Your response should cover relevant concepts as discussed in class, synthesized for the client

for her use in evaluating the opportunities as set out. Any assumptions made to assist in your

analysis should be clearly stated and reflect current market conditions.

One of your clients, Susan Smith, is a relatively risk averse investor. Since 2018, however, she

has been dissatisfied with the returns that have been generated in her equity portfolio. She is

seeking your advice after having been approached by a real estate broker who has outlined

three interesting alternative investments.

The first is a downtown development site which is currently zoned for residential use but sits

in an office node. While the property is not connected to the underground PATH network, it is

well located and suitable for 100,000 sq ft of office. The property can be purchased for $70

per buildable foot and office lease rates in the area are in the range of $20/sq ft. Ms. Smith

has no prior development experience but has been assured that a development team can be

assembled to complete the project.

The second is a suburban Toronto industrial property of 100,000 sq ft built in 1985. The

property is 70% leased to a private company related to the vendor. The company has

experienced some financial difficulty in the past but has never defaulted on its above-market

lease rate of $15 per sq ft (property NOI is $1,200,000 per annum). The property is being

offered for sale for $20,000,000 but the broker believes that the vendor will consider all

reasonable offers provided that the sale will close quickly and in any event prior to the end of

the calendar year.

The third option is a mid-town apartment building constructed in 1975 and fully renovated in

2005. There are 100 units in the building leased at an average price of $2,100 per month or

$2.45 per sq ft (average rent in comparable buildings is about $2.60 per sq ft). Costs associated

with operating the property are 5% of gross rental revenue. The broker is unsure of market

vacancy rates, but the subject property has consistently enjoyed occupancy rates of about 98%.

The property is listed for sale at $63,000,000.

Ms. Smith is seeking your guidance. She has a maximum of $15 million to invest in real estate

assets as part of her $75 million personal net worth. She is unsure of the impacts of COVID and

higher interest rates on real estate, and is seeking your guidance in terms of asset classes,

financing opportunities, risk/reward and the broader market

With regard to cap rates and other relevant matters, you will presumably need to explain both the concept and your numeric conclusion in sufficient detail that Ms Smith understands some of the theory and how it relates to her investment choices.

Presumably much of your focus will be on current market issues which are affecting demand, asset class desirability, cap rates, financing costs, etc.