Problem Set 10

Problem 1

ABC Fund has decided to enter in to a joint venture with Newtown Development to buy and operate an office building that will require an initial investment of $100 million. There will be no debt financing for the joint venture. Each party invests its capital at the beginning of the first year and cash flow for operations (NOI) is projected as follows:

Year 1: $2,000,000

Year 2: $4,000,000

Year 3: $9,000,000

Year 4: $12,000,000

Year 5: $14,000,000

Year 6: $15,000,000

The property will be sold at the end of year 5 based on a 9.8% cap rate on year 6 NOI. There is a 2% sales commission on the sales price.

ABC Fund will invest $45 million (45%) and Newtown Development will invest the remaining $55 million (55%).

ABC will receive a 5% return on its investment, and the return in noncumulative. That is any shortfall is not carried over the next year before Newtown Development receives a distribution. After ABC receives its 5% preferred return, Newtown Development will receive a 5% return on its capital, noncumulative. Any remaining operating cash flow is split 50/50 to each party.

When the property is sold, sales proceeds are distributed as follows:

First, repay the initial capital investment by ABC

Next, repay the initial capital investment by Newtown Development

Thereafter, split 45/55 between ABC/Newtown Development

Calculate the IRR for:

The entire project

ABC

Newtown Development

Problem 2

Do the same analysis, except there is an interest only acquisition loan for $50 million at 4% due on sale. The initial equity for ABC/Newtown is 45%/55% after taking into account the $50 million acquisition loan.

Calculate the IRR for, but levered for:

The entire project

ABC

Newtown Development