Uli Textbook Pages

MID-TERM EXAM Fall 2013

EXAMPLE:

A class B-/C office building located in a Class A location, constructed in 1960, is 40 % vacant. Market vacancy is 12% for Class A buildings and 18% for class B. The prospective new owner in under contract to buy this property for $27 million. The gross area of the property is 150,000SF on ten (10) floors. The developer wants to reposition the property into a Class A-/B+ office building and sell it once stabilized within 5 years.

Purchase Price $180/SF X 150,000SF $27,000,000

Building CapEx $ 80/SF X 150,000SF $12,000,000

TI –New Leases $ 60/SF X 60,000SF $ 3,600,000

TI- Renewals $ 20/SF X 90,000SF $ 1,800,000

Commissions $ 10/SF X 60,000SF $ 600,000

Soft Costs $ 100/SF X 150,000SF $ 15,000,000

Total Project Cost $ 60,000,000

$ 400/SF

QUESTION 1 (10 Points )

What kind of loan for this property would you select and why, a CMBS conduit loan or one from a portfolio lender? Discuss the pros and cons of each kind of loan.

A loan from a portfolio lender would be the most appropriate form of financing for the property described. Portfolio lenders can directly provide short-term financing for the construction phase of the project as well as long-term mortgage financing for the acquisition; because the repositioning will require a great deal of capital after the purchase, the borrower is likely to find that this type of loan is the best fit for their needs. Aside from this major benefit that is particularly attractive for this specific project, borrowers are afforded greater ability to make amendments to the loan, prepay or refinance with portfolio lenders. When compared to CMBS conduit loans, mortgage documents tend to be simpler with portfolio lenders and legal costs tend to be lower as well.

Many CMBS loans are relatively short in nature, which forces property owners to refinance 3 to 5 years after financing was obtained. With CMBS loans, workouts

Because the subject is located in...