax on depreciation |
(512,821) |
(1,346,154) |
| Increase in sales price |
2,000,000 |
7,000,000 |
| Recapture of mortgage amortization |
4,000,000 |
8,400,000 |
| Return of initial cash |
7,000,000 |
6,500,000 |
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