EXCALIBUR THE BACKGROUND

You are an acquisitions professional working for Excalibur Real Estate Partners, a regional multifamily operator based in California. Excaliburs investment strategy typically involves acquiring poorly managed class A and B apartment projects across the United States, reposition the assets through some combination of capital improvements and management improvement, and then hold the assets for up to ten years.

Excalibur targets a minimum levered IRR of 18% on its investments.

EXCALIBUR THE DETAILS

You have recently been presented with an opportunity to acquire Christophs Tower, a 275-unit, luxury apartment building with 300,000 gross square feet and 245,000 net rentable square feet.

The property is currently 60% occupied due to mismanagement with comparable properties fully, or almost fully occupied. Excalibur is looking to purchase the property for $375k/unit with all equity, lease up the remaining units, refinance at stabilization, and sell in 10 years from acquisition. In-place rent in year 1 is anticipated to be an average of $1.15 per square foot for occupied units and operating expenses are anticipated to be 30% of Revenue for the year and both operating expenses and rent growth are projected to be 3% per annum. Please assume 5% vacancy upon stabilization and closing costs of 2%.

The proposed strategy is to lease up the property at 5 units per month and refinance at Stabilization. The debt terms are as follows:

• Interest rate 3.5% per annum but calculated for monthly payments
• Payments are made monthly
• 30-year amortization period
• 10-year term
• Max loan to value is 70% at a 5% cap rate on NOI
• Minimum Debt Service Coverage ratio is 1.2x
• Loan Closing fees are 1.0%.

At the end of year 10, Excalibur will sell the properly at a going out cap rate of 5.5% with $200k in fees.

Question

Create a model to calculate the levered and unlevered internal rate of return and equity multiple. Based on your analysis, does this investment meet Excaliburs target return? What Purchase Price would meet Excaliburs investment criteria?