You have just received (late 1993) the attached setup from a local broker for the purchase of a commercial warehouse facility in the City of Commerce, a city east of downtown Los Angeles with a heavy industrial base. As either an investor or someone representing investors with capital available to be directed towards real estate assets, you want to analyze this property for possible acquisition/syndication. Review the attached setup and answer the following:

1. Summarize the salient features of the investment. What do you see as the risks of the deal? What are the rewards?

2. Assume you could close the purchase of the property on January 1, 1994, at a purchase price of $3.4 million, inclusive of all closing costs. Further, assume the following:

Rugbyís rent will increase to $0.475 per SF per month NN2 on 8/1/1994. The current tenant, Rugby Labs, vacates the property at the end of their primary lease term. The building is subsequently leased up after 90 days, at $0.35 NNN for a primary term of 10 years and an option term of an additional 10 years. The rent will be ad- justed every 30 months for changes in the Consumer Price Index (CPI), compounded annually. The minimum rental increase is 3% per annum, and the maximum, 5%. Upon re-leasing, you would have to pay $1/SF in tenant improvements, and a lease commission equal to 4.5% of the total base rents (without ináation adjustment) over the lease term. You will sell the property at the end of 10 years (beginning of 2004), the exit cap rate is projected to be 10%. For now, assume that there is no income tax consideration. (There are still real estate taxes!) Also, assume that the seller is taking care of the outstanding mortgage. Roof maintenance costs $10,000 in the Örst year, and is projected to increase 3% per year. Insurance expense is initially $7500 per annum, and is projected to increase 3% per year. Real estate taxes are projected to increase 2% per year. Ináation rate is projected to be 4%. To simplify the calculations, assume that all payments (rents, expenses, taxes, ...) in a year are made at the end of that year. Historical risk premium on industrial properties has been 3.5% per year. The trea- sury yields as of the end of 1993 are as follows: 3-months: 3.07%, 1 year: 3.63%, 2 years: 4.25%, 3 year: 4.58%, 5 year: 5.21%, 7 years: 5.53%, 10 year: 5.83%, 10 years: 5.83%. Moodyís Aaa corporate bond yields exceed the treasury yields by 1%, Baa yields exceed the treasury yields by 2%.

 
 

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PHYSICAL DETAILS: BLOG & LAND DATA SF BL.200 Land SP 187.33.50m Const Spis 45/3000 Mn Cr For Yea. Yes P SA 266 304 ICE.. IKE. Root Glu-Lam 24 Fenced INSURANCE REPAIR & MAINTENANCE LANDSCAPING UTILITIES MANAGEMENT 180+ OFFICE DATA Thomas DR Pg. 575-33 ON SF 16,500, 24 To Show Call Broker - Occupied we Yes Mest Yes ANNUAL EXPENSES BY LESSOR: REAL ESTATE TAXES 1987 Yes M ( OTHER Roof Reserve TENANT Marion-Merrell-Dov 81,200 3% 1 PLANT DATA Power 800277/480v 34 vire-verify No S Mail No THE HORI (10 x 14) and Low Des S Heal 47.500.00 Lessee is responsible for taxes 13,274.17 7,308.00- Lessor is responsible for roof 120.582.17 TOTAL ANNUAL EXPENSES CAE FIGURE IS ESTIMATED LESSORS PORTION AFTER PROPOSITION 13 REASSESSMENT AT THE LISTED PRICE TENANT(S) & LEASE(S) ALR STANDARD FORM LEASE Costing Yes-A/C Dock Yes Tues M1:37:41 Mes None Tuders M Current Use Distribution Facility 2T WIT OTHER LEASE FORM (specitys 1984 S.1.0.R. NN MONTHLY RENT $ APSP LEASE EXPIRES OPTIONS 1/31/97 None 36,872.69 $.454 wwe No 1:2X. check one FSG NNN MOD G GROSS NOU COL YES COL at 8/1/94 not to exceed 62 per year. PROPERTY ANALYSIS Concerns: The lease expires in 3.3 years and the tenant is paying an above market rental rate. Solution: Purchase the property for $3,800,000. At this price the buyer realizes a return of 91 based on an assumed market rent of $.35 per square foot per month. (Tenant is actually paying $.45 pr square foot per month today with a CPI increase scheduled for 8/1/94 resulting in a 5.47 rent range. Bank the estimated difference of $.12 per square foot per month ($385,000) as a reserve for lease up costs in the event the tenant does not renew the lease. (81,200 SF x $.12 $9,744.00 x 3.3 years remaining on the lease - $385,000). If the tenant does remain as a tenant, Buyer has reaped a tremendous bonus. 36,872.69 x 12 months - TOTAL $442,472.28 REMARKS: Rugby Laboratories is a division of the Darby-Rugby Group with headquarters Rockville Center, New York. The company was founded approximately 40 years ago by Joseph Ashkin and is still controlled by the family. Michael Ashkin, the founders som is Rugby's President and continues to be operated as a private company. Industry publications indicate that Rugby is the first or second largest distributor of generic drugs in the United States with annual sales estimated to be in excess of one-half billion dollars. Phase I and II Environmental reports are available. There are two oil wells on the property owned by Geo Petroleum Company. NOTE: Wall Street Journal, May 19, 1993, stated that Rugby was being acquired by Marion Merrell Dow, Inc., 712 owned by Dow Chemical Company. The sale is scheduled NOUIMAL INVESTMENT FOR SALE-PAR to be finalized by October 1993. PHYSICAL DETAILS: BLOG & LAND DATA SF BL.200 Land SP 187.33.50m Const Spis 45/3000 Mn Cr For Yea. Yes P SA 266 304 ICE.. IKE. Root Glu-Lam 24 Fenced INSURANCE REPAIR & MAINTENANCE LANDSCAPING UTILITIES MANAGEMENT 180+ OFFICE DATA Thomas DR Pg. 575-33 ON SF 16,500, 24 To Show Call Broker - Occupied we Yes Mest Yes ANNUAL EXPENSES BY LESSOR: REAL ESTATE TAXES 1987 Yes M ( OTHER Roof Reserve TENANT Marion-Merrell-Dov 81,200 3% 1 PLANT DATA Power 800277/480v 34 vire-verify No S Mail No THE HORI (10 x 14) and Low Des S Heal 47.500.00 Lessee is responsible for taxes 13,274.17 7,308.00- Lessor is responsible for roof 120.582.17 TOTAL ANNUAL EXPENSES CAE FIGURE IS ESTIMATED LESSORS PORTION AFTER PROPOSITION 13 REASSESSMENT AT THE LISTED PRICE TENANT(S) & LEASE(S) ALR STANDARD FORM LEASE Costing Yes-A/C Dock Yes Tues M1:37:41 Mes None Tuders M Current Use Distribution Facility 2T WIT OTHER LEASE FORM (specitys 1984 S.1.0.R. NN MONTHLY RENT $ APSP LEASE EXPIRES OPTIONS 1/31/97 None 36,872.69 $.454 wwe No 1:2X. check one FSG NNN MOD G GROSS NOU COL YES COL at 8/1/94 not to exceed 62 per year. PROPERTY ANALYSIS Concerns: The lease expires in 3.3 years and the tenant is paying an above market rental rate. Solution: Purchase the property for $3,800,000. At this price the buyer realizes a return of 91 based on an assumed market rent of $.35 per square foot per month. (Tenant is actually paying $.45 pr square foot per month today with a CPI increase scheduled for 8/1/94 resulting in a 5.47 rent range. Bank the estimated difference of $.12 per square foot per month ($385,000) as a reserve for lease up costs in the event the tenant does not renew the lease. (81,200 SF x $.12 $9,744.00 x 3.3 years remaining on the lease - $385,000). If the tenant does remain as a tenant, Buyer has reaped a tremendous bonus. 36,872.69 x 12 months - TOTAL $442,472.28 REMARKS: Rugby Laboratories is a division of the Darby-Rugby Group with headquarters Rockville Center, New York. The company was founded approximately 40 years ago by Joseph Ashkin and is still controlled by the family. Michael Ashkin, the founders som is Rugby's President and continues to be operated as a private company. Industry publications indicate that Rugby is the first or second largest distributor of generic drugs in the United States with annual sales estimated to be in excess of one-half billion dollars. Phase I and II Environmental reports are available. There are two oil wells on the property owned by Geo Petroleum Company. NOTE: Wall Street Journal, May 19, 1993, stated that Rugby was being acquired by Marion Merrell Dow, Inc., 712 owned by Dow Chemical Company. The sale is scheduled NOUIMAL INVESTMENT FOR SALE-PAR to be finalized by October 1993.

Answer rating: 100% (QA)

1 The salient features of this investment include a warehouse facility in the City of Commerce located east of downtown Los Angeles The purchase price is 34 million inclusive of all closing costs The ... View the full answer