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Posted: November 29th, 2022

COMM307 – Business as Usual Case – Questions

1
Sauder School of Business at UBC
COMM307 – Business as Usual Case – Questions
Fall 2022 Prof. Tsur Somerville
HA 278 822-8343
tsur.somerville@sauder.ubc.ca
Business as Unusual: Managing Commercial Property in Distress, Kellogg case via HBS,
KEL857. Submit by 8:00 PM (Vancouver time) on Monday Oct 17. Submission by email
to comm307.sauder.ta@gmail.com
Up to three students can work together and submit a single assignment. Student groups
can work together with other students and groups but must submit their own assignment,
one per group.
Ensure your answers address all elements of each question.
Structure your answer to each questions in the same order or numbering as each question
is asked. Provide:
• A pdf of your written answers for Q1-Q5, with summary tables as necesssary.
• Excel file showing your proformas for Q3-Q4. Each question should be a different
tab in the file
• Email the pdf and Excel file to with the following naming convention:
lastname+lastname+lastname.written.pdf and lastname+lastname+lastname.xlsx
Assignment will have a 10% percent weight (10 percentage points of the 20 percentage
points across the 3 cases).
This assignment will use the information from the case but pose a different set of issues
and questions for you. Information about the leases, market, prospective anchors are all
relevant. But we will ignore Clarke and all aspects of his deal
Context
You are the GP for a real estate fund that invests in opportunistic properties. You seeking
to exploit the financial crisis to seize properties in distress return them to stabilization and
then sell. Your fund’s target is assets where your going-in projected levered IRR is 20%.
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It is Jan 2011 (not 2010 as in the case). The lender foreclosed on Tilbury Plaza in 2010 as
Clarke was unable to make loan payments or show an ability to get an anchor tenant
violating the terms of the loan agreement.
The lender has put the property out to tender. You are now being asked whether you want
to purchase the property. The lender is listing it for $8.5M in order to try to recover the
loan outstanding balance foregone interest and fees.
Leasing Details
All CRUs (commercial retail units, the non-anchor standardized space) sign/resign for 10
year terms at prevailing market rent with 2% per year increases, all are triple net.
Fund details:
Initial investment is 90/10 (LP/GP). Additional funds are invested 25/75 with these added
to equity balance.
Initial equity is the initial invested. Equity balance includes additional invested equity
Cash flow splits on equity balance:
i) Preferred return to LP at 7%
ii) Return to GP at 5%
iii) Then pari-passu 75/25
Return of Capital (equity balance):
i) Pref return of capital to LP
ii) Then return of capital to GP
Return on Capital at Sale:
i) Pref return accumulated 10% for length of hold on initial equity to LP (this
means they get 10% on initial equity if sale is after one year, 21% if after two
years, 33% if after three years, etc.)
ii) Return accumulated at 10% to GP on equity balance
iii) 50/50 pari-passu above
Asset management fee per year of 1.5% of LP initial equity paid before distributions are
calculated
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Debt Financing:
You have access to debt on the following terms: 10% interest rate, 25 year amortization, 5
year term. The lender has a max LTV of 50% (valued using year 1 NOI and market cap).
They do not have a DCR underwriting criteria as they use year 1 NOI, not purchase price
for their valuation. Use as much debt as you can
ASSIGMENT QUESTIONS / TASKS
1. Briefly Describe the strengths and weaknesses of the asset (15 points)
• Physical layout
• Existing tenant mix
• Location
i. Market area
ii. Market conditions/propsects
2. Analyze the four prospective anchor tenants (60 points)
• Benefits of each anchor
i. as a tenant on their own and
ii. as they relate to the property and other tenants
• Weaknesses of each
i. as a tenant on their own and
ii. as they relate to the property and other tenants
• The financial value of each on a stand-alone (excluding synergies w/ other
tenants) basis per sq ft. The case provides 2010 numbers, so applying them
in future years make adjustments to revenues and costs as need be. Anchors
are subject to market inflation too.
3. Provide an Downsize Financial Analysis (100 points)
This scenario assumes that you do not find an anchor and hold the property for 5 years
before selling it. Make the following assumptions:
i) You sell at the end of year 5 based on year 6 expected NOI (not stabilized)
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ii) The space vacant in 2010 is never leased.
iii) For existing (and end of 2010 expiring) renewals: lease renewal probability
is 25% w/ 9 months of vacancy to find a new tenant.
Pro Forma
Create a pro forma as tab “Q3” for this question that shows i) all cash flows per tenant and
ii) summarizes these at the property level), purchase and sale values (price, debt,
purchase/sales costs), and generates the following metrics
• Year by year total operating cash flows and purchase/sales for the property
and unlevered IRR
• Year by year total equity cash flows and equity invested / earned at sale
levered IRR
• Year by year distributions from operating cash flows, invested equity and
equity at sale, with equity multiple and investment IRR separately for both
LP and GP
4. Lease Up Property (100 points)
This is the investment thesis for the opportunistic play. You sign an anchor and lease up
all of the vacant space.
Anchor and leasing assumptions:
i) Assume that it takes you a year to sign an anchor, and then 6 months to fixture
and prepare for occupancy. So, 2011 no anchor, 2012 TIs/Leasing fees and 6
mo of occupancy.
ii) For space where leases are expiring at the end of 2010, lease renewal
probability is 25% w/ 9 months of vacancy to find a new tenant as per Q3.
iii) Once an anchor is signed
a. Starting with leases ending 2011 and going forward lease renewal
probability for CRUs is 75% w/ 6 months of vacancy.
b. For the space that is currently vacant (2010 vacant space) leases signed and
TIs paid in the year the anchor occupies (2012) and occupancy in the last 3
months of 2012.
Hold and Exit assumptions:
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i) Once you have stabilized the property, you hold for the year at which it
stabilizes and show one year of stabilized income and then sell. So if you
stabilized in the last quarter of 2014 or were stabilized at the start of 2015, you
would hold for 2015 and sell at the end of 2015.
ii) You based on the following year expected NOI BUT apply a 5% vacancy
allowance to revenues, so this is a stabilized NOI measure using existing rents
iii) You exit at a 25 bp lower cap than entry because of resolving all uncertainty
Anchor decision
• Indicate, which anchor you choose and why?
• Please note, that depending on the anchor, new leases and renewal probabilities
can change. Only one of the anchors would count as “strong” and one would
count as weak based on business and degree of spillovers to other tenants.
o Weak anchor, with poor benefits for existing tenants, lower renewal to 65%
and increase downtime to 9 months
o Strong anchor, with excellent benefits for existing tenants, increase rent by
up to $2.00 psf, raise renewal to 85% and decrease downtime to 3 months
o Strong anchor with strong covenant, lower exit cap by up to 50 bps,
depending on lease length, need long lease to get full benefit
o Weak anchor with poor covenant, raise cap by up to 50 bps, but by less if
lease is short since you can potentially replace the poor anchor with a better
one.
Pro Forma
Create a pro forma as tab “Q4” for this question that shows i) all cash flows per tenant and
ii) summarizes these at the property level), purchase and sale values (price, debt,
purchase/sales costs), and generates the following metrics
• Year by year total operating cash flows and purchase/sales for the property
and unlevered IRR
• Year by year total equity cash flows and equity invested / earned at sale
levered IRR
• Year by year distributions from operating cash flows, invested equity and
equity at sale, with equity multiple and investment IRR separately for both
LP and GP
5. Decision (30 points)
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Should you make this purchase? (Explain why or why not)

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