• Define a Mission Statement to include minimum financial thresholds (e.g., EIRR, EMx. etc.)
• What stage is this building in its financial and physical lifecycle? What risks should investors be aware of during this stage?
• What are two positive and two negative Alpha (Market) and Beta (Property) considerations to consider for this asset? For each of the negatives and positives identified, what are the mitigating or enhancing factors an investor should consider? How realistic are these factors?
• Compared to an apartment building, identify at least three specific risks investors should be aware of when investing in an office building.
• Based on the market information provided what economic trends in the Washington, DC market would lead investors to consider this a "safe" or "unsafe" market to invest. What factors would potentially concern an investor? What additional information would you wish to have access too so as to feel "safer?"
• Based on the transaction volumes presented in the market study do you believe Washington, DC should be considered a highly liquid market? What are some examples of non-liquid markets? What considerations should investors give to highly liquid vs. non-liquid markets? What is the impact of a liquid market on the eventual sale of 1775 Pennsylvania Avenue? Hint...start you answer by defining what market liquidity is.
• There are always events that disrupt the capital lending cycle. As such what current events are impacting that cycle and what is the impact on 1775?

PROPERTY DESCRIPTION: 1775 Pennsylvania Avenue is an existing 10-story, class-B office building located in the Washington, DC Central Business District (CBD). The property is a 200,000 rentable square foot office building designed by Hartman-Cox Architects. The building's groundbreaking modern architecture, extraordinary double- corner location, efficient floor plates, and sweeping views from three sides have attracted forward-thinking companies and law firms since its completion in 1975. The property offers 8,000 SF of street retail and three levels of underground parking with 120 parking spaces. For purposes of this case assignment assume that over the years a large law firm made 1775 Pennsylvania their home, however, they outgrew the space, so the building is now completely empty. Hence the opportunity to structure a deal. Assume you are part of a group that is interested in purchasing the asset. Define your mission statement first as this will guide your decision making as you ponder this opportunity. Go online and research what comprises a mission statement and accompanying business plan and redevelopment plan. INVESTMENT OPPORTUNITY: Assume 1775 Pennsylvania Avenue became completely vacant at the end of 2019, thus allowing developers an opportunity to release the property or redevelop the facade, the common areas, and/or construct an additional floor provide for selected mechanical upgrades involving the HVAC and elevator systems. The building is a developer's dream because it allows for various alternatives. The property could remain a Class-B building, or combined with its strategic location, be repositioned from Class-B to Class-A Trophy status, to attract highly desirable tenants. You also have the opportunity to reposition the asset using one of two financing options (detailed later in this write up). LOCATION: K SL. Nw The property overlooks Pennsylvania Avenue, a bow tie park and is across the street from the World Bank and SL NW International Monetary Fund. Located one block east of the Old Executive Office Building and White House at the corner of 18" Street and Pennsylvania Avenue, it is one block south Lafayette of the Farragut West Metrorail Station, servicing the Orange Park The and Blue subway lines. The Farragut North Metrorail GSUNW Station, servicing the Red line, is located three blocks from the property. Office E St. Nw ESLNWPROJECT ASSUMPTIONS: Leasing: Due to the Class-B quality of the asset today, your brokers believe the existing space will lease for $25 NNN (pro-rata taxes, insurance, CAM, property management) without any renovations to the asset. Please note, as the owner/developer, you will still need to arrive at (and justify) your own rent assumptions but the broker opinion is a good starting point. You will also need to account for payment of Tenant Improvements, Leasing Commissions, and other appropriate fees. Lease Type: Assume all floors are 20,000 SF with no load factor (i.e., all 20,000 SF is rentable). In this DC market, assume all leases are triple net (NNN), which will cover common area space for as much of the building as is occupied Redevelopment Timing: All renovations on the "redevelopment menu" will take three months, with two exceptions: a new lobby that will take an additional six months; and a new top floor with HVAC upgrade that will take an additional nine months. Both additional upgrades would be necessary to achieve "trophy" status. This work must be completed prior to any new tenants leasing space at the property (i.e., you would purchase the property, renovate it, and receive no rental revenue until it's completed). Lease-Up timing: Brokers indicate that in Washington DC a vacant office building takes 18-24 months to lease- up the space depending on the amount of vacancy available in the market place. Market Data: Your leasing assumptions should be based on an analysis of comparable buildings (with comps based on the extent you choose to renovate i.e. Class-A Trophy or Class-B), going market rates and occupancy. You may utilize the data given in posted XLS market rent comparable tab (you may update if you have Co-Star but it is not required) and the Delta Associates 2017 & 2018 market report (these reports are available online). Leasing Assumptions: As a starting point (adjust based on your review of the market reports) all leases signed can be assumed to be 10-year NNN leases, withtenant improvement allowances ("TI's") of $60/SF and leasing commission of 5%. You may assume $65/SF NNN rent for the retail space, with the same TI/LC as the remainder of the building. . Lease-up (Absorption) Assumptions: Assume that each tenant suite under the renovation scenario is based on the following: Absorption of one floor per quarter as a starting point but arrive at your conclusions from the market data reports. Potential Tenant Mix: Since the Property's inception, it has traditionally attracted forward-thinking companies and law firms. Due to the smaller floor-plate size this property works well for several tenants. This is due to the floor plates breaking "well" and allowing smaller firms to have a full-floor identity off the elevator. Depending on the level of renovation, this location could be a single tenant building or multi-tenant property with associations, non-for profits, government affairs offices, corporations, or law firms.COMPETITIVE LEASING MARKET TROPHY COMPETITION - use the information below to refine your leasing assumptions. Building Name / Address % Office Asking Rental Typical Project Type Submarket Delivery Date Total RBA Leased Rate (psf) Floor Plate Stories 1225 Connecticut Ave., NW Redevelopment CBD Fall 18 225,000 0.0% $45.00 NNN 28,125 8 1200 19th Street Redevelopment CBD Spring 19 300,000 0.0% $40.00 NNN 27,273 11 Lafayette Tower 801 17th Street, NW New CBD Spring 19 250,000 0.0% $50.00 NNN 22,727 11 901 K Street, NW New East End Spring 19 250,000 0.0% $42.00 NNN 20.833 12 1000 Connecticut Ave, NW New CBD Spring 20 400,000 0.0% $52.000 NNN 33,333 12 1101 K Street, NW New East End 2017 315,000 35.0% $45.00 NNN 31,500 10 1050 K Street, NW New East End Winter 18 125,000 10.0% $45.00 NNN 11.364 11 1129 20th Street, NW Redevelopment CBD Winter 18 185,000 0.0% $60.00 FS 18,500 10RENOVATION MENU Item Cost PSF Submarket Hard Costs Patch and Paint Existing Facade $5.00 PSF Install new roof $5.00 PSF Existing roof is 15 years old - expected life is 25 years Core (reconfigure and bathrooms) $15.00 PSF Demo and Refurbish Bathrooms Garage $2.00 PSF Paint and Light existing garage New High-Quality Lobby $18.00 PSF Install new 2 story lobby with high quality finishes Refurbish Existing Lobby $8.00 PSF Refurbish existing lobby Updated Elevator Finishes $200,000 per Elevator New finishes in elevator cab New Elevator Mechanicals $600,000 Update elevator control system Upgrade HVAC $30.00 PSF Install VAV Boxes throughout the building Balconies $1.000,000 Create balconies for tenant on top two (2) floors New Windows $10.00 PSF Replace windows in building New Fitness Center $500,000 Build-out new fitness center New Retail Storefronts $350.000 Replace retail windows/storefronts New Retail Signage $150,000 Replace retailer's signage Multi-tenant Lobby Built-out $100,000 per floor Add Additional Density (20,000 SF) $300.00 PSF Receive Benefit of Additional Density purchased through TDR's - Must also replace HVAC to accomplish LEED Certification - Silver 3.5% of Hard Costs Receive Silver LEED certification LEED Certification - Gold 6% of Hard Costs Receive Gold LEED certification Hard Cost Contingency 3% of Hard Costs Soft Costs ARE/ Engineering 10% of Hard Costs Insurance 2% of Hard Costs Marketing Budget $5.00 PSF Fees |Developer Fee 5% of total Budget Financing Costs 100 bps of Loan Costs Contractors GC 10% of Hard CostsCLASS-B VS. CLASS-A TROPHY BUILDING FINANCING: Financing A: Financing B: American Republic Bank and Trust British Royal Banking Society 1st position: Interest Rate Dec 2019 US Prime rate plus 300bps Dec 2019 12mo LIBOR plus 500bps Amortization 15 years 20 years Max LTV 75% 85% Max LTC 65% 75% Min DSCR 1.20 1.25 Type Fully amortizing, Constant Payment Fully amortizing, Constant Payment Mortgage paid monthly Mortgage paid monthly Loan fees 125 bps of amount lent 75 bps of amount lent 2nd position ("Mezzanine": Interest rate Dec 2019 US Prime rate plus 1000bps Dec 2019 12mo LIBOR plus 1500bps Amortization 10 years 7 years Max additional LTV 10% 5% Max LTC n/a n/a Type Interest only, balloon due on term Fully amortizing, Constant Payment Mortgage paid monthly Equity Necessary shortfall to balance all sources Necessary shortfall to balance all sources and uses to zero and uses to zero