A. Introduction

In this group project consider your group as real estate investment analyst with Landmarks Real Estate Consulting.The consulting firm has been retained by Southfork Private Equity (SPE) Inc., a major private equity and asset manager for institutional investors and high net worth individuals.SPE invests in both new and existing prime properties (although it does also operate a vulture or opportunistic fund) on behalf of its clients. It also holds various types of real estate (both direct and indirect) for its own portfolio.SPE uses both equity and debt in its capital structure. Additionally SPE uses various acquisitions vehicles including limited partnership, joint venture, syndications, commingled funds open-end or private real estate investment trust, vulture funds, real estate hedge fund, etc.

The myriad of alternatives real estate investment vehicles provides SPE with flexibility which allows for market play consistent with real estate market cycles.Indeed, both your consulting firm and SPE follow the real estate market very closely and attempts to track real estate cycles using National Council of Real Estate Investment Fiduciaries (NCREIF) Index Capital Return component.Tracking the real estate markets to determine its sequence (property peak), frequency, and amplitude (peak to trough) is very useful for determining when to buy and when to sell.

Sourtfork is considering investing in the four-story suburban office building on behalf of its clients. If it invests in the property SPE will manage the property either externally or internally. Southfork invests both long term and short term depending on clients' and its own needs and risk appetite. In this particular case, it will likely hold the property for at least for 5 years or probably for 10 years.The overall objective of SPE is to hold diversified portfolios that outperform both the NCREIF and NAREIT return indices.

The attached proposed office project provides you with extensive information on the proposed project as well as in-depth and useful market information pertaining to office property market. This information was gathered and analyzed by a previous analyst with a competitor consulting firm, called Embacadero Associates.

B. Your Tasks

You have been assigned the task of analyzing the proposed project again and providing appropriate recommendations to Southfork Private Equity (SPE).Your task is to undertake a complete project feasibility analysis to determine whether an office project can be built on a specific site already selected by the client, consistent with regulatory/environmental requirements and leased at competitive market rates to justify total capital investment (debt and equity) in land and improvements, as well as other claims on the property. You are then also asked to provide recommendation on the suitability of this investment to the clients of Southfork Private Equity Inc.

Accordingly, as shown in several tables included in the case market and investor information have been diligently collected and analyzed by the previous analyst. This information include the following: proposed building description, site description, office market data, suburban office market data, suburban office market investor survey responses, summary of comparable office rentals, mortgage financing information, comparable office property sales, comparable land sales, Marshall Valuation Service (MVS) cost estimate, and construction cost for comparable projects

More formally you are asked by your boss Mr. Henry Knight of Landmarks Real Estate Consulting to conduct complete project feasibility analysis of relevant market data and information.Your tasks should include but are not necessarily limited to the following:

(a)Legal, environmental, and physical feasibility analyses:type of property rights and their investment implications, environmental factors and regulation, and whether the site has enough square footage to sustain the office building.

(b)Market analysis: assessment of office market conditions market, potential demand for office space, supply, market absorption, market risks, office market cycle, etc

(c)Financial and investment feasibility analyses: this part of your analysis should include use of valuation and investment feasibility metrics such as front/back door, cap rates analysis, multiples valuation (e.g. price/rent ratio, market comparison approach, and complete discounted cash flow (DCF) analysis.In conducting the DCF analysis use both before and after tax approach, equity valuation, leverage analysis, risk-return analysis, etc. c

C. Guide to financial and investment analysis

To assist you in conducting the financial and investment part of the assignment I have listed a series of questions and issues to prompt and draw your attention to key financial and investment aspects of the project relevant for an investment analysis of this type. Your analysis should at the very least address the questions and issues listed below (1-15).I would also encourage you to include additional analysis that you deem will help shed more light on your analysis and conclusions. You are not limited to the following guideline issues to be analyzed.

1.Using the market data in Tables 3, 4, 5, and 6 analyze the office project by estimating (in the form of range) the following market metrics or performance measures for Class A suburban office investments and briefly justify your conclusions:

a.Market rent per square foot in year 1 ,

b.Percent growth rate in market rent per year,

c.Vacancy rate,

d.Operating expenses per sq. ft in year 1,

e.Percent growth rate in operating expenses per year,

f.Going-out (terminal) cap rate

g.Investors Required yield (IRR)

h.Total construction cost per GLA

2.Now based on your analysis above, provide realistic estimate of the following for proposed project and state your assumptions.

a.Rent per square foot in year 1,

b.Percent growth rate per year,

c.Vacancy rate,

d.Operating expenses per sq ft in year 1

e.Percent growth rate of operating expenses per year

f.Terminal cap rate or going-out cap rate

D: Initial Financial Solvency Analysis Using Front Door/Back Door Model

3.Now use the information that you have gathered in questions 1 to 2 and other relevant information from the case conduct an initial financial solvency analysis using the Front Door/Back Models. Alsoinclude other market feasibility metric such as price to income ratio

4.Now base on your analysis of the suburban office market as contained in question (1) above, which were based on Tables 3 to 6,and your front door back analysis forecast the NOI for years 1 through 6

5.Using you analysis of the market as contained in question (1) above, which were based on Tables 3 to 6, forecast the expected selling price at end of year 5. Please show the methodology you used to forecast the selling price, then proceed to estimate the net selling price

6.Using the mortgage market data in Table 7 and other information scattered in the case , provide and justify reasonable value for the following: (a) Mortgage Interest Rate, (b) Loan-to-value ratio, (c) Amortization period, (d) Term of loan for the office project, depreciation base, depreciation method, marginal rate

E: COMPLETE DISCOUNTED CASH FLOW ANALYSIS USING THE SPREAD SHEET PROVIDED BY PROFESSOR SA-AAADU

7.Using the information you have distilled so far from the case conduct a complete DCF analysis of the proposed project.You are free to make additional assumptions. However you must justify any assumptions you make. Conduct your DCF analysis

8.Perform additional financial analysis from the equity investors perspective by estimating (a) Net Present Value (NPV), (b) Profitability Index (PI), (c) Internal Rate of Return (IRR), (d) Total Investment Value, (e) Annualized Net Present Value (ANPV).

9.Estimate (a) Before Tax Required Yield, (b) Break-even Interest Rate, and (c) Total Present Valuethe Investment

Note: You can certainly adopt the DCF model that I posted on ICON to perform most of this analysis. But as always the devil is in the assumptions that you make. That is why I am asking that you go through the analytical process that I have outlined above. I want to see some real conceptual and analytical thinking in this case assignment.