Graybar

Graybar Redux

An Analysis of Investment Risk in Graybar Building Associates

Prepared by:

Newt Ganugapati & Josh Klaetsch

for

Real Estate 870, Professor T. Riddiough

March 12, 2007

UNIVERSITY OF WISCONSIN – MADISON

SCHOOL OF BUSINESS

BUSINESS 870: ADVANCED REAL ESTATE FINANCE

SPRING 2007

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Purpose

This report will analyze the specific risks that we examined when analyzing the investment in Graybar Property Associates (henceforth, Associates). The proposed investment is for a share of a leasehold in the Graybar Building, located in New York City’s business center on Lexington Avenue between 43rd and 44th Streets. The investment is rather legally complex and has several financial tiers which must be examined. Additionally, the operating environment of the building requires us to look at several other risks which must be considered before investing.

i. Investment Risks

The list below details what we see as the risks to investment in Associates, with the most relevant risks listed first.

• New construction supply

• Operation of property

• Tax treatment of distribution

• Tax law changes

• Competition

• Conflict of interest between legal counsel and Associates

• Depreciation/maintenance/repair

• Increasing operating expenses

• Agency risk in each JV operation

• Lease cost increase on ground lease

• Poor physical inspection

• Default of superior lessees

ii. Discussion and...