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Real Estate Case Study – 60-Minute Mixed Office/Retail Acquisition Modeling Test
You are an institutional investor contemplating the acquisition of a 92% leased, 3-story, 25,000
rentable-square-foot office/retail property in Manhattan (“1201 Broadway”). The current
owner has offered to sell the building for $1,000 per rentable square foot, and he is not willing
to negotiate (yes, prices are that high – it’s New York).

The building is currently occupied by two office tenants and one retail tenant on the ground
floor. The retail tenant is on a 10-year lease, but the two office tenants have 5-year leases that
expire within the next 3-4 years.

You believe that you can increase the property’s value by getting the two office tenants to sign
longer-term, 10-year leases in exchange for below-market rent escalations; potential rental
income will be lower, but NOI will be more stable.

Your firm plans to acquire the property along with an Operating Partner who will run day-to-
day operations, and you plan to hold it for five years and then sell it.

Please use the following assumptions and complete the Excel template that has been provided
to you. You have 60 minutes to make the calculations and respond to the case study questions:

Operating and Rent Roll Assumptions:

Assume that each figure applies to the historical year (e.g., Insurance per Rentable Square Foot
was $2.00 in FY 17) and then escalate the numbers from FY 18 onward:

• Property Management Fees: 3.0% of Effective Gross Income

• Common Area Maintenance per Rentable Square Foot: $5.00; 3.5% annual growth
• Common Area Utilities per Rentable Square Foot: $3.00; 3.0% annual growth
• Insurance per Rentable Square Foot: $2.00; 2.5% annual growth
• Real Estate Taxes: 4.00% of initial property value; 2.0% annual growth
• Replacement Reserves per Rentable Square Foot: $2.50; 3.0% annual growth

There are only three tenants in the building, so you will model the revenue and expenses on a
lease-by-lease basis. Here is the lease information for each tenant:

Tenant #1 – Office Suite – 10,000 square feet

• Lease Type: Full Service (Tenant is not responsible for paying any expenses)

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• Lease Expiration Date: 2019-12-31

• Rent per Square Foot: $120.00; 4% growth declining to 3% in the last three years

Tenant #2 – Office Suite – 7,000 square feet

• Lease Type: Single Net (N) Lease (Tenant is only responsible for share of Property Taxes)
• Lease Expiration Date: 2020-12-31
• Rent per Square Foot: $105.00; 5% growth declining to 3% in the last two years

Tenant #3 – Retail Suite – 6,000 square feet

• Lease Type: Triple Net (NNN) Lease (Tenant is responsible for share of Common Area
Maintenance/Utilities, Insurance, and Property Taxes)
• Lease Expiration Date: 2024-12-31
• Rent per Square Foot: $90.00; 6% growth declining to 3% in the last two years

You should model out the possibility of a lease renewal or lease expiration for each tenant by
using weighted numbers based on the renewal probability. Use the following figures:

• New Lease Term: 10 years upon expiration for all tenants

• Renewal Probability: 70%
• Months of Downtime for Non-Renewals: 6
• Months of Free Rent: 6 (New Tenants); 3 (Renewal Tenants)
• Tenant Improvements (TIs) per RSF: $10.00 (New Tenants); $3.00 (Renewal Tenants)
• Leasing Commissions (LCs) % Total Lease Value: 3.0% (New Tenants); 1.0% (Renewals)

Acquisition & Exit Assumptions:

Assume an acquisition price of $1,000 per rentable square foot. Acquisition costs represent
1.0% of the gross price, and loan issuance fees will be 1.5% of total debt issued. Also, assume
$62,500 in initial replacement reserves.

You will use two tranches of Debt to fund the deal, with the following terms:

Senior Loan:

• Loan-to-Value (LTV) Ratio: 50%

• Interest Rate: 5.00% (fixed)
• Loan Amortization Period: 25 years

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• Loan Maturity: 5 years

Mezzanine:

• Loan-to-Value (LTV) Ratio: 10%

• Cash Interest Rate: 7.00% (fixed)
• Paid-in-Kind (PIK) Interest Rate: 3.00% (fixed)
• Loan Amortization Period: None (Interest-only loan)
• Loan Maturity: 5 years

The lenders are seeking a minimum Debt Service Coverage Ratio (DSCR) of 1.25x, a minimum
Debt Yield of 10%, and a minimum Interest Coverage Ratio of 1.70x. Include both Cash Interest
and PIK Interest in your calculations.

The Operating Partner in this deal will contribute 10% of the required Equity and will receive a
1.5% asset management fee on that initial Equity each year.

The Limited Partners – your firm – will contribute 90% of the required Equity and 100% of the
cash flows up to a 10% leveraged IRR to the LPs. In other words, the Operating Partner will
receive nothing except the management fee when the leveraged IRR is below 10%.

When the leveraged IRR exceeds 10%, the OP will receive 20% of all cash flows, with the
remaining 80% going to the LPs. Assume no catch-up or lookback provisions.

Finally, assume that you can sell the property in Year 5 for a 6.00% Cap Rate and that Selling
Costs represent 1.5% of this exit price.

Please complete the model and respond to the following questions:

1) If your firm is targeting a 15% IRR, would you do this deal? Why or why not?

2) Would the lenders be likely to approve of this deal? If not, which terms of the Senior
Loan and Mezzanine would you change to win their approval?

3) Are the operating assumptions in this model realistic? If not, which assumptions might
you change to get a more reasonable view of this deal?

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