Subject: Asset Management

Introduction.

Situated in Calgary's highly sought-after North East quadrant, The Arthur Cityscape Condos is a New Condo development. The city's Skyview Ranch neighbourhood offers a unique opportunity to live adjacent to a 115-acre reserve while being situated just a 20-minute drive from the burgeoning downtown core.

Northeast Calgary is a highly sought-after and beautiful part of the city. With burgeoning employment hubs and a quickly growing tech industry, this area gives professionals easy access to their workplaces, University of Calgary and to the Calgary airport.

Based on the property we chose in Phase I, we filled out the green boxes in the attached spreadsheet, "Assumptions".

What assumptions must be considered to develop a CAPEX analysis? We will explain each of our inputs and reference all sources.

The goal of these assumptions is to help determine the net present value, modified internal rate of return, economic value added, and discounted payback period.

1.- Short-term rental operational cash flow

Average daily rate (range): The average daily rate (ADR) is a metric widely used in the hospitality industry to indicate the average revenue earned for an occupied room on a given day. The average daily rate is one of the key performance indicators (KPI) of the industry. This rate range in Calgary, and in this specific area in the North East of the city, and for this kind of apartment is between CAD$120 to 160 per day. The Arthur Cityscape is one of the best alternatives in this are of the city, there is a new Condo apartment with a very good projection to the future.

Management fee (range): The management fee is the cost of having your assets professionally managed. The fee compensates professional money managers to select securities for a fund's portfolio and manage it based on the fund's investment objective. Management fee structures vary from fund to fund, but they are typically based on a percentage of assets under management (AUM). In this case the management fee range is between 8% and 14%.

Vacancy rate (range): Calgary's rental vacancy rate for short term rental dropped in a range of 30% to 50% in 2022 the lowest since 2014, according to a new annual report by the Canadian Mortgage and Housing Corporation. According to The Truman Houses (in a short call), their expectation for a vacancy rate less of 35% for The Arthur Cityscape Condo, that mean more than 65% of occupancy rate will be on 2027, when the condo will start in operation.

2.- Financing, including purchasing and selling

The financing amount assumption for Matt and Roise investment in the condo in the Calgary is as under

Required rate of return (or discount rate): 10%

Growth Rate: 3%

Financing Rate: 4%

Closing Costs: 3%

Reinvestment Rate: 6%

With the assumption of ADR( Average daily rate) range of $120 to $160 and finance of $ 100,000 at 4% interest rate for 20 years the period to reach the breakeven point for the investment of Matt and Rosie will be 40.2 years which indicates that it will take longer than 40 years to recover the initial investment. Moreover, based on the results from table1 the required rate of return of 10% generates negative as shown investment in the condo is not profitable with NPV of $ 259,969.93, which is negative. Furthermore table 1 shows Internal rate of returns and modified internal rate of return which are negative and lower than the required rate of return shows that investment might not be profitable. Matt and Rosie can go for an alternate option for investment which can provide a higher rate of return such as securities like stocks, bonds, or mutual funds, which may have a reinvestment rate of at least 6%, but if they prefer to buy this condo they need to negotiate the interest rate or purchasing price of property or need to self finance the investment.

Analysing all the three tables, the positive side of investment is that the chances of the property to generate the revenue at year 10 is $40,004.35 which could provide a significant return on investment however the chances of the price of property to appreciate or depreciate demands on the market condition. As per outcome of table 3 the net income of the property is projected as $5,432.23 and the net cash flow is $18,991.95 which shows the investment will generate a positive cash flow and profit. Furthermore, the sale of property generates a positive return but the net present value of investment over the period of 10 years is negative. The investment cap rate is 7%, which suggests that the potential income from the property may not be very high. Overall, the investment in the condo appears to be profitably moderate but may not generate long term required return.

3. Taxes:

To calculate the value for depreciation each year, we can follow the double declining depreciation method wherein, certain assets are depreciating twice as the rate outlined under straight line method. By using this method, the depreciation value is very high in the first year and gradually lowers down as the valuation is done over a long period of time. In this case, the depreciation is 20% each year for 10 years. The depreciation value starts from $72,100 and in the 10^th year it is $9677.10.

The property is in Calgary, Alberta, wherein, the federal income tax ranges from somewhere between 10% to 15% in 2022. Alberta takes pride in the fact that it is the only province in Canada without a provincial sales tax, relying instead on the money it gets from bitumen sales. This mindset, also referred to as the "Alberta tax advantage," dates to 1936, when a new Social Credit administration enacted a two percent sales tax that had been suggested by an income tax commission.

To evaluate the property tax, the following formula is used to determine the price of the property each year on which the tax is imposed: Value of property= Cost - Depreciation + Land Value. According to the reports and researchers, the predicted property tax values for the upcoming years in Calgary ranged from 3.2% to 4.0%. This percentage varies overtime and is decided by the municipality body and market force of a particular area. As a property depreciates down the years, usually the imposed tax is also lowered except in some unusual market situations or policy change. Like in 2022, the property tax rate was 0.79% and in 2023 it is 4.4%.

Question:

4. Summaries - please do not simply summarize what I can already see... I'm looking for your interpretation of the results (ie- any standout figures? Is this a good investment? Is the level of debt adequate? overall thoughts about the numbers) Table 1- Operational Net Cash Flow Table 2- Terminal Cash Flow Table 3- Year 10 Operational Net Cash Flow