Working only on #6 and just the part of pessimistic scenario

My Group finished most of them and my Part is #6 and JUST working on Pessimistic scenario.

Your complete assignment should read and look like a professional report and include the following sections:

  • Short introduction Tell the reader what she/he is about to read.

  • Property description Identify and describe an income producing property that you would be able to purchase with a $2,500,000 down payment. You are expected to hold this investment for eight years. You may use the entire $2.5M but do not have to. (However, a certain percentage of the property must be financed. That is, you can not buy the property with 100% cash). You can evaluate any property you would like and you are not limited to a specific location. I recommend using a website such as www.Loopnet.com to search for your property.

  • Assumptions Make reasonable assumptions about the NOI growth rate, terminal growth rate, mortgage interest rate, required rates of returns, down payment and terminal cap rate. All assumptions should be justified in the text. To construct your assumptions you are encouraged to use your class notes, documents from the course’s website and the internet. (You may assume without justification that selling expenses are 4%. You may also assume financing with a 10-year interest only fixed rate loan and DCR of no less than 1.3). For this project you may assume that the NOI reported by the seller (or the implied NOI reported, given the asking price and the reported CAP) is correct and no due diligence is required.

  • Before tax expected return Using an Excel spreadsheet, determine the “before tax” annual expected rate of return on your capital.

  • Max price Based on the scenario above, calculate the absolute maximum price you are willing to pay for the property. Obviously, you will never tell this to the seller, but it is important to have this number in mind when/if you are ready to negotiate the price you pay for the property.

  • Sensitivity analysis Consider and analyze two additional scenarios (one optimistic scenario and one pessimistic scenario). In each scenario you will need to change the NOI and/or NOI growth and/or the terminal CAP rate. You will need to articulate the reasons for the possible changes and their magnitude.

     

    7. Conclusion Summarize your findings. Do you think that you should commit your hypothetical funds to this income producing property?

    Note: a snap shot of all Excel spreadsheets and calculations used to derive your result should be included in your report. 

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