Evaluate the base case assumptions Zaski made. Would you have made different assumptions? What do you think is the fair market price for Financial Commons?

Real Estate by Geoffrey

Wildcat Capital Investor Case

Homework Questions

  1. Complete the waterfall using the assumptions described in the case. The waterfall does not need to be outlined as shown in Exhibit 10. Under these assumptions, calculate the expected return to Wildcat and its limited partners. Then compare those returns to the property-level return on the Financial Commons if it is sold after three years.
  2. Please re-calculate the returns each on a separate tab based on the various changes in the assumptions as stated below. Assume that outside investors will become partners with Wildcat only if they believe they will receive an internal rate of return (IRR) of at least 20 percent, and Wildcat will only close on the property if it believes it can earn a 50 percent IRR. Discuss whether or not the deal will proceed.
    1. North Shore Bank does not renew its lease at the end of Year 3 and its space remains vacant in Year 4. A new tenant begins leasing the space in Year 5 at $18/square foot on a triple-net (NNN) lease requiring $5/square foot expense reimbursement. The new lease does not contain any rent escalation clause. To make the space suitable, capital expenditures of $4/square foot are required in Year 5 for tenant improvements. A leasing broker charges Wildcat 2 percent of the first year’s rent as a commission. As a result of this turnover, Wildcat holds the property for five years.
    2. All tenants renew according to the benchmark assumptions. However, due to continued weakness in commercial property demand, Wildcat holds the property for five years. During its hold period, Wildcat makes capital expenditures of $500,000 in Year 2 for a new roof and $150,000 in Year 3 for a new parking lot.
    3. After more careful underwriting, the life insurance company offers a reduced loan-to-value (LTV) of 60 percent and interest rate of 7 percent. Assume a three-year holding period.
    4. The outside investors are nervous about the economic climate. As a result, they demand the following investor-friendly changes to the waterfall structure. Assume a three-year holding period.
      1. Outside investors will provide only 90 percent of the required equity.
      2. Outside investors will receive a 12 percent IRR preference. (This means that at sale, after invested capital has been returned to the outside investors and to Wildcat, the outside investors will receive additional cash until they achieve a 12 percent

        over the lifetime of the investment. Remaining cash flow will then go through the promote.)

  • Cash flows in the promote structure will be split 80/20
  1. If the IRR gets to a 15% then the promote structure will be 70/30
  2. Please calculate the net IRR and net multiple to the investor and sponsor in this scenario
  1. Evaluate the base case assumptions Zaski made. Would you have made different assumptions? What do you think is the fair market price for Financial Commons? Explain why your answer does or does not differ from $10,400,000.
  2. If you were an outside investor being approached by Wildcat and were shown the financial projections outlined above, what additional information would you seek before investing?