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On December 31, 1978, Olympia and York purchased 11 million

On December 31, 1978, Olympia and York purchased 11 million square feet of Class A office space in M… Show more On December 31, 1978, Olympia and York purchased 11 million square feet of Class A office space in Manhattan for $31 psf ($341 million). In doing so, they assumed $296 million of existing non-recourse mortgage financing with annual debt service of $24 million, interest only. Annualized Net Operating Income (before debt service) of $24.2 million existed as of 1/1/79 with market rents for new tenant leases being $12 psf while existing rents for space occupied averaged $8.50 psf. Additional operating expenses for each new square foot occupied are $2 psf per year and the average landlord-paid build-out will cost $15 psf during the next ten years. 20% of the office space was vacant in the buildings as of January 1, I979. All existing tenant leases expire evenly over the sixty months beginning 1/1/79. New leases and renewal leases are all signed for an average of seven year terms for the rents listed below. Annualized operating expenses for the properties (including insurance and taxes), but exclusive of variable expenses, for space vacant on January 1, 1979 are $50.6 million per year and are assumed not to increase during the next ten years. Assume that 75% of existing tenants (now and in the future) renew and 25% move-out but are immediately replaced with new tenants. No build-out cost is spent for renewal tenants’ space. Leasing commissions are 6% of the total of new tenant’s rent payable in the first 5 years of their lease and 2% of a renewal tenants total rent payable during the first 5 years of the renewal tenant’s term. All commissions are payable on the first day of the new/renewal lease. 1. Calculate the actual 1979-1988 (Net Cash Flow) or deficit after capital expenditures but before debt service. Assume that by the end of 1981, the buildings reached 95% occupancy and stayed that way through 1988. Leases signed in each year were at the following rates: 1979……………………$12 1980……………………$15 1981……………………$19 1982……………………$25 1983……………………$28 1984……………………$30 1985……………………$32 1986……………………$34 1987 and after…….$36 2. What is the “Current Return” (Before Debt Service) for each year for 1979 through1988? 3. Using the “Cash Flows” computed in question (1) above, what is the internal rate of return for the property assuming it was sold for $3.4 billion on 12/31/88. 4. Assuming that the property’s mortgages were refinanced on January 1, 1985 for $2.0 billion at 10.5% interest-only for 10 years and that the properties were sold for $3.4 billion (total) on 12/31/88, what would the “after-debt-service” internal rate of return be? 1 of 2 5. Assume now that you are the deal Sponsor NOT Olympia and York. You have a lot of talent and very little money. You have convinced a Pension Fund to give you the equity money to purchase the 11 million sq. Ft. office portfolio. Based on the following Terms: Money Going IN: Pension Fund 95% Sponsor 5% Money Out: 1st 11% Preferred Paid equally on all contributed money 2nd 75% Pension Fund / 25% Sponsor – Until Pension Fund has cumulative IRR of 15% 3rd 65% Pension Fund / 35% Sponsor – Until Pension Fund has cumulative IRR of 20% 4th – 60% Pension Fund / 40% Sponsor – Thereafter A) What is the Leveraged IRR of the Sponsor? B) What is the leveraged IRR of the Pension Fund? HINT: Base your answer from question 4 (Meaning your leveraged rate of return answer). 2 of 2 • Show less

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