Final Exam - Northbrook Court

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Rowan University *

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03509

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Finance

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Jan 9, 2024

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Private Equity & Institutional Real Estate Finance Instructor: Rafi Hovsepian Final Exam – Case Study Due Date: Please refer to the date listed on Brightspace. You are the portfolio manager of a single-asset real estate fund held in a private equity firm. On December 31, 2011, your fund – consisting of your firm as General Partner (GP) and a prominent pension fund as Limited Partner (LP) – acquired Northbrook Court Apartments, a 100-unit garden-style apartment complex in Northbrook, Illinois, a suburb of Chicago. The acquisition price was $20 million, with a 75% mortgage at purchase. The remaining 25% equity portion was provided as 90% LP and 10% GP. Furthermore, in lieu of ongoing asset management fees, the GP and LP agreed to a waterfall with lucrative hurdle rates for the GP. In return, the LP stipulated certain return requirements as follows: Equity multiple for the fund of no less than 2.0x. Equity multiple for the LP’s own investment of no less than 1.9x. IRR for the fund of no less than 17.0%. IRR for the LP’s own investment of no less than 16.0%. Northbrook Court was sold on December 31, 2016. The LP is currently waiting on a post-sale summary deal assessment regarding the asset’s performance during the Fund’s ownership. You are tasked with preparing this assessment and reporting your findings to the LP in the form of a brief (1-2 page) investment memo. The LP would like the memo to reference the results for both the deal and its own investment, to ascertain if the above-listed equity multiples and IRRs were realized. In order to perform this exercise, you must create an Excel summary file of the deal, showing a pro forma during your ownership period. Please refer to the Excel file for the relevant modeling factors. In addition, the Excel file contains a waterfall worksheet that will help you to calculate the deal, GP and LP-specific metrics (you simply need to make sure that row 14 of the Waterfall worksheet links to the generated annual cash flows of your pro forma). Aside from providing quantitative results, your memo should highlight one or two factors that contributed to the return requirements being realized or unrealized. (For example, if the return requirements were not met due to a low annual rent increase, then what rent increase would have been needed for the return requirements to be met?) Please make your memo AS PROFESSIONAL AS POSSIBLE – concise, fluid and well written, while checking for spelling mistakes and run-on sentences. Also, please be sure to date your memo. Both the memo and Excel model should be provided to me via email. And remember that, even if your Excel does not contain the correct figures, your conclusions in the memo should be based on your Excel findings. Good luck, I’m sure you will all do well!
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