Angus Cartwright Jr.
1. Introduction:
The report presents a case where Angus Cartwright (AC), Jr., an investment advisor, is considering needs of two cousins from DeRight family, his old and valuable client, who are at different stages of their lives. John DeRight (JHD) recently sold his business in exchange for $6 million Company’s stock. He retired and expected to live comfortably on $200,000 in dividends on stock plus other income he had of equal amount. He need to diversify, however, and planned to sell half of his stock and reinvest in real estate and other investments.
Judy DeRight (JDD) was President and sole stockholder of a small sized chemical company that had earned excess of $800,000 before taxes and $550,000 after taxes in each of the previous five years. She feels it was wise for her to diversify. She personally had accumulated over $3,500,000 invested in short term securities which she considered unnecessary and thus available for investment.
Both felt that real estate would give diversity, protection from inflation and tax advantages and want a property large enough to attract real estate Management Company to relieve them of day-to-day management. They wanted a minimum return of 12% after tax.
2. Problem Statement:
Following points need to be analyzed;
- 4Ps of properties.
- What are returns for each of the properties calculated using exhibits.
- Under what circumstances case exhibits should be used and what do they tell.
- Which investment, if any, should be suggested for each investor?
3. Analysis / Result:
Let us consider and analyze the above mentioned points. Also refer to the Excel Sheet – Angus Cartwright;
4Ps of properties:
For the purpose of analysis and suggestion, AC gathered data regarding various real estate investment options and from the very preliminary selection process, AC identified four different properties for the purpose of detailed analysis. Over these four property investment options, AC carried out detailed analysis as Cartwright had been given a method for analyzing income producing real estate for comparative analysis like the one he wanted to make. This step by step analysis is specifically provided in case Appendix A. To determine Before Tax Cash Flow, the Tax Payable and the After Tax Cash Flow. Steps are outlined in Appendix A. Cartwright calculated Internal Rate of Return and NPV at 12% which is the minimum rate of return the investors/clients were seeking which could be useful in price negotiations.
With regards to each of the property, following are provided;
1- Alison Green
Product: This real estate property is a residential property, with 100-unit garden apartments. It was completed in 1990 and is operating at 97% occupancy since initial rent up.
Price: Asking price was $4.6 million, but broker received indications that $4.4 million would probably be acceptable.
Place: It is located in Montgomery County, Maryland.
Promotion: The property is promoted through broker’s channel and would need broker’s support for leasing and sale/purchase. There was a building moratorium in parts of the county because of inadequate public facilities, preventing short term competition.
2- 900 Stony Walk
Product: This real estate property is a commercial property, with five-stories, 40,000 square foot office building. 33,500 square feet is actually rentable from 40k sq. feet space, which is rented to lawyers, accountants and small service companies each rented between 2,000 and 5,000 square feet. It was completed in 1988 and is operating at a 97% occupancy since initial rent up
Price: Asking price was $3.9 million, but broker received indications that $3.75 million would probably be acceptable.
Place: It is also located in Montgomery County, Maryland, near Alison Green.
Promotion: The property is promoted through broker’s channel and would need broker’s support for leasing and sale/purchase.
3- Ivy Terrace:
Product: This real estate property is a residential property, with 80 units’ garden apartment under construction. Land was leased for 99 years with annual payments of $20,000. Buyer would take title upon completion. It is expected to be operating at 95% occupancy.
Price: Asking price was $3.7 million, but broker was certain that $3.6 million would be acceptable.
Place: It is located in Arlington, Virginia.
Promotion: The property is promoted through broker’s channel and would need broker’s support for leasing and sale/purchase.
4- The Fowler Building:
Product: This is a commercial property, with two-stories, 45,000 square foot office building from which 38,000 square feet is rentable and building is under construction. Land was leased for 99 years with annual payments of $55,000. Already 80% of space was rented, mostly to small computer and consulting companies, at below market rents. A number of new properties were coming in Arlington area, thus Cartwright could negotiate a guaranteed return based on his pro-forma on both Ivy Terrace and The Fowler Building during the first three years until rentals reached projected 95% occupancy levels.
Price: Asking price was $4.9 million, but broker was certain that $4.7 million would be acceptable.
Place: It is also located in Arlington, Virginia.
Promotion: The property is promoted through broker’s channel and would need broker’s support for leasing and sale/purchase.
What are returns for each of the properties calculated using exhibits:
Each of the property is analyzed for the returns expected from them. Summarized result for various returns from each of the property is provided in Exhibit 6. This return is used to rank all the four properties among each other for the purpose of comparison. This comparison is available in Exhibit 7, which shows comparison of each property.
Returns calculated for each property includes;
- Capitalization rate on purchase
- Capitalization rate on sale
- Cash on cash return
- Increase in capital value
- Internal rate of return (IRR)
- Net Present Value @ 12%
- Profitability Index (NPV)
For Alison Green, these returns calculated are found to be;
- Capitalization rate on purchase = 10.82%
- Capitalization rate on sale = 7.68%
- Cash on cash return = 10.46%
- Increase in capital value = 40.91%
- Internal rate of return (IRR) = 16.51%
- Net Present Value @ 12% = 401.73
- Profitability Index (NPV) = 33.48%
For 900 STOW WALK, these returns calculated are found to be;
- Capitalization rate on purchase = 10.93%
- Capitalization rate on sale = 6.95%
- Cash on cash return = 4.21%
- Increase in capital value = 57.33%
- Internal rate of return (IRR) = 16.36%
- Net Present Value @ 12% = 353.10
- Profitability Index (NPV) = 41.54%
For IVY TERRACE, these returns calculated are found to be;
- Capitalization rate on purchase = 12.15%
- Capitalization rate on sale = 8.41%
- Cash on cash return = 12.58%
- Increase in capital value = 44.44%
- Internal rate of return (IRR) = 17.73%
- Net Present Value @ 12% = 522.09
- Profitability Index (NPV) = 40.16%
For THE FOWLER BUILDING, these returns calculated are found to be;
- Capitalization rate on purchase = 10.89%
- Capitalization rate on sale = 6.56%
- Cash on cash return = 3.95%
- Increase in capital value = 65.96%
- Internal rate of return (IRR) = 18.82%
- Net Present Value @ 12% = 811.96
- Profitability Index (NPV) = 58.00%
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