Real estate finance RA - MK - 4A (Graded A+) - use as a guide only - 26151

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  • Posted on: Thu 26 Sep, 2013
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Lakeview Limited Partnership has been formed to acquire and operate an office building in Boston. For simplicity, assume that there are only 1 general partner and 1 limited partner.  Based on the agreement of the partnership, equity contributions are: general partner, 0%, and limited partner, 100%. Cash distributions from operations: general partner, 10%, limited partner, 90%. Taxable income and losses from operations: general partner, 10%, limited partner, 90%. Allocation of gain or loss from sale: general partner, 15%, limited partner, 85%. Cash distribution at sale: based on capital account balance. Note: the partnership initially decides to use 100% equity finance.

 Property capital structure:                                Amount

   Purchase Price                                                     $24,000,000

   Organization Fees (Amortized over two years)               500,000

   Syndication Fees (included in the original cost)              500,000

   Total                                             $25,000,000

   LessMortgageLoan                                      0

   Equity Requirement                                  $25,000,000

 Depreciable Basis:                    

   Purchase Price                                      $24,000,000          

   Land value                                          (2,400,000)

   Building Improvement                                $21,600,000

   Depreciable Life (for the improvement)                     39 years

   Annual Depreciation                                   $553,846

   Tax Rate*                                             28%

      Operational Year                    Year 1            Year 2

   NOI at the end of year               $2,000,000          $2,500,000


* Assume the tax rate for operational income and capital gains are the same. 

The limited partnership is expected to sell the office building at the end of year 2 (Assume the partners make equity contributions at the beginning of year 1). The expected sales price is $30,000,000. Selling expenses will be 8% of the sales price. 

  1. What are the before tax cash flows from operation of the investment that would be distributed to the limited partner for year 1 and year 2?
  2. How much capital gains would be allocated to the limited partner upon sale of the property?
  3. What is the capital account balance for the limited partner after the two years?
  4. What is the after-tax IRR on total funds invested in the property (ATIRRP)
  5. Determine an estimated after-tax equity return (ATIRRE) for limited partner.
  6. Suppose that a loanis available, with annual interest rate 8%, amortized over 25 years, and monthly compounded. The loan amountwill be 80% of the initial purchase price. In this case, is there favorable financial leverage if the limited partnership borrows this loan? Why? [Hint: calculate the ATIRRE given the loan is borrowed]. Briefly discuss.


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12 Finance Tent.xlsx
12 Finance Tent...