Advanced Real Estate Investment Analysis Project 2 Homework Help Homework Help

Advanced Real Estate Investment Analysis Project 2 Homework Help

Executive Summary

The subject is an11 unit apartment, which is situated at NW 6th Street in Miami Florida. The total land area for the property is 9922 sq ft. This property is located in the Civic Center’s Health District sub market and the surrounding area is surrounded by many newly apartment projects. This district is considered as the second highest

Advanced Real Estate Investment Analysis Project 2 Homework Help

Advanced Real Estate Investment Analysis Project 2 Homework Help

health district in US and it is located on the south side of the Miami River. The center of this district is considered as the center of Miami for medical research and the biotechnology industry. The Health District is approximately 5 minutes north of the Downtown Miami on the Miami Metrorail. The occupancy rate in this area has been historically high and currently, the rate of occupancy in this area is around 97.1%. The amenities of the apartment include alarm systems, carpets, ceiling fans, dishwashers, extra storage, internet access, walk in closets, cable, broadband internet access, air conditioning, window covering and washer dryer hookup. This report attempts to perform a detailed valuation analysis for the subject property. The listing price of the property as stated by the memorandum of the property is $ 695,000 with a cap rate of 7%. The assumptions for the valuation of this property have been extracted from different sources and the assumptions for the best case and the worst case scenario have been assumed based on intuition and the market statistics. The valuation of the property shows that the true value of the Lindberg Apartment is much less than the asking price of $ 695,000. If we assume that the assumptions under the best case scenario might be realistic, then this property should be purchased at a maximum price of $ 541,752. If the price exceeds this value then it would not be a worthy investment. Therefore, it is not recommended to buy this property at a price of $ 695,000.

Property Highlights

Address: 1111 NW 6TH ST, MIAMI, FLORIDA, FL33136

Location: This property is located in the ‘Civic Center’s Health District’, sub market in the area of the newly apartment projects.

Building Size: 3500 SF

Number of Units: 11 units:

Sale Price: $ 695,000

Land Area: 9922 sq ft

Year Built: 1937

Renovated:2000/ 2005

Occupancy: 97.9%

County: Miami Dade

Stories: 2 Story

Subdivision: Lawrence Est.

Utilities:Water&Sewer–Miami-DadeCounty, Electric–FloridaPower & Light(FPL)

Pictures & Visuals

Front Photo

Front Photo

Location Map

Location Map

Location Map

Ariel View

Ariel View

Side View 

Side View

Retailer Map

Retailer Map

Retailer Map

Market Preview

The subject property is located at the ‘Civic Center’s Health District’ in Miami which is a neighborhood in the city of Miami, Florida in United States. This Health District is surrounded by the Northwest 20th street and 14th Avenue to the northwest, The Miami River to the west and south, the Dolphin Expressway and also between the I-95 to the east and Midtown Interchange. This district has the largest concentration of the research and medical facilities after Houston in US. The neighborhood of this property is primarily composed of the clinics, research institutes and hospitals.

The center of this district is considered as the center of Miami for medical research and the biotechnology industry. The Health District is approximately 5 minutes north of the Downtown Miami on the Miami Metrorail. The entire Civic Center is also served by the Metro bus throughout area and also by the Miami Metrorail. The Health District is also served by the Civic Center Station at the Metrorail rapid transit system. It connects it to all the major research centers, hospitals and also connects to the district of Hialeah and Downtown Miami, Dadeland. Along with this, it also connects it with the computer rail system of Miami.

In March of 2012, the new Miami Trolley system had inaugurated the first route which passes through the Civic Center on its way to the Marlins Park. The occupancy rates in the Miami Dade area have been the highest with growth rates of around 5% to 7% in 2016. The rental market in Miami is also back in action and the rentals will also see a strong growth over the next few months. The speed of construction within this health district is also continuing to expand rapidly. Moreover, the median listing price for a home in Miami is $ 435 K. In September 2016, around 80% of the homes had been sold under this listing price. The majority of the homes which were sold last month included 65 single family homes, 148 condos and only 15 townhomes had been sold. Out of the total sales 173 of the buyers had purchased at the asking price and 15 sales had been made above the asking price. The new housing units authorized for building permits had declined but again it is on the verge of increase in 2016 as predicted by the analysts.

new housing units authorized by building permits miami dade county (1991 2012)

The Miami-dade retail stats by market are shown in the figure below:

Maimi Dade Retail Stats By Market

Demographics

Demographics

Demographics

Demographics

Demographics

Marketability

The name of the subject property is Lindberg Apartment, which is located in the ‘Civic Center’s Health District’ submarket in the area of the newly constructed apartment projects. This district is classified as the second largest district in the county after Houston in Texas. It is located on the South Side of the Miami River which is just east of the primary artery NW 12 avenue and the North of the Flagler street. This property is a two story building which is a Garden low rise building and it has 3 studios and 3 efficiencies on a fully fenced +/- 10,000 Square foot corner lot.

Additional apartments can also be developed in the nearby locations. Along with this future apartments could also be developed in the T-4 L Zoning City of Miami. The average rental per square feet is $ 25.62. River Landing is located in the center of the Civic Center of Miami. It is close proximity to the Miami River District and the Health District makes it an ideal place for dining and shopping for around more than 45,000 shopping professionals and also makes it ideal for 160,000 visitors which come to this district. The occupancy rates are very high within this district and the current occupancy rates stand at around 97.9%. The amenities of the apartment include alarm systems, carpets, ceiling fans, dishwashers, extra storage, internet access, walk in closets, cable, broadband internet access, air conditioning, window covering and washer dryer hookup.

River Landing is also less than a mile away from the Miami International Airport and west of Downtown Miami and Brickell. The River Landing development is very close to many residential buildings which are similar to the subject property. There are also around 5000 more residential units which are planned along the Miami River District. The area also includes more than 4,000 existing multifamily units in the area. There are also many other developers which are planning to invest in this area as this area is a rapidly booming area. Some of the developers include the Melo Group, Related Group, Kar Properties and Chetrit Group.

Rent Comparables

The rent comparables of the subject property are as follows:

Rent Comparables
Address/Name of Property No. of Units Avg Unit Size SF Total SF Avg Rent Rent/SF Occupancy
1363 Nw 7th Ct, Miami, FL 33136 12 160 1920 32.52 0.20325 96%
 1201 NW 1st Pl, Miami, FL 33136 11 200 2200 30.4 0.152 98%
727 Nw 12th St, Miami, FL 33136 13 250 3250 32.33 0.12932 97%
1345 N Miami Ave, Miami, FL 33136 14 300 4200 35.65 0.118833333 97%
Averages   227.5   32.725 0.150850833 97%

If we look at the average of the rent comparable figures in the above table, then we can see that our subject property would compete well with all of the direct competitors based on the cap rates and the occupancy rates. Along with this, the unit size is equal to the average of the rental properties.

Sales Comparables

The offering memorandum states the asking price of the property as $ 695,000 with a cap rate of 7%. Therefore, using this data from the property brochure we would consider this as the list price for this property. The sales comparables of the above property are as follows:

Sales Comparables
Address Units Avg Size Big Size Land Area Sale Date Sale Price Price/SF Price/Unit Cap rate
600 NW 6th St 13 170 2210 5959 1/12/2010 $500,000 $2,941.18 $226.24 6.50%
300 NW 7th AveMiami, FL 33128 (East Little Havana) 12 221 2652 6699 4/6/2013 659,500 $2,984.16 $248.68 7.00%
3268 SW 24th TerMiami, FL 33145 (Coral Way) 14 265 3710 8822 22/3/2009 450,000 $1,698.11 $121.29 6.50%
1560 NW 25th AveMiami, FL 33125 (West Little Havana) 16 312 4992 - 4/6/2011 7500000 $24,038.46 $1,502.40 7.20%
Averages   242       2277375 7915.5 524.7 6.80%

The listing price of the property has been mentioned in the brochure which is $ 695,000; however, it seems that the price of the property would be higher than the identified sales comparables as it is located in a highly marketable area. All of the properties are comparable to our property in terms of the location and quality. However, the most comparable is the second property which has 12 units and was sold for exactly the same price as the asking price for our subject property.

Analysis with Assumption Support

The information and all the assumptions about the real estate market variables such as capitalization rates, occupancy rates, expense growth, rent growth and the vacancy rates have been extracted from different sources over the internet. Some of the key assumptions such as the vacancy and the average rentals have been stated in the report in previous sections. The key assumptions which were used in this report included a range of different variables such as occupancy rate, credit losses, management fees, rental growth rate, expense growth rate, exit capitalization rate, initial capitalization rate and LTV which is the leverage.

Vacancy & Credit Loss:The vacancy and the credit loss percentage is 2.9% since the occupancy rate in Central Miami is 97.1%. Similarly, for the best case and the worst case we have used rates of 1.9% and 3.9% respectively.

Management Fee: The management fee is 4% of the effective gross income and as it does not change so often therefore, it remains same for all the three scenarios.

Rent Growth:The growth rate for the rentals had fluctuated between 1% and 6% over the past several years therefore, we have assumed an average rental growth rate of 3% for the base case, 4% for the best case and 2% for the worst scenario.

Expense Growth: The expenses have been growing between 2% and 7% over the past several years;therefore, we have used 3% as the base growth rate for expenses, 4% for the worst case and 2% for the best case scenario.

Interest Rate:The market rate for permanent mortgages at the market for this type of project has been found to be 3.55% which has been taken from bank rate website which has a maximum 30-year term.  For the best case and the worst case scenarios, we have increased and decreased the 3.55% interest rate by 1% respectively.

Selling Costs:The typical fees associated with property sales in the market are between 2.5% and 5.0% of the sales price including the disposition fee you firm charges. 2.5% is used for best case scenario, 5% for worst case scenario and average of 3.75% for the base case scenario.

Leverage: The LTV of 75% has been used for the base case scenario however, 85% and 65% LTV ratios have been used for the best and the worst cases.

Rental per Unit:The average rental per unit for this type of the property as shown by Costar is $2250 per month. Therefore, this has been used as the base rental per month for the Lindberg Apartment. The best case and the worst case dollar rental per month have been assumed to be $2500 and $2000 per month.

Going in Cap Rate:The going in or the initial cap rate has been stated in the memorandum which is 7%. This has been used as the rate for the base case and the cap rate for the best and the worst case have been decreased and increased by 1% respectively.

Exit Cap Rate:The exit cap rate is higher than the initial cap rate therefore; a single exit cap rate of 8% has been assumed which has been used in the base case. For the worst and the best case scenarios we have increased and decreased this exit cap by 1% respectively.

Hurdle Rates: The BT required returns and AT required return have assumed on the basis of prospective returns and alternative investments. These rates are 13% and 12% respectively.

Tables

The sensitivity analysis has been performed by generating three different key scenarios for valuing this property. These three scenarios are the base case, worst case and the best case scenarios. The above assumptions have been used as stated for each of these three key scenarios. The sensitivity of the ATIRR, BTIRR, ATNPV and BTNPV would provide us insights about the real value of investment in this property and also its riskiness. The summary assumptions table is shown below:

Summary of Assumptions Table

  Base Case Worst Case Best Case
Property Basics
VacCredit 2.90% 3.90% 1.90%
Mgtfee 4.00% 4.00% 4.00%
Other income 0.00% 0.00% 0.00%
Rental growth rate 3.00% 2.00% 4.00%
Expense growth rate 3.00% 4.00% 2.00%
Expense ratio (initial) . . .
Loan terms
Loan to value ratio 75.00% 65.00% 85.00%
Loan amount 369,163 182,840 460,489
Amortization in years 30 30 30
Annual interest rate 3.55% 4.55% 2.55%
Monthly payment ($13,019.37) ($13,019.37) ($13,019.37)
Acquisition
Cap rate (initial) 7.00% 6.00% 8.00%
Property Value 492,217 281,292 541,752
Depreciable base rate 80% 80% 80%
Depreciable base 393,774 225,033 433,402
Cap rate (at sale) 8.00% 7.00% 9.00%
Sales expense 3.75% 5.00% 2.50%
Dep period 27.5 27.5 27.5
Tax implications
Marginal t rate 36.00% 36.00% 36.00%
Capital Gains rate 20.00% 20.00% 20.00%
Return requirements
BT required return 13.00% 13.00% 13.00%
AT required return 12.00% 12.00% 12.00%
Expenses
Units number 11 11 11
Op Exp per unit $500 $600 $400
Taxes per unit $150 $170 $130
Reserves per unit $70 $80 $60

Returns for Base Case Analysis

Returns
Investment cash flows
BTCF -960,470 112,699 120,767 129,077 137,636 146,452 1,385,166
ATCF -960,470 92,624 97,075 101,656 106,369 111,219 1,122,624
BTIRR 16.60%
BTNPV 152,524
ATIRR 11.30%
ATNPV (28,561)
 
Debt coverage ratio 1.72 1.77 1.83 1.88 1.94 2.00

Returns for Worst Case Analysis

Returns
Investment cash flows
BTCF -960,470 77,973 85,000 92,237 99,691 107,368 1,102,721
ATCF -960,470 -42,248 79,247 83,163 87,186 91,317 956,651
BTIRR N/A
BTNPV (111,900)
ATIRR 191.34%
ATNPV (283,929)
 
Debt coverage ratio 1.50 1.54 1.59 1.64 1.69 1.74

Returns for Best Case Analysis

Returns
Investment cash flows
BTCF -960,470 148,058 157,187 166,590 176,274 186,250 2,161,480
ATCF -960,470 2,607 125,447 130,749 136,199 141,801 1,790,659
BTIRR 26.23%
BTNPV 656,511
ATIRR 18.17%
ATNPV 309,150
 
Debt coverage ratio 1.95 2.01 2.07 2.13 2.19 2.26

Variance Analysis

Variance Analysis

Variance Analysis

The base case IRRs before and after tax for the Lindberg property are 16.60% and 11.30% however, the after tax IRR does not exceed the required hurdle rate therefore, we can say that this property might not yield adequate returns for the investors. Since we have used realistic assumptions and the cap rate which has been stated in the brochure of this property therefore, if we compare the property value with the list price of $695,000 then we can see that the property value under base scenario is $492217 after tax which is less than the stated list price. Therefore, based on the base case scenario the list price of the property is high and it is not recommended to purchase this property.

The best case scenario shows the BTIRR and ATIRR rates of around 26.23% and 18.17%. These cross the hurdle rates but the assumptions might not be realistic because we have assumed a number of rates based on market history and intuition. The price of the property under the best case scenario is &541,752 after tax and it is still lower than the listing price of $ 695,000. Finally, the worst case scenario shows that the before tax IRR is negative which is -10.17% and the after tax IRR is 5%. Both of these do not cross the hurdle rates and this also means that even on nominal dollar terms all of the equity has not been returned to the original investors. The value of the property is also too low under this scenario which is $281,292. This is significantly less than the asking price of the Lindberg Apartment. Therefore, according to this scenario it is not recommended to purchase this property.

Recommendation

Therefore, based upon the overall investment analysis, the sensitivity analysis performed on the basis of the base case, worst case and the best case scenario, we can conclude that this is a high risk property and its real value is much less than the stated list price of $ 695,000 and this property also does not achieves the hurdle rates for the return. If we assume that the assumptions under the best case scenario might be realistic then this property should be purchased at a maximum price of $ 541,752. If the price exceeds this value then it would not be a worthy investment. Additional research might be necessary to determine that whether the best case assumptions are realistic or not. But if we consider the base case and the worst case scenarios, then we see that the risk in this property is high. The investors might not be able to achieve their target BTIRR and ATIRR of 13% and 12% respectively. Therefore, investing in such a high risk property is risky and small changes in the growth rates might turn this investment into a huge loss therefore, it is not recommended to invest in the Lindberg property.

Exhibits

Exhibit 1: Base Case Model Operating Cash Flow

Year Year Year Year Year Year
1 2 3 4 5 6
Potential Gross Rent Number Initial rent (Average)
Building Units 11 2250 297,000 305,910 315,087 324,540 334,276 344,304
Total 297,000 305,910 315,087 324,540 334,276 344,304
 Less: Vac&Credit 8,613 8,871 9,138 9,412 9,694 9,985
 
 Plus: Other income 0 0 0 0 0 0
Effective Gross Income 288,387 297,039 305,950 315,128 324,582 334,320
Less: Operating Expenses
 Management Fee 11,535 11,882 12,238 12,605 12,983 13,373
 Operating Expenses 5,500 5,665 5,835 6,010 6,190 6,376
 Taxes 1,650 1,700 1,750 1,803 1,857 1,913
 Reserves 770 793 817 841 867 893
 All other 0 0 0 0 0 0
Total Expenses 19,455 20,039 20,640 21,260 21,897 22,554
Net operating Income 268,932 276,999 285,309 293,869 302,685 311,765
Less: Interest 101,404 99,425 97,375 95,252 93,051 90,771
Depreciation 111,764 111,764 111,764 111,764 111,764 111,764
Taxable income 55,764 65,811 76,170 86,853 97,870 109,230
Times: Marginal tax rate 36% 36% 36% 36% 36% 36%
Income tax 20,075 23,692 27,421 31,267 35,233 39,323
BTCF     112,699 120,767 129,077 137,636 146,452 155,533
*** *** *** *** *** ***
ATCF     92,624 97,075 101,656 106,369 111,219 116,210
Property Cap Rate 7.00%
Property Value $492,217

Exhibit 2: Worst Case Model Operating Cash Flow

Year Year Year Year Year Year
1 2 3 4 5 6
Potential Gross Rent Number Initial rent
Building Units 11 2000 264,000 271,920 280,078 288,480 297,134 306,048
Total 264,000 271,920 280,078 288,480 297,134 306,048
 Less: Vac&Credit 10,296 10,605 10,923 11,251 11,588 11,936
 
 Plus: Other income 0 0 0 0 0 0
Effective Gross Income 253,704 261,315 269,155 277,229 285,546 294,112
Less: Operating Expenses
 Management Fee 10,148 10,453 10,766 11,089 11,422 11,764
 Operating Expenses 6,600 6,798 7,002 7,212 7,428 7,651
 Taxes 1,870 1,926 1,984 2,043 2,105 2,168
 Reserves 880 906 934 962 990 1,020
 All other 0 0 0 0 0 0
Total Expenses 19,498 20,083 20,686 21,306 21,945 22,604
Net operating Income 234,206 241,232 248,469 255,923 263,601 271,509
Less: Interest -211,505 113,488 111,502 109,424 107,249 104,973
Depreciation 111,764 111,764 111,764 111,764 111,764 111,764
Taxable income 333,947 15,980 25,203 34,736 44,588 54,772
Times: Marginal tax rate 36% 36% 36% 36% 36% 36%
Income tax 120,221 5,753 9,073 12,505 16,052 19,718
BTCF     77,973 85,000 92,237 99,691 107,368 115,276
*** *** *** *** *** ***
ATCF     -42,248 79,247 83,163 87,186 91,317 95,558
Property Cap Rate 8.00%
Property Value $281,292

Exhibit 3: Best Case Model Operating Cash Flow

Year Year Year Year Year Year
1 2 3 4 5 6
Potential Gross Rent Number Initial rent
Building Units 11 2500 330,000 339,900 350,097 360,600 371,418 382,560
Total 330,000 339,900 350,097 360,600 371,418 382,560
 Less: Vac&Credit 6,270 6,458 6,652 6,851 7,057 7,269
 
 Plus: Other income 0 0 0 0 0 0

Posted by: andy