You are a real estate investor considering purchasing a 200,000 square foot parcel in order to build a two-story warehouse, which will be leased to four tenants.

The parcel is zoned for industrial use and comes with a 2.5 FAR. The site is presently on the market for $20,000,000. Your investors are looking to achieve no less than a 15% rate of return. The improvement will contain several large loading docks and is adjacent to a main rail line and small shipping terminal. Part of the building offers refrigerated storage.

You expect to lease the space to four tenants: Baskin Robbins, which occupies 175,000sf and pays a base rent of $8.25psf, Tokar Enterprises, which occupies 80,000 square feet and pays a base rent of $9.00psf, Ascella Financial, which occupies 95,000 square feet and pays a base rent of $8.50psf and ColdStone Creamery, which occupies 150,000 square feet and pays $8.00psf in base rent.

The market appears relatively strong, with an expected commercial vacancy rate of 7.00%. The leases for both Baskin Robbins and ColdStone allow the landlord to recover fuel and utilities on a pro-rata PSF basis for each tenant. Though the building will be new you expect to reserve approximately $10,000 per year for potential repairs and maintenance.

You will hire a third-party property manager at a cost of $35,000 per year, which can be fully recovered from all the tenants on a pro rata PSF basis. Annual Expenses are estimated at: Utilities $25,000, Fuel $30,000, Other $10,000, RE Taxes $50,000 and Insurance $15,000. NOI is projected to grow at 3.50% per year.

Your discussion with local banks sparks the interest of one lender, who will offer debt financing at the lesser of 65% LTC or 60% LTV (assuming an 8.00% cap rate). Construction will take one year, after which the property will be considered completed and stabilized. At closing, all required equity will be contributed in order to purchase the land. After construction, completion, and stabilization, the construction loan will convert to a permanent loan for 10 years at an interest rate of 6.00% based on a 30-year amortization schedule. You discuss construction costs with your architect and engineer. Hard costs are estimated at $25.00psf with Soft Costs (inclusive of the Interest Reserve) estimated at $7.00psf.

You expect to sell the project at the end of the 6th-year holding period at an Exit Cap of 8.50%.

1. Calculate NOI

2. Determine Value

3. Determine Total Project Costs (Acquisition, Hard, and Soft)

4. Calculate LTC and LTV

5. Determine the Capitalization Structure (the amount of Debt and Equity needed)

6. Calculate your NPV and IRR

7. Determine the Levered Cash-on-Cash return each year.