Real Estate Institute
REAL ESTATE VALUATION and INVESTMENT Analysis
Case Study 6 – Single Tenant
You have an opportunity to purchase a 150,000 square foot state-of-the-art industrial building that is 100% leased to Cyberdyne Industries (rated AAA/Aaa), a high-tech tenant on the cutting edge. The Lease is Absolute Net, meaning that 100% of all expenses and maintenance are paid for by the tenant. The Lease was recently renewed at the end of July 2020 for a period of 10 years, with a start date and payments beginning on August 1, 2020. When the lease expires, it will take 5 months to re-lease the space (no rent received), with a new lease starting on the following January first at the projected market escalated rate.
The tenant has a Lease Termination Option that is exercisable at the end of the 7th Year of the Lease, with no recourse or further monetary obligations. If that option is taken, you will be left with a vacant building that is estimated to be worth $20,000,000. You will sell the project if the Lease Termination Option is taken and estimate it will take 5 months to consummate a sale.
Monthly rent is at market and begins at $200,000 with annual market escalations of 2.50% upon every anniversary of the Lease. The tenant received a buildout allowance prior to occupancy and is responsible for making 6 annual payments of $75,000 every December 31st starting in 2022.
The Fair Market Appraised Value of the asset is $25,000,000 based on the annual NOI in 2021, and you agree to that price. You purchase the asset on January 1, 2021. An insurance company has provided a term sheet for a 10-year loan at 75% LTV, 4.00% interest rate and 30-year amortization schedule. No prepayment penalty.
Your investor group is seeking a 11.00% minimum return. An Exit Cap Rate of 2.30% over the Market Cap Rate is considered reasonable. At the end of 10-years when you sell, you will pay 3.00% to brokers to facilitate the sale.
- Determine the NPV and the IRR for both an All-Cash scenario and a Debt Financing Scenario where the Lease runs through expiration and where the Lease Termination Option is exercised.
- For both the All Cash and the Debt Financing 10-year holding periods, create tables which show the effect a change in both Exit Cap Rates and Purchase Price will have on IRR and NPV.
- Assume a beginning Purchase Price of $25,000,000 reducing by $500,000 to a low of 23,000,000.
- Assume a starting Exit Cap Rate of 10.00% with 0.50% increases to a maximum high of 14.00%.