BIC 2023 Updated

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University Of Georgia *

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Finance

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Feb 20, 2024

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Module 4 Assignment Class Time: 9:35T/TR Group Number: ____12___ Semester Group Members (eLC Last Name, First Name): 1. ___Campbell Pitzer________ 2. ____Hunter Benson______________ 3. ____Lily Mahoney______________ 4. ___Emily Miller___________ Bulldog Investment Company (BIC) recently sold a property from their portfolio and is now considering new investment options. Your group’s task is to determine which one of the following properties BIC should purchase. The cost of any of the options is not a concern. This assignment meets the Module 4 Learning Objective of being able to compute present values and make investment decisions using DCF and NPV for CRE. An additional important takeaway is how each investment option can be compared directly because individual risk has already been factored into the analysis. Each question has one correct answer; therefore, no partial credit is available. Please make your answers clear by highlighting them in some way. The deliverable is one team copy of this document. The assignment is due by 9/22 by 5 pm to the eLC dropbox. Any late assignments will reduce the grade by 10% per day. Since the deliverable is a team project and the grade reduction applies to all, a strong recommendation is to submit the assignment well before 5pm so that all team members can verify the submission by the chosen member.

Final recommendation: Which property does your team recommend and why? (5 points for each answer) We recommend the Tiger Town Investment as we have calculated this investment to have the highest NPV without appearing to be “too good to be true”. BIC’s extensive market analysis gave the company confidence that they can complete capital improvements to increase rents. This need for capital improvements may contribute to the Bulldog Investment Company having leverage and as a result, being able to purchase this property at the discount resulting in the large positive NPV. Additionally, the extensive market analysis points to this being a good investment. DCF and NPV analysis is only as good as the input numbers (GIGO). Subsequently, our investment decisions are only as good as the quality of the cash flow and discount rate assumptions that go into the right-hand side of the DCF valuation formula. While based on the given market data, does one of these investment opportunities appear to be too good to be true and why? (5 points for each answer) The investment opportunity of purchasing raw land for an office and retail complex seems as though it may be too good to be true. Bulldog Investment Company would likely need to seek additional demographic information to determine whether or not an NPV of over $2 Million for the retail property is realistic depending on if the local economy could support the retailers present. It is important that the company considers which types of retailers could fill the space. Office and Retail space are currently riskier product types so it is necessary for the company to proceed with caution. However, it is important to note that because development is generally a higher risk venture, higher rewards can be expected. Consequently, it is more likely that a development venture would have a higher NPV that is not necessarily indicative of being “too good to be true” as opposed to a more black and white “buyer and seller” transaction for an already stabilized property where such massive discounts are unlikely to occur. Regardless, it would be important to conduct market research to ensure that the community could sustain such a large retail facility. The first property is the Empty Arms hotel. Next year’s NOI and cash flow is expected to be $900,000 and BIC’s forecast of market supply and demand and vacancy levels indicates that these factors will continue to be in balance. As a result, NOI should

increase by 2 percent each year and BIC believes they should earn 10% total return on the investment. A) If Empty Arms is like other recently sold properties, what is the cap rate in the local market? (5 points) Cap rate= NOI/ property value R=y+g Cap Rate = 8% B) What is the estimated value of the property? (5 points) Value= NOI/Cap rate Value = $11,250,000.00 C) Thinking only of this property and not the other options yet, should BIC purchase this investment if the negotiated asking price is $11.25M and why? Answer this question and all others that ask for a recommendation in the form of: Yes/No, the NPV = +/- $xxxxxx (5 points for each answer) Yes, the NPV=0. An NPV of zero is not only profitable but expected during transactions as both the buyer and seller must benefit for the transaction to occur (Transaction Price = Market Value, or there would be no transaction). The second property is Tiger Town. BIC has done an extensive market analysis and has estimated that, based on the current rents and operating expenses, the annual NOI will be $1,200,000 next year. The NOI will be flat for a few years until capital improvements allow BIC to increase rents. After which, NOI is expected to increase by 1.5% per year

indefinitely. Bulldog believes that investors should earn 9.5% total return on this type of investment, which is therefore the discount rate. End of Year NOI 1 1,200,000.00 2 1,200,000.00 3 1,200,000.00 4 1,218,000.00 5 1,236,270.00 6 1,254,814.05 7 1,273,636.26 8 1,292,740.80 A) While this specific property does not exhibit constant growth, we can determine the market cap using the returns relationship. Recalling Equation (2) in Chapter 9, what current cap rate should be found in the market for similar properties? (5 points) (Y= CF/V). R= y+g à 9.5% = y + 1.5% à Cap Rate =8% B) Assuming the investment will be owned for 7 years and then sold, what is the present value of the property? Assume the cap rate in year 7 is the one computed in part A. (10 points) The present value of the property is $14,606,868.05 C) What is the NPV if the final negotiated purchase price is $14,500,000? Be clear if it is positive or negative. (5 points) If the final negotiated purchase price is $14,500,000 the NPV = $106,868.05

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