REAL ESTATE INVESTMENT ANALYSIS

UCLA Extension

Instructor:
Mark Ruff
markruff@ucla.edu
310-210-9652

Case Study #2

This is your Case Study #2 which is due no later than Tuesday, March 14th, 2023, by 6:30pm.

UNLESS PRIOR ARRANGEMENTS HAVE BEEN MADE,

NO LATE CASE STUDIES WILL BE ACCEPTED.

Your investment group, Bruin Bear Properties (BBP), is considering the purchase of the 6-unit
apartment property located at 244 North Kenwood Street, Glendale, California.

Title to the property has been vested in the Grandpa Joe and Grandma Sally Irrevocable Property
Trust #49-33-7 for many years and, although the property has been relatively well maintained, it
still shows signs of some deferred maintenance. Only a few of the units have been recently
rehabbed.

BBP’s investment objective is to reposition the property in the trade area by investing $300,000
in further renovations for the remaining units and then capture incremental rent growth. No
tenants will be displaced during the renovation period, expected to last about 6 months after
purchase. After the rehab of the remaining units (at the end of 6 months), BBP anticipates
raising rents on all units based on AB 14821. Accordingly, BBP anticipates raising rents by 8%
per year for all units. Further, in addition to the loan financing closing cost(s), BBP anticipates
that it will be required to pay $25,000 in additional escrow, title, and other acquisition closing
costs.

BBP has tasked you with the responsibility to make an investment recommendation. BBP’s
investment objective is to maximize the IRR of the property during the hold period, anticipated
to be 8 years, but also takes into consideration the risk of the investment based on partitioning
the IRR.

The property is represented by a broker and the sellers are asking $2,490,000 for it. The broker
has provided you with an abbreviated OM/flyer and through discussions with them, and your
own internal review, you have determined the following:

1
AB 1482 is a statewide act that has two main functions: it limits rent increases and removes the right of landlords
to evict tenants without just cause. Rent Increases: AB 1482 restricts the allowable annual rent increase to 5% plus a
local cost-of-living adjustment of no more than 5%, for a maximum increase of 10%.

1
  Each apartment unit is rented at $3,000 per month
 BBP anticipates that it will generate an additional $5,000 per year in other income
throughout the duration of the hold period
 The operating ratio for the property is presently, and is anticipated to remain, 32%.
 The terminal cap rate is anticipated to be 4%.

The best financing alternative BBP has located is with Bruin Bank and offers the following:

< 70% LTV or 1.20 DCR

Rate: Index of 3% plus a margin of 2%
Term: 30/10
Origination points: 1%
Pre-payment penalty: 2% of unpaid balance at time of payoff

You have been tasked to determine the following (please clearly label your spreadsheet with the
following indicated question numbers):

1. GRMx
2. EGIx
3. NOIx
4. Going-in Cap Rate
5. Break-even ratio
6. To what extent may the EGI decline before the property cannot service its debt?
7. Equity dividend rate
8. Broker’s rate of return
9. Equity build-up
10. IRR
11. What is the partitioning profile (i.e., what % of the IRR will likely come from
operations and what % will come from reversion?)
12. If the minimum investment criterion for the property is that it must achieve an
anticipated/scheduled minimum IRR of 20%, would BBP likely purchase or not
purchase the property?
13. If the property meets the minimum IRR, but BBP requires that the property’s
partitioning profile be no more than about 2/3 from reversion and no less than about
1/3 from operations, would BBP likely purchase or not purchase the property?