Stern square partners has been investing in dallas, texas over the past few years. a broker we work closely with sends us an offering memorandum for a vacant warehouse in the deep ellum neighborhood of dallas, an upcoming nightlife and restaurant area district similar to nyc's meatpacking district. there's no pricing guidance on the property and the Seller is just advising interested buyers to "make an offer". there's also not a lot of detail on the property itself other than a square footage breakdown and some pictures. the property clearly needs a gut renovation, but we think that it could be a great office/retail conversion given the large amount of development in the area, including a 400,000 SF office project to be fully occupied by uber. 

 

investment summary:

location: 429,413, 409, and 325 south 2nd avenue

occupancy: 0%

building size: 111,663 sf

vacant land: 0.40 acres

lot size(s): 3.21 acres

debt: free and clear

 

property breakdown:

 

address	size	category
429 south 2nd avenue	59547 sf	warehouse
429A south 2nd avenue	8080 sf	warehouse
409 south 2nd avenue	33956 sf	warehouse
413 south 2nd avenue	10100 sf	warehouse
325 south 2nd avenue	10000 sf	land

 

after discussing the project internally, we come up with the following assumptions: 

1. estimated closing costs of 4% of the purchase price 

2. hard costs (capex) required for interior renovations - $75 psf 

3. landscaping/parking renovations - $1,500,000 

4. soft cost estimate for interior renovations - $15 psf 

5. construction period (including permitting) - 12 months 

6. lease up period - 6 months 

7. estimated operating expenses - $4 psf during construction and lease up, $7 psf after lease up. this includes real estate taxes and property management. 

8. rental rate psf - $34 PSF 

9. estimated pro forma vacancy rate - 7.5% 

10. annual increases (beginning after lease-up); 3.0% for rents, and 2.5% for OPEX 

11. leasing commissions are paid once at the beginning of the lease and are 25% of the gross yr. 1 annual rent. 

12. you will take out a loan at purchase at 60% LTC (Loan to Cost) with an interest rate of 5.25% with 30 years amortization. 

13. you sell the property at the end of five years based on an exit cap of 6.25%. your closing costs are 4% of the purchase price. 

 

questions to answer 

1. what is your gross sales price in year 5?
   1. the gross sales price of the property in year 5 is $36,877,760
2. if we want to achieve a deal level IRR of 18%, how much can we offer to buy the property for?
   1. if you want a deal-level IRR of 18%, then we should offer [blank] to purchase the property
3. ASP decides to raise 90% of the equity required for the project from various high net worth investors. we decide to give these investors a 7% preferred return on their equity and anything beyond that we will take 35% of their profits (our 'promote'). if we want to give them a 15% IRR (net of the 'promote') how much can we offer to buy the property for?