Case Assignment: Bob Dobalina Real Estate Finance Robert "Bob" Dobalina runs a small investment advisory rm based in Hoboken, New Jersey. For the past six months, Bobs attention has been focused on his clients Ray and Connie Marble. Connie was the developer of an app called Yip Yap that used dierent sounds from dogs - barks, howls and whimpers - to create aural emojis. Connie sold the app to a social network for a tidy sum and invested most of the proceeds in stocks, bonds and short-term securities. She and Ray were looking to diversify their holdings and, as Rays family had some experience owning and managing a small apartment building, they decided to put the funds that remained into real estate. The Marbles have been looking over investment opportunities for some time now without much to show for it. They rst considered multi-family units in Hoboken and Jersey City, but residential properties in the area seemed expensive and just didnt make sense based on their cash ow projections. As for commercial property, institutional investors have decreased the minimum size of acceptable investments in real estate and the additional capital allocated to the market for class A o ce made that sector similarly expensive. With Ray and Connie on the verge of giving up, Bob made the suggestion to look at class B o ce properties. One in particular, the Maxwell Medical Center, seemed like an attractive investment opportunity. The Maxwell Medical Center is located on Willow Avenue, not far from the Hoboken University Medical Center. The property oers 32,000 square feet of rentable space and is on the market for $7.6M. The building was constructed in the 1920s and has been renovated several times since, the last major face lift was performed in 2000. The property is currently fully leased with three tenants. Based on conversations with the property management company, the current tenants nd the space to be satisfactory and its location near the Hoboken train station is a big plus. The largest tenant, occupying nearly half of the buildings space, Squill Pharmaceutical, has been in the building now for more than 10 years. Finally, the medical practice on the ground oor has just renewed and signed a new 5-year lease. A few back of the envelope calculations suggested that the property seemed to be a good investment. Bob put the Marbles in touch with QOD Bank and, based on the rent roll and a rough pro-forma, QOD was willing to lend up to $4.94M toward the purchase of the building. The debt service on the loan is based on a 5.75% contract rate and 30-year amortization. Just as Ray and Connie had come to the point where they had decided to make an offer on the Maxwell Medical Center, Bob was informed by a local broker of another property, Turtle Tower, that was coming onto the market. Turtle Tower is located on Washington Street, the main throrough fare running through Hoboken. The building, with an asking price of $7.175M, is ve stories tall and offers 30,500 square feet of rentable space. The ground oor of the building is home to the Tasty Turtle Bar & Restaurant, a popular and historic watering hole serving up burgers, beers and, yes, turtle soup. The restaurants name refers to the Hoboken Turtle Club; a social club founded in 1796 by John Stevens.1 The upper oors, oering 22,000 square feet of o ce space, had, until recently, seen better days. The space was largely vacant and, until a recent renovation, in evident disrepair. In 2021, a developer purchased the property and went about updating and renovating the upper oors of the building. As a realty company has just signed on to take the remaining vacant space in the building, the development team is now looking to sell and move on to their next project. After a few quick calculations, it appeared that Turtle Tower also provided most of what the Marbles were looking for in an investment property. QOD was also willing to provide nancing for this acquisition, but on more conservative terms, as they had little experience with underwriting space occupied by restaurants. In the end, QOD agreed to lend on the same rate and amortization period as oered for the Maxwell Center, but only up to a 55% LTV ratio based on the asking price for the property. On the surface, the Marbles thought that Turtle Tower seemed like a safer bet, especially since it seems like the worst of the pandemic is in the past; four oors of newly renovated o ce space sitting atop a long-standing and successful restaurant. The medical center, a solid and steady performer for many years now, seemed a little tired and worn. Bob suggested, as he does with all his clients, to rst look at the numbers. If the properties are roughly equivalent in terms of risk and return, then qualitative and personal preferences should be the deciding factors. If not, then it is important to make an informed, quantitative decision. While transactions volume typically slows during the holiday season, Bob noted that there is currently a limited set of available properties on the market and that if they, the Marbles, do not act quickly, these opportunities may be snapped up by someone else. You interned at Bobs rm during the summer between your junior and senior years at Rutgers. As a member of a small and busy rm, you had an assortment of dierent responsibilities in a variety of dierent deals. After the summer, Bob oered you the opportunity to return as a nancial analyst after completing your education at Rutgers and you accepted. After graduating in the spring of 2022, you settled into your new job. Your rst responsibilities involved many hours of cash ow modeling in Excel and Argus, but, as time passed, Bob oered you a more intimate look at the deals that his high net worth clients were considering. You toured several properties with Ray and Connie and had done most of the basic nancials for these two opportunities. In the past, Bob had taken your preliminary work and then constructed detailed cash ow projections and investment recommendations for his clients. This time, however, Bob had to leave town due to a family emergency and asked you to complete the work needed to make an informed recommendation. Just before leaving, Bob turned over the work he had already completed for Maxwell Medical, along with a few notes about Turtle Tower. You need to complete a set of cash ow projections for Turtle Tower, produce the metrics that the rm uses to evaluate investments, and then make a written recommendation to the Marbles. Most of the information for the nancial analysis is provided in the spreadsheets Bob gave to you. There are a couple of elements associated with Turtle Tower that he highlighted:

- Base your analysis on taking control of the property as of January 1, 2024.

-Given the recent renovations of Turtle Tower, the market rent is expect to increase at a slightly higher rate.

-The newest tenant, Rays Realty, will take occupancy as of January 1, 2024. As part of the sale agreement, the sellers will pay the TI expense and leasing commissions associated with the tenant in the rst year. Note, however, that the lease expires after 5 years and the Marbles will be responsible for these expenditures when a new lease is signed in year 6.

-The expense reimbursements for the Tasty Turtle are based on a net structure. It is easiest to treat the recoveries as a modied gross lease but with an expense stop of $0 in each year. The real estate tax expense grows at 2% annually. This is in contrast to the other expense that grow at the expense ination rate. The Marbles are willing to contribute up to $4M as their equity contribution to the investement. Based on the information they provided, the Marblescurrent household income puts them in a 37% marginal income tax bracket. Their capital gains and depreciation recapture rates are 20% and 25%, respectively. Finally, they are looking for a minimum after-tax return of 10%.

Instructions: This is the first part of a two-part case assignment. In this part, you will generate cash ow projections for a 5-year holding period for Turtle Tower. A template, Turtle Tower_blank, is provided. To check your work along the way: The unlevered IRR is 10.62%, the before-tax IRR is 15.00%, and the after-tax IRR is 11.09%. Your objective is to match these returns based on the information and modeling performed in Excel