Transaction Summary

You are the senior acquisitions associate at a New York$-$based private equity fund with a $$core$$ investment focus. You have reached an agreement to purchase a well$-$located, $185,000$ square foot office building in a solid suburban market. It was built in $2020$ and has no additional leasing since the pre$-$development leases were signed. The submarket is quite desirable with no new supply coming on$-$line, yet economic growth is uncertain.

Income Summary

It is currently leased to three tenants on a gross $($full$-$service$)$ basis: Tenant #$1$ occupies $50,000$ square feet at $$29$ per square foot annually through $12/2032,$ Tenant #$2$ occupies $80,000$ square feet at $$28$through $12/2033,$ and Tenant #$3$ occupies $36,500$ square feet at $$32$ per square foot through $12/2034.$ Other$/$ancillary income has added another $$4$ per total sf of revenue annually, which you don$$t see changing after acquisition. Operating expenses have consistently been $$14$ per total sf annually but you expect to immediately reduce this by $14\mathrm{.}3\%$ at the time of closing. On a run$-$rate basis $($stabilized$),$ capital expenditures, leasing commissions, and tenant improvements are expected to cost you $$0\mathrm{.}65$ per total sf annually. There is no growth expected from this investment $($flat revenue, flat expenses, flat cap ex$,$ TI$$s$/$LC$$s$).$

Capitalization Summary

You are purchasing this building for $$227\mathrm{.}00$ per total square foot. You have lined$-$up a $10-$year mortgage financing of $70\%$ LTV at an interest rate of $6\mathrm{.}5\%$ with a $30-$year amortization schedule $($payments calculated monthly but paid annually, for modeling purposes$).$ You have also lined up a $5-$year mezzanine loan $($treat as a second mortgage$)$ for an additional $10\%$ of the purchase price at an interest$-$only rate of $11\mathrm{.}00\%.$ Assume zero transaction costs for the sale$/$disposition of this investment.

Investment Strategy

You are purchasing the building on January $1,2023$ and plan on selling the building at the end of the year $2026.$ You believe your exit capitalization rate will be $75$ basis points lower than your going$-$in capitalization rate.

Based on the information above, answer questions $5-8$

$5.$ What is the IRR of your equity investment?

$6.$ Assuming that your private equity fund has a hurdle rate of return $($Re$)$ of $15\%,$ what is the PV of this equity investment?

$7.$ What is the NPV of this equity investment?

$8.$ What is the mortgage lender$$s going in DSCR$?$ What is the mortgage lenders going$-$in Debt Yield?