MEMO DATE: September 10, 2004 TO: Tony Filipovitch FROM: Kari Barker RE: Real Estate Pro Forma I performed a Real Estate Pro Forma to determine the income and expenses associated with a 20,000 square foot building that served as a former bank. The building would cost $87,500 to purchase and an additional $600,000 to rehab. The investors would require a minimum pre-tax return on equity of 15%. Mortgage financing at 12.5% is available for only one-half of the acquisition and improvement costs. My findings are summarized in the paragraphs below. Feasibility of the project The attached Excel spreadsheet titled Real Estate Pro Forma calculates the costs associated with the building acquisition and rehabilitation and the income generated from the project. Both the front door approach and the back door approach on the Real Estate Pro Forma analysis show that the project as described is not feasible. The "front door" approach is an acquisition-driven model. This approach starts with the cost of acquiring and improving a property and concludes with the minimum rent, or income, needed to make the project work. The front door approach indicates that a rental rate of $8.98 per square foot would be required to make feasible the project as described. The rental rate of $8.98 per square foot is nearly $2 a square foot higher than the $7 per square foot market rate. The "back door" approach, which is an income-based model, begins with market rents. It formulates the maximum amount of money available for acquiring and improving a property. The back door approach indicates that the project as described would support a justified equity of only $136,299. This amount is far short of the $378,250 required from the investors. The problem: a. prepare a proforma which demonstrates their analysis and conclusions b. now using the proforma you constructed, propose an alternative scenario in which the project is worth doing c. write a short memo explaining your alternative approach and the attractiveness of the project in this scenario.