Angus Cartwright IV Case Study Solution
The Fowler Building:
The fowler building is a two floor building having a rental space of 11000 square feet, and has an occupancy rate of 95%. The price of the building is 2.75 million, which is costly as compared to 15 million cost of Stony Walk,and the reason behind it is the larger space provided. The building achieved NPV of $11.63 million and IRR of 25%, which is lower than Stony Walk but higher than Alison green. The cash on cash return of 23.58% achieved by the building is lower than Stony Walk.However, the achievement of 25% increase in capital value is quite higher than Stony Walk, indicating that significant gain will be earned by the investors in case of its sale in future. Pretax investment multiple is lower than Stony walk but higher than Alison green, therefore, investors will prefer buying this building as compared to Alison green. (See Appendix 1)
Ivy Terrace:
Ivy Terrace is a 75 unit office building located in Arlington, and is available to small service firms for rental purposes. The building costs 11 million, and is depreciated on a period of 27.5 years using straight line method. The building is mortgaged at an amount of $7 million along with an interest rate of 4.25%. The building generated 4.5 million NPV, which is lower than Stony Walk and The fowler building, but much higher than Alison Green. Both Ivy Terrace and Alison green have almost similar internal rate of returns that is 13.2%, which is lower than the fowler building as well as the Stony Walk. (See Appendix 1)
The future value of the company is 95%, which is higher than all other three buildings and the capitalization rate at the time of purchase is 6.61%, higher than all three buildings. In terms of added margin and increase in capital value, Ivy terrace seems the most profitable investment. The loan to value ratio of 64%, which is lower than other three buildings, indicating that financing the purchase of stony walk will be cheaper, whereas it has the higher debt service coverage ratio (See Appendix 3) as compared to other investments, which indicates that the higher cash flow will be available to pay current obligations raised from funds borrowed to purchase this building. (See Appendix 2)
Conclusion
Stony walk will be ranked as the most profitable investment as it achieved cash on cash return of 38%, IRR of 43% and investment multiple of 6.03, which is the highest among all investments. The Fowler building will be ranked as second, as it achieved the IRR of 25%, NPV of 11.85 million, cash on cash return of 24%, increase in capital value of 25% and an investment multiple of 4.85 times.
Since investment decisions in real estate businesses are taken on the basis of Cash on Cash return and investment multiples, the investors will invest in Ivy Terrace, the fowler building and Stony walk as these projects provide maximum returns. On the other hand Alison green has the higher capitalization rates, which is an important measure of project evaluation in real estate businesses. Therefore, investors might decide investing in Alison green, because of higher investment multiples as compared to rest of the properties.
Appendices
Appendix 1
| Financial Analysis | Alison Green | 900 Stony Walk | The Fowler Building | Ivy Terrace |
| Equity Required | $6,000.00 | 2,750,000 | 6,500,000 | 4000000 |
| Simple Return Measures | ||||
| Capitalization Rate-Purchase | 7.25% | 3.09% | 4.07% | 6.61% |
| Capitalization Rate-Sale | 7.88% | 3.44% | 4.40% | 7.02% |
| Cash-on-Cash Return (year 1) | 10.80% | 37.48% | 23.58% | 18.63% |
| Increase in Capital Value | 20.00% | 13% | 25% | 27% |
| Pre-tax investment multiple | 3.6 | 6.03 | 4.85 | 3.94 |
| Discounted Return Measures | ||||
| Internal Rate of Return | 13.91% | 43.47% | 24.66% | 13.20% |
| NPV @ 12% | $1,803.60 | $7,870,554 | $11,385,189 | $4,603,203 |
Appendix 2:
| Percent of total benefits | 900 Stony Walk | The Fowler Building | Ivy Terrace |
| Before Tax Cash flows | 98.39% | 84.45% | 85% |
| Tax Benefits | -15.03% | -11.67% | 10% |
| Future Value | 83.36% | 72.78% | 94.75% |
Appendix 3:
| Break-even Analysis | 900 Stony Walk | The Fowler Building | Ivy Terrace |
| Current or Projected Occupancy | 95% | 95% | 95% |
| Added Margin | 13.33% | 25.45% | 27% |
| Break-even Occupancy | 81.7% | 69.5% | 68% |
| Loan to Value Ratio (LTV) | 82% | 76% | 64% |
| Debt Service Coverage Ratio (DSCR) | 0.04 | 0.05 | 0.10 |
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