1.Complete the waterfall shown in Exhibit 10 using the benchmark assumptions outlined in the case. Under these assumptions, calculate the expected return to Wildcat and its limited partners and compare those returns to the property-level return on Financial Commons if it is sold after three years. Returns to Wildcat should be calculated without including its management fee. Step by step instructions follow:

a.Exhibit 9 provides a pro forma analysis of Financial Commons at a property level whereas Exhibit 10 shows only the equity-level cash flows. The missing component which bridges the two exhibits is the debt service cash flows so first determine debt service cash flows and then complete Exhibit 10.

b.Outside investors provide 95% of the total equity amount while Wildcat provides 5%. Outside investors have a preferred return of 8% each year while Wildcat is not entitled to a preferred return. Note the 70:30 split of EBTCF in excess of the preferred return.

c.Note also the projected sale price of the building using the 8.4% exit cap rate.

d.A simple IRR calculation on the cash flows to investors and to Wildcat will then provide the expected returns to each set of investors based on the benchmark assumptions.

For the exclusive use of P. Rela, 2017. REVISED FEBRUARY 11, 2015 CRAIG FURFINE KEL553 Wildcat Capital Investors: Real Estate Private Equity \"Okay. Now we're even,\" said the voice on the telephone. As he hung up the phone, James Tripp, managing director of Wildcat Capital Investors, thought back to that beautiful summer evening two years earlier when he was about to enter Ravinia Park to enjoy a performance of the Chicago Symphony with his friend, commercial real estate broker Katherine O'Brien. The sound of scraping metal had caught Tripp's attention just in time for him to save O'Brien's lifeor so he liked to claimby blocking an approaching bicyclist headed straight for O'Brien in a reckless attempt to cross the track ahead of an oncoming train. At the time Tripp had joked, \"Now you owe me.\" Referring to the opportunity to purchase a piece of commercial property before the sale became public knowledge, he continued, \"How about showing me a great off-market deal some day?\" Now, in September 2009, it seemed that O'Brien had indeed returned the favor. The opportunity O'Brien had just briefly outlined on the phone sounded perfect for Wildcat. Financial Commons was a 90,000-square-foot office property located in the Chicago suburb of Skokie. The building was 90 percent occupied and was being offered for what seemed like an incredible price of $10.4 million. Given the bleak commercial market environment at the time, such opportunities were few and far between. But Tripp knew there were many factors that could spoil this deal. As they did with several properties each week, Tripp and Wildcat's MBA-student intern, Jessica Zaski, would have to dig deeper into the numbers. What were the economic fundamentals in the market? Who were the tenants of Financial Commons? Would Wildcat be able to profitably exit this deal in three to five years? Could it get the returns its investors demanded? And, in the midst of the worst credit crunch in Tripp's memory, would Wildcat be able to obtain financing? Tripp called Zaski into his office. Her task would be to research the Skokie office market to derive the realistic assumptions necessary to calculate the returns Wildcat could hope to achieve by acquiring Financial Commons. About Wildcat Evanston, Illinois-based Wildcat Capital Investors, LLC, was a privately held entrepreneurial real estate firm that invested in a wide range of real estate assets on a deal-by-deal basis. Tripp 2015 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Craig Furfine with research assistance from Jessica Zaski '10. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail custserv@hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Kellogg School of Management. This document is authorized for use only by Paula Rela in Strategic Financial Decision Making taught by Raul Consunji, Wentworth Institute of Technology from April 2017 to October 2017. For the exclusive use of P. Rela, 2017. WILDCAT CAPITAL INVESTORS KEL553 and his friend William Paris had founded the company in 2005 to serve the growing real estate alternative investment space by raising capital from wealthy individuals and investing in commercial real estate not only through traditional equity investments but also throughout the capital structure. Wildcat's early deals involved mezzanine loans to support multifamily development efforts. It developed a niche in providing such debt on some high-profile projects in Chicago's South Loop. At the beginning of 2009, however, Wildcat had determined that the best opportunities were in acquisitions and began exiting its existing mezzanine deals at a profit. At about the same time, the market for traditional real estate mezzanine finance dried up and many debt providers to commercial real estate lost everything as they mistakenly shared the common market assumption that rents and prices would rise forever. Thus, Wildcat had the financial resources to pursue acquisitions; Financial Commons would be its first. The Property Through her research, Zaski learned that Financial Commons was a three-story, Class B+ office building located in the Chicago suburb of Skokie, Illinois. Zaski was pleased to find out that although Financial Commons had been built in 1981, it had undergone a major renovation in 2007. The property sat on six and a half acres of land, with approximately 85,812 square feet of rentable space and a large parking lot. In the fall of 2009, there were six tenants filling 90.5 percent of the rentable space. The building also had three small equal-size vacancies totaling 8,126 square feet. The Market Zaski knew that ensuring a good investment was about more than just the building attributes alone. She next investigated the financial health of the Chicago area and Skokie's future prospects. She also wanted to make sure Financial Commons was well placed geographically so that it was accessible and appealing to tenants and that it was not located in an oversupplied market. Through market research and Tripp's discussions with local leasing brokers and investment sales brokers, Zaski found that the Near North submarket of Chicago, of which Skokie was a part, contained approximately 14 million square feet of corporate office space occupied by strong companies, including national businesses such as Peapod and Illinois Tool Works (see Exhibit 1 and Exhibit 2). Although Chicago had suffered a slight population decline over the previous decade, Skokie and its immediate surroundings had seen slow but steady population growth. Further, the submarket was one of the best-performing regions outside the downtown area of Chicago in terms of its low vacancy rates and high quoted rents (see Exhibit 3). In terms of location and appeal to high-quality office tenants, Financial Commons was well positioned. The property was in an established business park that was home to dozens of employers, primarily service and professional firms. The trade area encompassed some of Chicago's most affluent zip codes and one of the region's strongest residential markets. The building was also less than half a mile from a 2.7-million-square-foot super-regional mall, Westfield's Old Orchard. 2 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only by Paula Rela in Strategic Financial Decision Making taught by Raul Consunji, Wentworth Institute of Technology from April 2017 to October 2017. For the exclusive use of P. Rela, 2017. KEL553 WILDCAT CAPITAL INVESTORS The Deal Structure Zaski knew that Wildcat, like most commercial real estate investors, would want to use a combination of debt and equity to finance the acquisition of Financial Commons. She knew that in the fall of 2009 a bank loan, especially a commercial mortgage, was unlikely due to the freeze of the credit markets. National and regional banks had all been burned by real estate and construction lending as defaults climbed; they did not have the appetite for even low-risk property lending, and as a result loan origination had recently dipped to an all-time low (see Exhibit 4). Consequently, sales of commercial property had also collapsed, which made finding comparable salessomething buyers and sellers relied on to value their propertiesa difficult task (see Exhibit 5). She began by investigating a loan through Commercial Bridge Finance, a Chicago-based mortgage broker that specialized in this market. Based on its market knowledge and relationships with various non-bank lenders, the broker felt confident Wildcat could obtain a non-recourse 65 percent loan-to-value (LTV) loan from a life insurance company at a rate of 6.75 percent. The loan would carry a five-year maturity and would amortize based on a twenty-five-year schedule. The loan would require monthly payments andas was becoming typical in the tight credit marketswould carry a 3 percent penalty on all prepaid balances if the loan were fully repaid before maturity. Like most real estate private equity firms, Wildcat did not want to put much of its own cash into the deal, so it raised most of the equity for its investments from limited partners. As such, Zaski assumed that 95 percent of the required equity investment would come from outside investors, with Wildcat putting up 5 percent. Should there be any cash inflows required over the holding period, Zaski assumed that these, too, would be split 95/5. Outside equity investors would be given an 8 percent preferred return (or \"pref\"), with any unpaid pref accumulating forward until the property was sold. Any cash received in excess of the 8 percent pref would be split between the outside investors and Wildcat at a rate more favorable to the sponsor (known as a \"promote\"). For this deal, Zaski assumed that beyond the pref, Wildcat would keep 30 percent of the cash and its investors would receive 70 percent, although promote structures had become a key negotiation point in the difficult economic environment. When Wildcat sold the property, Zaski assumed that after-debt proceeds would first repay Wildcat and its investors their invested capital. If cash still remained, the investors would receive 70 percent, with Wildcat keeping the remaining 30 percent. Wildcat would also earn a 1.5 percent fee annually, charged against the initial (outside) equity under management. This fee would be taken from the operating cash flow of the property. The Underwriting Given the assignment of building a financial model for Financial Commons, Zaski began gathering the details she would need to build a six-year cash flow projection (pro forma). She chose six years because Wildcat typically had a hold period of three to five years, and she would need a forecast of net operating income (NOI) in Year 6 to estimate a projected sale price if the property were held for the full five years. KELLOGG SCHOOL OF MANAGEMENT 3 This document is authorized for use only by Paula Rela in Strategic Financial Decision Making taught by Raul Consunji, Wentworth Institute of Technology from April 2017 to October 2017. For the exclusive use of P. Rela, 2017. WILDCAT CAPITAL INVESTORS KEL553 The challenge for Zaski was to make realistic assumptions about the cash flows associated with the property, such as future rent and expenses. As her real estate finance professor often cautioned, \"Skilled financial analysts can make a spreadsheet justify anythingso think carefully about your assumptions.\" Her plan was to build a benchmark scenario based on her expectations about what would happen. She would then see how sensitive her results were to variations in her assumptions as well as to a few specific adverse scenarios. Tenant stability was especially important in the recessionary economy; property owners were being hit hard by defaults and vacancies as tenants went bankrupt. The rent roll revealed that Financial Commons' tenants appeared to be a stable and diversified mix, including the largest locally owned accounting firm in Illinois, the headquarters and lead branch of a significant local bank, a trade association for CFAs, an investment advisory services group, a large auto lender, and a national risk and claims management services group. Zaski knew that tenant stability was an especially delicate set of projections to make, as it seemed no one knew when a recovery was coming, and it was difficult to know how these particular tenants would fare in the next few years. However, she did feel confident that the Skokie area would support a steady demand for B+ office space in the long run. To begin constructing the pro forma, Zaski read through each existing lease carefully. All leases were dated January 1 of various years and would expire on December 31 of the lease expiration year. The leases were either triple-net (NNN) or modified gross, and Zaski made a simple table (see Exhibit 6) showing lease terms for each tenant. The leases called for annual rent increases of 2 percent. As owner, Wildcat would be responsible for paying all operating expenses, with the tenants reimbursing Wildcat a fixed amount (per square foot) depending on their lease type, with the modified gross lease tenants providing reimbursements at a lower rate. Zaski liked that no leases would be expiring in the next two years and that no more than two tenant leases expired in the same year, reducing the risk of high concentrated vacancy. From what she had learned, all of the tenants were pleased with management (which Wildcat planned to keep on after the acquisition) and would most likely renew their leases as they came up. Balancing the attractiveness of the local market against the more fundamental weakness in leasing markets generally, Zaski assumed that all existing leases would renew at 2 percent above the previous year's base rent, contain the same 2 percent annual rent escalation clauses, and maintain the same level of reimbursable expenses. She further assumed that she would not need to deduct leasing expenses to renew existing tenants. Zaski also thought it reasonable to assume that Wildcat could lease one of the three vacant spaces in time to collect rent during the first year of ownership. She further assumed that one of the remaining two vacant spaces would lease in Year 2, with the final space leasing in Year 3. To determine the rental rate for the new leases, Zaski examined recent vacancy and leasing trends for the area (see Exhibit 7). The average rental rate in the area was $21.80 per square foot at the end of the second quarter of 2009, but Zaski felt that because of the market downturn, $21 would be both prudent and realistic for the next couple years and that these new leases would not have annual rent increases. Each new tenant would be found through the help of a leasing broker, who would charge 2 percent of the first year's gross rent as commission. As was typical in the industry, Zaski assumed that an additional 3.5 percent of realized rental income (potential gross income less vacancy) would be allocated for credit losses. 4 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only by Paula Rela in Strategic Financial Decision Making taught by Raul Consunji, Wentworth Institute of Technology from April 2017 to October 2017. For the exclusive use of P. Rela, 2017. KEL553 WILDCAT CAPITAL INVESTORS She saw from the property's financial statements that total operating expenses came to roughly 61 percent of realized rental revenue, so she used this ratio to forecast operating expenses in Year 1. Zaski assumed that these expenses were fixedthat is, independent of the level of occupancyand that they would grow at 2.5 percent a year. With an exit in three to five years, it was likely that Wildcat would not need to make any major capital improvements to the property, so Zaski did not include these expenses in her benchmark scenario. Zaski also needed to plan for Wildcat's exit. She estimated the sales price of Financial Commons by applying an exit cap rate to the next year's forecasted NOI. For instance, a sale in Year 5 would be forecasted at a price equal to Year 6 NOI divided by an exit cap rate. Based on the experience of Tripp and the rest of the Wildcat team, Zaski assumed an 8.4 percent cap rate on exit. Although dismayed by the dearth of hard data and the complete lack of comparable office transactions in the submarket for more than a year (see Exhibit 8), Zaski saw that Wildcat could back into an 8.4 percent cap rate by assuming a sale at roughly $140 per square foot in three years, which Tripp believed was at the conservative end of what the region would support after credit markets stabilized. The Deal Wildcat was presented with the opportunity to buy the property for $10.4 million. This price represented a 28 percent discount from the current owner's purchase price and was more than 13 percent below the currently outstanding debt. Zaski set to work to determine if Financial Commons was a worthwhile investment for Wildcat in its real estate acquisitions-focused business. She began by developing a cash flow pro forma for Financial Commons assuming that Wildcat would sell the property after a three-year hold using her benchmark assumptions (see Exhibit 9). Having completed that analysis, Zaski next had to consider how the terms of the mortgage financing and the terms of the partnership agreement would interact to determine the expected returns to Wildcat and its limited partner investors. She developed a template for modeling the equity before-tax cash flows that each investor group would receive (see Exhibit 10) and began her work. As careful as she had been with the assumptions in her benchmark analysis, Zaski knew the future had a way of diverging from expectations, so she began to review and test her underlying assumptions to determine which were most important in determining the ultimate return received by Wildcat and its investors. KELLOGG SCHOOL OF MANAGEMENT 5 This document is authorized for use only by Paula Rela in Strategic Financial Decision Making taught by Raul Consunji, Wentworth Institute of Technology from April 2017 to October 2017. For the exclusive use of P. Rela, 2017. WILDCAT CAPITAL INVESTORS KEL553 Exhibit 1: The Office Submarkets of Chicago Source: CoStar Group. 6 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only by Paula Rela in Strategic Financial Decision Making taught by Raul Consunji, Wentworth Institute of Technology from April 2017 to October 2017. For the exclusive use of P. Rela, 2017. KEL553 WILDCAT CAPITAL INVESTORS Exhibit 2: The Near North Submarket of Chicago Source: CoStar Group. KELLOGG SCHOOL OF MANAGEMENT 7 This document is authorized for use only by Paula Rela in Strategic Financial Decision Making taught by Raul Consunji, Wentworth Institute of Technology from April 2017 to October 2017. For the exclusive use of P. Rela, 2017. WILDCAT CAPITAL INVESTORS KEL553 Exhibit 3: Performance of Office Submarkets of Chicago, Second Quarter 2009 Quoted Lease Rates (per sq. foot per year) Vacancy (%) YTD Net Absorption (sq. feet) Central Loop 104 42,229,795 13.10 -653,538 $29.31 Central North 702 33,053,460 13.80 -626,885 $20.55 Central Northwest 357 7,697,348 15.50 -78,626 $21.98 99 1,194,674 11.20 -22,149 $18.46 Market Cicero/Berwyn area East Loop Eastern East/West corridor Number of Buildings Total Rentable Building Area (sq. feet) 84 27,729,351 16.30 -1,300,203 $27.47 834 33,079,259 17.40 -428,717 $21.11 Far North 216 4,533,498 11.70 -73,701 $18.27 Far Northwest 795 9,656,432 20.80 -138,397 $19.09 Far South 183 3,200,489 13.70 4,267 $16.61 28 566,082 10.10 -7,554 $21.81 Gold Coast/Old Town Indiana 573 7,533,197 11.10 4,401 $16.76 Joliet/Central Will 591 8,759,302 16.70 287,561 $21.71 Kenosha East 9 51,540 6.50 3,425 $25.22 Kenosha West 77 1,036,219 17.50 2,034 $14.77 171 3,232,657 8.80 -39,890 $21.52 90 2,257,568 18.30 -41,028 $14.82 Near North 414 14,283,588 9.70 -151,522 $21.80 Near South Cook 291 3,392,824 11.60 -10,970 $19.17 Lincoln Park Melrose Park area North DuPage 257 7,702,324 22.00 -377,563 $21.39 North Michigan Avenue 103 15,399,929 11.10 -261,687 $31.57 Northwest city 847 14,967,070 8.90 -41,017 $18.47 Oak Park area 140 1,944,237 9.50 9,037 $21.20 O'Hare 415 18,823,485 23.60 -693,419 $21.47 Porter County 267 2,283,660 13.90 -13,146 $17.49 River North 217 17,729,379 12.10 691,561 $28.13 River West 128 4,907,923 13.10 -114,128 $18.59 Schaumburg area 761 34,811,302 19.60 -1,197,740 $19.55 South Chicago 472 11,372,599 9.80 -56,127 $17.70 South Loop South Route 45 West Loop Western East/West corridor Totals 36 3,452,173 5.00 40,388 $19.58 265 3,768,087 13.70 -44,416 $18.92 142 49,207,787 14.40 -966,617 $30.55 1,334 35,588,827 16.60 -205,852 $20.00 11,002 425,446,065 15.00 -6,502,218 $23.44 Source: CoStar Group. 8 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only by Paula Rela in Strategic Financial Decision Making taught by Raul Consunji, Wentworth Institute of Technology from April 2017 to October 2017. For the exclusive use of P. Rela, 2017. KEL553 WILDCAT CAPITAL INVESTORS Exhibit 4: Commercial/Multifamily Mortgage Bankers Originations Index 2001 Quarterly Average = 100 Source: Mortgage Bankers Association. Exhibit 5: Office Property Sales ($ in billions) Source: Real Capital Analytics. KELLOGG SCHOOL OF MANAGEMENT 9 This document is authorized for use only by Paula Rela in Strategic Financial Decision Making taught by Raul Consunji, Wentworth Institute of Technology from April 2017 to October 2017. For the exclusive use of P. Rela, 2017. WILDCAT CAPITAL INVESTORS KEL553 Exhibit 6: Rent Roll Tenant Sq. Feet Base Rent Year 1 Annual Rental Adjustment Summer Weill 9,959.00 $241,505.75 2% Remaining Lease Maturity (years) 7 Lease Type Modified Gross Reimbursed Expenses (per sq. foot) 2 North Shore Bank & Trust Co. 44,280.00 $737,262.00 2% 3 NNN 5 Illinois Institute of CFAs 10,250.00 $214,737.50 2% 6 NNN 5 Beverly & Torres 2,844.00 $66,265.20 2% 7 Modified Gross 2 iFinance Dealer Services 6,741.00 $164,480.40 2% 5 Modified Gross 2 APQ Consulting 3,612.00 $90,480.60 2% 8 Modified Gross 2 Suite 102 (currently vacant) 2,708.67 $56,882.00 0% NA NNN 5 Suite 107 (currently vacant) 2,708.67 $56,882.00 0% NA NNN 5 Suite 205 (currently vacant) 2,708.67 $56,882.00 0% NA NNN 5 Exhibit 7: Near North Leasing and Vacancy Rates Source: CoStar Group. 10 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only by Paula Rela in Strategic Financial Decision Making taught by Raul Consunji, Wentworth Institute of Technology from April 2017 to October 2017. For the exclusive use of P. Rela, 2017. KEL553 WILDCAT CAPITAL INVESTORS Exhibit 8: Office Sales Comparables Closing Date Square Feet Sales Price Price Per Square Foot 1033 University Place, Evanston Jun-08 92,520 $19,200,000 $208 8255 N. Central Park Ave., Skokie Mar-08 283,008 $11,000,000 $39 5700 Old Orchard Rd., Skokie Jan-08 34,365 $5,000,000 $145 5200-5202 Old Orchard Rd., Skokie Dec-07 350,559 $64,000,000 $183 Cap Rate at Sale Occupancy at Sale 82% 66% 5.0% 76% Source: Real Capital Analytics. Exhibit 9: Cash Flow Pro Forma for Financial Commons 2009 2010 2011 2012 2013 Year 0 Year 1 Year 2 Year 3 Year 4 1,685,377.45 1,715,672.08 113,764.00 56,882.00 Potential gross income Vacancy Credit loss Effective gross income Expense reimbursements 1,746,572.60 1,778,091.13 55,006.47 58,057.65 61,130.04 62,233.19 1,516,606.98 1,600,732.43 1,685,442.56 1,715,857.94 332,505.33 346,048.67 359,592.00 359,592.00 1,849,112.31 1,946,781.09 2,045,034.56 2,075,449.94 Operating expenses 958,684.20 982,651.31 1,007,217.59 1,032,398.03 Net operating income 890,428.11 964,129.78 1,037,816.97 1,043,051.91 1,137.64 1,137.64 1,137.64 51,870.00 51,870.00 51,870.00 Total operating revenue Capital expenditures Leasing commissions Management fee Reversion sale price 12,417,284.65 Property before tax cash flow from operations Property before tax cash flow (10,400,000.00) 837,420.47 911,122.14 984,809.33 837,420.47 911,122.14 13,402,093.98 KELLOGG SCHOOL OF MANAGEMENT 11 This document is authorized for use only by Paula Rela in Strategic Financial Decision Making taught by Raul Consunji, Wentworth Institute of Technology from April 2017 to October 2017. For the exclusive use of P. Rela, 2017. WILDCAT CAPITAL INVESTORS KEL553 Exhibit 10: Equity Waterfall for Financial Commons 2009 2010 2011 2012 Year 0 Year 1 Year 2 Year 3 EQUITY-LEVEL CASH FLOWS: Equity-level operational before tax cash flow Equity-level reversion before tax cash flow Equity-level before tax cash flow INVESTOR EQUITY CAPITAL ACCOUNT: Beginning equity investment balance Annual preferred investment Preferred return earned Preferred return paid Accrued but unpaid preferred return Ending equity investment balance WILDCAT EQUITY CAPITAL ACCOUNT: Beginning equity investment balance Annual subordinated investment Ending equity investment balance OPERATIONAL CASH FLOW: Investor-level cash flows Wildcat cash flows (excluding management fee) REVERSION ALLOCATIONS: Investor return of equity (with preference) Wildcat return of equity Investor additional proceeds Wildcat additional proceeds REVERSION CASH FLOW: Investor-level cash flows Wildcat-level cash flows TOTAL EBTCF: Investor-level cash flows Wildcat-level cash flows 12 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only by Paula Rela in Strategic Financial Decision Making taught by Raul Consunji, Wentworth Institute of Technology from April 2017 to October 2017