LEON CAPITAL GROUP – ANALYST PROBLEM SET
The company has acquired a site in Roanoke, TX and is contemplating the development of a 7,000 sf retail
strip center situated on 40,794 sf of land. The site was purchased for $750,000 plus a 4% commission paid by
the purchaser. Additional closing costs include $15,000 for legal counsel, $10,000 for third party reports,
$10,000 for title and escrow costs, $7,500 for due diligence and a 1% acquisition fee. The basis for the
acquisition fee are the total project costs.
The acquisition is financed with a loan that provides initial proceeds equal to 65% of the purchase price funding
at closing. The loan will then fund all development costs up to 75% of the total project costs. However, before
the rest of the loan funds the project has to maintain at least a 1.20X debt coverage ratio for 3 months; the
lender will then release any remaining loan proceeds such that the total loan funding will be equal to 75% of
the total project costs. The loan will have a 5.00% interest rate and consist of interest only payments for the
first 18 months and payments based on a 25 year amortization schedule thereafter for the remainder of the 10
year loan term.
The strip center is projected to be leased to three tenants on the following terms:
Dental Group:
• Size – 3,000 sf
• Term - 10 year initial term
• Rent - $28.00/sf plus NNNs for years 1-5 with a 10% bump in year 6. No further bumps.
• Leasing Commissions – 6.00% on the total rent amount for the full 10-year term
• Tenant Improvement Allowance - $20.00/sf
Cell Phone Group:
• Size – 1,500 sf
• Term - 10 year initial term
• Rent - $33.00/sf plus NNNs with $0.50/sf rent bumps every year
• Leasing Commissions – 6.00% on the total rent amount for the full 10-year term
• No Tenant Improvement Allowance
Fast Casual Restaurant:
• Size – 2,500 sf
• Term - 10 year initial term
• Rent –$35/sf plus NNNs; 10% bump every 5 years
• Leasing Commissions – 6.00% on the total rent amount for the full 10-year term
• Tenant Improvement Allowance - $35.00/sf
3500 Maple Ave., Suite 1600
Dallas, TX 75219
O 214.865.8082
leoncapitalgroup.com
The development will commence 3 months after closing and will take approximately 9 months to complete. It
is assumed that all tenants will commence rental payments 3 months after the development is complete.
Development hard costs include $6.31/SF (of land) for site work, $83/SF (per building SF) for cold dark shell
and $41.12/sf (per building SF) for landlord work above shell. Development soft costs include Architecture &
Engineering of $7/sf (per building SF), Geotechnical of $5,000, Development Fees equal to 10% of the
development hard costs and a 5% contingency on the total hard costs + soft costs.
The project will capitalize all carry costs up front which includes interest reserves, real estate taxes, insurance
and operating expenses. It is assumed that prior to rent commencement real estate taxes will be based on 80%
of the purchase price, insurance will be $400 per month and operating expenses will be $600 per month. After
rent commencement, real estate taxes will be based on an assessed value equal to 75% of the total project costs,
insurance will be $10,000 per year paid monthly and CAM will be $20,000 per year paid monthly. (HINT: Real
Estate Taxes are dictated by the County where the property is located)
3500 Maple Ave., Suite 1600
Dallas, TX 75219
O 214.865.8082
leoncapitalgroup.com
EXCEL DELIVERABLES
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Development Budget
Sources & Uses of Capital (at closing and for the total project)
Rent Roll
10 Year Project Cash Flow Statement (expressed both monthly and annual)
Project Question Answers
PROJECT QUESTIONS
1) What is the total project NOI at stabilization?
2) What is the development yield (stabilized cap rate)? (Dev Yield= Stabilized NOI/ Total Project Costs)
3) Assuming a 7.00% exit cap rate what is the development spread for the project? (Dev Spread= dev
yield – exit cap rate)
4) What is the IRR, leveraged equity cash on cash multiple and net cash flow on a 2 year and 5 year hold
assuming a 7.00% exit cap rate?
5) What is the debt coverage ratio, debt yield and LTV assuming a 7.00% cap rate valuation?
6) Run a sensitivity analysis that stresses the rent on the fast casual space from $30 - $35 in increments
of $1/sf showing what the development yield and 2 year IRR is under each scenario.
7) What happens to the development yield and development spread if construction hard costs are 15%
higher?
8) Run a sensitivity analysis that stresses the exit cap rate from 6.50% to 7.50% in increments of 0.25%
that shows the 5 year IRR and 5 year cash on cash multiple.
9) The company is approached by a single-tenant user that would ground-lease the entire site as-is for
$80,000 per year + NNNs. This ground lease would sell at a 5.50% exit cap rate. Compare this option
to the strip center development and make a recommendation for which option is better
10) Identify three risks that are inherent in the development scenario.
11) You are the General Partner for this project and have to propose an investment structure to your
Limited Partners. Outline your proposed waterfall structure based on your assessment of the
risk/return profile of the project and present the GP and LP level returns (IRR, Multiple, Net Cash Flow)
under that structure. What is the total promoted interest that the GP receives under your proposed
structure?
3500 Maple Ave., Suite 1600
Dallas, TX 75219
O 214.865.8082
leoncapitalgroup.com