Stuyvesant Town is a sprawling collection of red brick apartment buildings with typical housing project style architecture, stretching from First Avenue to Avenue C between 14th and 23rd Streets in Manhattan. Stuyvesant Town has 8,750 apartments in 35 residential buildings. The surroundings of Stuyvesant Town are bordered by the East River on the east, the Gramercy neighborhood on the west, the East Village to the south, and Kips Bay to the north. The surrounding area to the west is notable for its historic Stuyvesant Square, a two block park surrounded by the old Stuyvesant High School, Saint Georgeâs Church and the Beth Israel Medical Center. Since opening its doors in 1947 this has been a highly desirable place to live due to its location, surroundings, and family friendly neighborhood. Currently the apartments rent for the following: 1,500 1-Bedroom Units Renting @ $2500/month 2,500 2-Bedroom Units Renting @ $4250/month 4,000 3-Bedroom Units Renting @ $5800/month 750 5-Bedroom Units Renting @ $7500/month Additionally, this property has covered parking, a recreation facility, and other non-real estate revenue equal to 3.5% of the Potential Gross Rent. While this is a highly desirable place to live with a waiting list during most years there are times when apartments are empty while renovations occur. The vacancy expense is 2% of Potential Gross Income plus Other Income and Operating Expenses are typically 39% of Effective Gross Income. Your partnership is unable to lock down a favorable loan with the best rate having the following terms 55% LTV, 6.0% Interest Rate, 20-yrs, 10-yr Balloon Mortgage, 2.0 Pts, $1,000,000 in Fees. Unfortunately due to the strict loan terms you will need a second and third loan to buy this property as you feel ill-equipped for the necessary down payment. Due to the higher risk nature of this second loan the terms are even less favorable. For your second mortgage you will receive 15% LTV, 7.25% Interest Rate, 10-yrs, 2.0 Pts, $500,000 in Fees. And your third mortgage will come at 10% LTV, 8.5% Interest Rate, 10-yrs, 3.0 Pts, $300,000 in Fees. General Market Terms for DCR = 1.33, EDR = 6.5%, BV/TV = 0.4 still apply. Despite inflation being quite low currently the partners ask you to model inflation at 3% for all 10-years. Also, due to the standard of living Stuyvesant provides to those that live within this oasis in Manhattan appreciation is expected to be equal to the inflation rate. This investment on behalf of the partnership is expected to last 10 years at which time the market for housing is expected to be robust and the partnership will then sell the investment and invest the profits elsewhere. The sales expense at that time is expected to be 1.5%. However, despite the return to a ânormalâ real estate market the partnership will most likely accept an offer at 3% less than the full value of the property. Calculate and show the Annual Cash Flows, Taxes (utilize and show both methods), IRR & NPV for your Partnership (Round all dollar answers to the nearest dollar, use 20% for the capital gains tax, use 25% for depreciation recapture tax rate, the head of household tax bracket for the tax rates and assume that losses cannot be carried forward). Would you make these loans to the partnership? Make sure to comment on why or why not. In addition, calculate a Potential ROE/Leverage Chart for the first year as computed in class based on 0%, 55%, 70%, and 80% Leverage to illustrate whether this is (1) positive financial leverage, (2) negative financial leverage, or (3) neutral financial leverage and explain why.
