Boeing Space Center

You work for a small private pension fund looking for more value in its real estate acquisitions. With current capitalization rates for class A office and multi-family properties near historically lows, and corresponding prices near all-time highs, the fund manager has asked you to look into different property types and price points, particularly those involving investments requiring less than $5MM in equity where there might be less competition.

After talking with several brokers, you have identified what looks to be an attractive opportunity to acquire a small industrial property in Houston, Texas. The property at 13150 Space Center Boulevard which consists of 52,400 square feet of space that is currently 100% leased to the Boeing Company. The broker explained that Boeing first took possession of the building in July of 2006 under a 10-year lease with 2 five-year options. The base rent was $10/SF with a 2% annual increase. The renewal rates are at $12.5/SF and $14.5/SF and also subject to the 2% annual increase. The property at that time was financed with a $5,000,000, 20-year assumable loan at 6.25%. The purchase price is $8.2MM.

1. 1)The fees to close including an assumption fee are $60,000.
2. 2)Buyer shall take ownership of the building and lease by assignment on August 1, 2012.
3. 3)Tenant is responsible for CAM, Real Estate taxes and Insurance (triple net)
4. 4)The broker estimates that there is a 75% likelihood that Boeing will exercise its renewal options.
5. If so, there shall be no exposure to tenant improvement, leasing commissions or downtime.
6. 5)If not, the Broker estaimates the tenant improvements for a new tenant shall be $20/SF (adjusted for inflation) and that the broker commission shall be 8% of the total rent stream, and
7. the downtime six months.
8. 6)If vacant the total CAM charges the owner will be forced to carry are estimated to be about 12 of
9. what they would be with a building at 100% occupancy.
10. 7)You believe it is best to assume the mortgage since getting anew loan with so little guaranteed
11. time of the Boeing lease may be difficult. At closing the mortgage balance shall be $4,085,177 and the first payment shall be due on September 1, 2012.

Provide investment summary analysis for committee.