You are an analyst with Perception Partners and have been asked to make a preliminary recommendation regarding the acquisition of ROSE GARDEN APARTMENTS. This project was built 5 years ago and contains 250 units in a suburban market area. The broker who brought the project to your attention indicates that the asking price will be $27,000,000. S

Perception generally believes that it should acquire Rose Garden. However, management believes that market returns (IRR) for its investors should be in a range of 8% (compounded annually) for an all cash purchase (i.e. unlevered equity IRR) of this type. Perception plans to (1) own the property for 5 years then sell it and (2) believes that at the beginning of year 2, rents will grow at 3% per year. At the present time, Perception believes that the sale price that it hopes to achieve at the end of year 5 should be based on a going out, or exit, cap rate that will be 50 basis points greater than the going in cap rate. Perception Management believes that debt financing (leverage) may increase investment returns on equity. You have sent RFPs to three mortgage bankers and from the responses, you have determined that debt financing will be available at 75% of the $27,000,000 offering price. Financing would be an interest only loan with an interest rate of 6% annually for 30 years (monthly payments)

gross rent = $2,886,000 net income = $1,645,000 operating expense = 40% vacancy = 5%

- Your managing partner instructs you to begin the investment analysis by assuming that Rose Garden is acquired for $27,000,000. Prepare annual statements of net operating cash flows for the next 5 years as well as of the cash flows expected to be generated from sale of the property at the end of year 5. (Rent for year 1 should be $2,886,000 in your projections.) What would be the unlevered and levered equity IRRs over the 5-year period of ownership? What would be the equity cash flow multiple generated from the investment? What would the debt coverage ratio be each year? What would be the annual equity cash on cash returns generated from the propertys operating cash flows?

- You have learned that construction costs for building a new Rose Garden are estimated to be $100 per square foot (PSF) of rentable area (224,500 rentable area). If Rose Garden is accurately priced at $27,000,000 what does this imply for its underlying land value (per acre) units per acre = 17.9? What if you do additional research and find that comparable unimproved land (14 acres) in the same submarket has recently sold for $6,000,000. What may this suggest for Rose Garden or for future real estate development in this market? What if recent comparable land sales were actually in the range of $3,000,000?