You have slaved away for four years as an Associate in the real estate group of the prestigious investment banking group Gold in Stacks $($GIS$).$ You have been able to accumulate savings of $$75,000,$ and your current lifestyle requires you to make a pre$-$tax gross income of $$200,000.$ You have a two$-$year$-$old child and a working spouse. Secretly you have always wanted to be your own boss and to build equity with your sweat. One day while walking home you notice an old, abandoned, six$-$story office building that is about $30,000$ gross square feet. Intrigued by the building, you do a little homework and conclude: $$ The neighborhood is solid, and is largely owner$-$occupied high$-$ and mid$-$rise residential condominiums. $$ A typical condo in the neighborhood is about $1,400$ square feet and sells for $$450,000-$$$500,000.$ You can purchase the property $($inclusive of transaction costs$)$ for $$3\mathrm{.}45$ million. $$ You estimate that if all goes smoothly, you can renovate the property into condos for about $$3\mathrm{.}3$ million in hard and soft costs $($including interest expense$).$ The property is unlikely to support any ground$-$level retail. $$ Construction will probably take about one year. Based upon your knowledge of financial markets and equity joint venture deal structures, you believe that: $$ You can get a combined purchase and construction loan secured by the property of $65\%$ Loan$-$to$-$Cost, drawn down over the purchase and construction period, subject to all equity going in first. $$ The loan would carry an annual interest rate of $6\mathrm{.}8\%$ payable monthly, accruing until cash coverage exists. $$ The lender will sweep all cash inflows not required for construction and sale of units. $$ The loan would be for a term of three years with no amortization. $$ A private equity fund would be willing to provide the necessary equity; however, they will require you to personally invest $3\%$ of the cash equity, which will be given a subordinated equity position. $$ They will give you a $20\%$ carried equity position on any profits the project earns in excess of an annual $11\%$ project$-$level equity IRR. $$ They will allow you to take a development fee of $$132,000,$ with half paid on a pro rata basis to construction outlays, and the other half retained in a subordinated equity position. Even though half will in fact be paid out during construction, the entire $$132,000$ amount will be credited to you as carried equity. Though you hate to admit it$,$ if you undertake this project, you will have to essentially put all of your savings at risk, and also work on it full time. If you$$re going to take all of this risk and disrupt your predictable and stable lifestyle, you would require that the project hit a $30\%$ gross development profit margin $($sale value $/$ total development cost $1).$ This high a margin is also required to get the investor on board, as they typically do not write checks for anything less than $$5$ million in size. Calculating Required Sales Amounts for Achieving a Targeted Profit MarginUnits

SSF $80/20$ SplitSum of above $2$ lines

Profit

Total Profits to Parties $\backslash (=\backslash )$ Total Project$-$Level Profit:

TRUE

Split "Cash Left for $80/20$ Split"

in dollar term

Find the Equity $\backslash \%$ above to derive the dollar term

Find the Equity $\backslash \%$ above to derive the dollar term in dollar term

Dollars from $80/20$ Split

Dollars from $80/20$ Split

Check whether the sum of investor$-$Developer splits is equal to project$-$level profit Value should be TRUE if the table is filled in correctly