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Alternative Investments

Angus Cartwright, Jr
Case Analysis

J Srinivasan
2008PGP091B

Introduction:
Mr. Angus Cartwright, a financial planner, needs to make
recommendations for his two long-time family clients, the
DeRights. John and Judy DeRight are coming to Cartwright at
different stages in their life and both are interested in
diversifying their investment portfolio to include investments in
real estate. Cartwright has four properties he believes to be
perfect for his clients however he needs to narrow them down
to just one property to each client.
John DeRight, currently in retirement, will have $9 million from
the sale of stock to invest in a property. He is comfortable with
his retirement savings, but would like to diversify his retirement
funds in real estate. He requires a 12% return. Judy DeRight
has $16 million available to invest. She is at the peak of her
career and is likely interested in longer-term possibilities
compared to John. She also requires a 12% return on her
investment.

Investor’s Profile:
John DeRight is a retiree and has all of his wealth in securities;
primarily in common stock of a company that bought his
startup company. John currently has $6 million in stocks.
Dividends from these stocks provide John his main source of
income. Not diversifying but having all his net-worth in one
basket can be very risky and especially in common stocks. John
wants to diversify his portfolio by taking approximately $3
million out of securities to invest in real estate. Again, John is a
retiree looking to balance his portfolio by including real estate
investments. His investing profile can be stated as low risk
investor looking for periodic income payments (steady income
stream) in which John can use for daily living expenses.
Judy DeRight is a much younger investor. She owns and
operates her own company as President. The company
performs well with annual income of $800,000 before taxes and
$500,000 after taxes. Judy was able to accumulated $3.5
million and also wants to diversify her investments to include
real estate. Judy presumably is in a high-income bracket and
does not necessarily need immediate cash-flows from her
investments. Her investing profile can be characterized as
higher-risk, higher return, no immediate income from
investment is necessary, high potential gains in later years
(targeting appreciation), and currently would like investments
with tax shelter capabilities due to current high ordinary
income from other sources.

Real Estate Industry:


In investment finance, private equity real estate is an asset
class consisting of equity and debt investments in property.
Investments typically involve an active management strategy
ranging from moderate reposition or releasing of properties to
development or extensive redevelopment.
Investments are typically made via private equity real estate
fund, a collective investment scheme, which pools capital from
investors. These funds typically have ten year life span
consisting of a 2-3 year investment period during which
properties are acquired and a holding period during which
active asset management will be carried out and the properties
will be sold.
Private equity real estate funds generally follow core-plus,
value added, or opportunistic strategies when making
investments.
Core Plus: This is a moderate risk/moderate return strategy.
The fund will generally invest in core properties however some
of these properties will require some form of enhancement or
value-added element.
Value Added: This is a medium-to-high risk/medium-to-high
return strategy. It will involve buying a property, improving it in
some way, and selling it at an opportune time for a gain.
Properties are considered value added when they exhibit
management or operational problems, require physical
improvement, and/or suffer from capital constraints.
Opportunistic: This is a high risk/high return strategy. The
properties will require a high degree of enhancement. This
strategy may also involve investments in development, raw
land, and niche property sectors. Investments are tactical.

Analysis:
Properties: NPV:

Alison Green $454500

Stony Walk $315429

Ivy Terrace $327690

Fowler Building $435029

Exhibit 1 Alison 900 Ivy The


Green Stony Terrace Fowler
Apartme Walk Apartme Bldg.
nts (Office nts (Office
) )
Number of units/or 100 33,500 80 38,000
square feet of rentable
space
A) Gross $4,400. $3,750 $3,600. $4,700
Purchase 00 .00 00 .00
Price
B) Deprecia $3,900. $3,350 $3,600. $4,700
ble Base 00 .00 00 .00
C) Deprecia 27.5 39 27.5 39
ble Life
(Capital
Recovery
Period in
Years)
D) Estimate $6,200. $7,000 $5,000. $7,000
d Sales 00 .00 00 .00
Price
E) Expected 10 10 10 10
Year of
Sale
G) Annual 3.00% 3.00% 3.00% 5.00%
Increase
in CFO
H) Leasehol $ n/a $20.00 -
d - $70.00
Payments
I) Equity $1,200. $850.0 $1,300. $1,400
Investme 00 0 00 .00
nt
J) Amount $3,200. $2,900 $2,300. $3,300
of 1st 00 .00 00 .00
Mortgage
1) I-Rate 9.50% 10.00 9.50% 10.00
% %
2) Term 10 10 10 10
3) 30 20 30 25
Amortizat
ion
Period
4) -10.16% 11.75 10.17% 11.02
Constant % %
Loan
Payments

Alison 900 Stony Ivy Terrace The Fowler


Green Walk Apartments Bldg.
Apartments (Office) (Office)
Gross $ $ $ $
Rents 840.00 1,742.00 1,296.00 1,275.00
Vacancies $ $ $ $
25.00 (87.10) (90.72) (89.25)
Effective $ $ $ $
Gross 815.00 1,654.90 1,205.28 1,185.75
Income
Real $ $ $ $
Estate 117.00 (209.04) - -
Taxes
Other $ $ $ $
Operating 221.00 (90.45) (100.00) (200.00)
Expenses
Capital $ $ $ $
Reserves 25.00 (10.05) (20.00) (11.40)
Cash Flow $ $ $ $
from 452.00 1,345.36 1,085.28 974.35
Operation
s
Finance $ $ $ $
Payments 325.00 (340.63) (233.87) (363.55)
Lease $ n/a $ $
Payments - 20.00 (70.00)

Before $ $ $ $
Tax Cash 127.00 1,004.73 871.41 540.80
Flow

EXHIBIT 4 - BREAK-EVEN ANALYSIS


Alison Green Stony Walk Ivy Terrace Fowler
Current or Projected Occupancy 97.00% 97.00% 95.00% 95.00%
Added Margin 14.96% 5.95% 21.24% 7.68%
Break-even Occupancy 82% 91% 71% 80%
Loan to Value 72.73% 77.33% 63.89% 70.21%
Debt Coverage Ratio 1.46 1.20 1.87 1.41
1= least risky
4=most risky Alison 900 Ivy The Risk
Green Stony Terrace Fowler Assessm
Apartme Walk Apartme Bldg. ent
nts (Office nts (Office Weights
) )
Simple Return
Measures
Capitalization 2 4 3 1 12.00%
Rate-Purchase
Cap Rate-Sale 2 3 4 1 12.00%
Cash-on-cash 1 3 2 4 12.00%
Return( Y1)
Discounted
Return
Measures
IRR 3 4 2 1 30.00%
NPV 1 2 4 3 25.00%
Profitability 3 4 2 1 9.00%
Index
(NPV/initial
equity)

Overall Risk 2.02 3.26 2.86 1.86


(Calculated by
weights)
Overall Risk 2.00 3.33 2.83 1.83
(Average)
Overall Risk 1.00 4.00 2.00 3.00
Assessment

EXHIBIT 6 - Financial Analysis


Alison 900 Ivy Fowler
Green Stony Terrace Building
Walk
Equity Required 120000 850000 130000 1400000
0 0
Simple Return
Measures
Capitalization 10.82% 10.93% 12.14% 10.89%
Rate - Purchase
Capitalization 10.02% 9.07% 10.97% 10.18%
Rate - Sale
Cash-on-Cash 10.47% 4.22% 12.55% 3.96%
Return (yr 1)
Increase in Capital 40.91% 57.33% 44.44% 65.96%
Value

Discounted
Return Measures
Internal Rate of 16.51% 16.36% 16.01% 16.01%
Return
Net Present Value $ $ $ $
@ 12% 454500 3,15,429 3,27,69 4,35,029
0
Profitability Index 29.90% 37.11% 25.21% 31.07%
(NPV)

Interpretation:
From the NPV calculation we can see that Alison Green and
Fowler Building are the best investment. But this calculation
does not take into account the risk factor. IRR method was not
used for calculation because there is a large re-investment risk.
Now taking both NPV and the risk factor into account Alison
Green and Fowler Building are the best investments.

Recommendation:
As a retiree, John’s future income is limited to whatever returns
he’ll receive from his investments. He requires an investment
that can shelter some of his income and producereliable future
resources.
Hence he should invest in Alison Green for his needs.
Judy has more income earning potential, more years before
retirement, and even more equity to invest in properties. This
opens her up to potentially riskier investments, and possibly
longer-term properties. With Judy’s ability to invest in higher-
risk properties, she would get higher returns and shelter more
income by investing in Stony Walk. Stony Walk has the
greatest shelter, shows very solid returns both in the operating
cash flow analysis and in the final sales price.