Cash Flow Modelling - Accounting and finance Assignment Help

Assignment Task

You are a Capital Markets Associate supporting a team of debt origination professionals at a top Debt Advisory firm based in New York City. A borrower has approached your team with a financing request and provided the following information:

• Single tenant office building in downtown NYC
• Total area – 250,000 SF
• Currently leased at $75.00 PSF per annum NNN with 2 years remaining on the existing lease.
• Current market rents are approximately $85.00psf NNN. Assume the space is released at that rate under the following assumptions:
• 9 months downtime between the current lease of $75psf and the new lease which will be at market or $85psf.
• 10 year lease commences 9 months after expiration of the initial tenant at market rent with a $5.00 step up in lease rate at the end of year 5 of the lease.
• In addition to the downtime of 9 months, there is 6 months’ of rent free at beginning of 2nd lease
• Leasing commission equal to 3% of the total or aggregate amount of rent to be collected over entire lease term. The Leasing commission is paid day 1 of the new lease
• Tenant improvements of $50.00 psf are paid on day 1 of the new lease
• Purchasing the building today is based on a cap of 5.00% of existing lease net rent.
• Borrower plans to hold the asset for 10 years and exit at a 4.5?p rate on Year 11 cash flow. Assume selling expenses are 3% of selling price.

After a few weeks of performing financial analysis and preparing a target list of potential lenders, your team takes the borrower’s offering to market. A week later the borrower receives three financing proposals:

Option A: 50% LTV @ 2.5% interest only and therefore no amortization

Option B: 65% LTV @ 3.00%, monthly pay, fully amortizing based on 30-year amortization

Option C: 75% LTV @ comprising:

• Senior: 65% LTV 3.25%, monthly pay, fully amortizing based on 30-year amortization; and
• Mezzanine: up to 75% LTV 8.00% and no amortization (75% total minus Senior)

REQUIRED

1. What is the borrower’s levered IRR in each case?
2. Which proposal do you think is more attractive and why?
3. What loan terms / structural points should the borrower be on the lookout for?

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