You have a decision to make… will you, or won’t you buy 2020 Center Street? I

You have a decision to make… will you, or won’t you buy 2020 Center Street? In order to make this decision, please answer the following questions (answers to the following 4 questions is what you will turn in):
1) What is the Net Operating Income for the property? What do you think the Cap Rate should be? What is the Value of the Property based on your assumed NOI and Cap Rate?
2) How much do you think you can borrow from the bank to help finance the purchase? Why?
3) Assuming an interest rate of 4.15%, a 25 year amortization and 40% tax rate, what do you estimate the actual annual cash flow will be to the new property owner in the first full year?
4) The potential new owner of the property and the owner of the tenant (the business that will rent the space) are the same (i.e. potential new owner of the building and owner of the business are the same investors). Considering the new property owner’s estimated annual cash flow and the fact that the new property is costing the tenant an extra $140K a year to rent the new / upgraded space…. WOULD YOU ACQUIRE THIS PROPERTY, why or why not?
HERE Download HEREis a simple worksheet you can use to study this investment.
Other Information to consider when making your decision:
Commercial Property Investment Case Study: 2020 Center Street
You are considering an acquisition that will become the new office space for a company / tenant seeking to upgrade from their current location. You have an agreement with the tenant to lease the acquired space if you choose to move forward with the following opportunity.
TENANT / LEASE
The proposed new Tenant is currently paying $475,000 annually for office space in Valley View Ohio. Their current space is convenient, but lacks the aesthetics to “wow” clients and reinforce/reflect their high energy positive culture key to attracting and retaining top talent. The company is growing and is looking to find a space that better reflects their brand to help attract talent and enhance their client experience.
They are willing to pay up to $625,000 annually for a premium space in a preferred location that meets their needs. The potential incremental cost represents a 1% increase in costs for the company. They believe this is a good investment in order to achieve the added benefits that come with the premium space. The tenant believes that they will easily make up for this additional investment with lower cost of employee recruiting, higher employee retention and increased client/revenue growth (by retaining clients, growing with existing clients, landing new clients).
Current Location Base Rent: 200,000 annually
Utilities + (Taxes + Insurance + Maintenance i.e. Triple Net Costs**): 275,000 annually
Current Total Annual Office Cost $475,000 / year
**A triple net lease (triple-Net or NNN) is a lease agreement on a property where the tenant or lessee promises to pay all the expenses of the property including real estate taxes, building insurance, and maintenance. These payments are in addition to the fees for rent and utilities. NNN leases are common with commercial leases.

LANDLORD / INVESTOR OPPORTUNITY
A property at 2020 Center Street in Cleveland that meets the needs of the tenant can be purchased and renovated for $2.6M (see Sources & Uses in the worksheet provided).
An appraisal, considering the proposed renovations, came in at $2.4M.
Current mortgage terms are 25 year mortgage at 4.15% (as of July 2020)
Building Acquisition and Renovation Summary (from the worksheet provided above)
Uses of Funds
Property Purchase Price
1,350,000
signed purchase agreement
Building Renovation
1,252,212
based on contract with construction manager & other costs
Total Uses
2,602,212
Sources of Funds
Mortgage
0
plug in mortgage based on what you think bank will loan
Incentive Dollars
230,000
dollars from city / state to support project
Cash from New Building Owners
2,372,212
this amount adjusts based on mortgage
Total Sources
2,602,212

LANDLORD RENTAL INCOME
2020 Center Street Office Tenant Rent: $29,617 / month, or 355,404 for 12 months**
Utilities + Triple Net Lease Costs: 259,571 (paid directly by the tenant) annually
Proposed Total Annual Tenant Office Cost $614,967 / year

LANDLORD EXPENSES
The landlord will pay a $1,500 per month property management fee.
Because the landlord will have a NNN lease with the tenant, there are no other expenses to the landlord. The tenant will cover property tax, condo fees, utilities, insurance, etc.