2019 argus university challenge “the marvelous return … argus university...an increase in...

© Altus Group Limited P a g e | 1 ARGUS University Challenge 2019

2019 ARGUS University Challenge “The Marvelous Return Home”

For many people, the desire to go back to the community where they grew up may be farthest from their mind, especially if they went to college in another part of the country and, of course, if they recently graduated. However, with the recent superhero and supervillain activity in today’s world it is becoming more and more common for people to move away from some of the larger cities, like New York City, Los Angeles, Chicago, and Houston. We have seen in current events that these larger cities are more likely to be the location of these superhero and supervillain wars and disasters, whether it is aliens coming to level the cities or supervillains trying to annihilate the heroes, it is seemingly clear that it is safer to move to the outlying smaller towns. Also, as one ages, the dream of moving back to one’s hometown may grow more appealing, particularly if everything about the community, including (1) a positive school experience, (2) knowledge of and memories from the various neighborhoods, and (3) perhaps the fact that one still has family and friends living nearby. Of course, the cost-of-living factor may be either a positive or negative in one’s decision, depending on whether it is financially feasible. As a hometown native of Northeasternville, the city has become known as a desirable community that received several million dollars in funds to enhance its downtown structures, represent its diverse population, and improve its status to connect with the main source of employment via a rapid rail system that will also have new and improved housing and parking capabilities nearby. The city itself has a rich history that speaks to the current diversity found. The need to increase and improve housing throughout its boundaries is evident, as is the need to expand its schools to accommodate the migrant population is a factor that has existed for over 150 years, but never to the extent needed today with the additional outpour of people from larger cities. The city is in the process of renovation throughout its main business area, i.e., Downtown, and many of the houses, while old and rather small, are in the process of expansion and renovation. Due to the typically higher costs in the region, these houses are very desirable for younger couples who want to have the benefit of living close to a major metropolitan area without being in the city. The older residents, who want to sell their homes, are being met by young, prospective buyers who want to buy cheap and then update them to their personal satisfaction. The older residents are then able to move into a smaller single-family home, rental or condo unit, or perhaps into an independent or senior-housing facility. There has been a desire to move back to Northeasternville for several years, and even more now with the desire to move away from large cities. The urge to move back is also based on primarily being an investor who could have property located in the primary business area on Main Street, which is also experiencing an increase in multi-family housing and renovation / modernization of the retail areas. It would also, of course, require the purchase of a residence to better enjoy staying close to family and friends. It is evident that this is a great time to invest, as the community improves due to the funding and the increased population. However, there are factors to consider relating to the real estate cycle (see Appendix). The economy and the supply-and-demand factors must be taken into account before a final decision is rendered. The office building under consideration, constructed five years ago, contains first-level local retail stores, two stories of office space above, and an on-site parking lot. The subject property is located within walking distance to the rail line, the Strange Urban Railroad (SURR), which provides good transportation to the current workers not residing within the subject community. Also, busses run throughout the community to connect residents from several neighborhoods to the property under consideration. Of course, SURR also allows Northeasternville residents to jump on the train and head to New York City, located approximately 30-to-45 minutes away.


While mortgage rates have increased slightly over the past few years, the forecasts indicate that they will soon increase slightly more. Another unknown is the real estate cycle, as referenced above. The last down cycle was almost ten years ago, which indicates that there could be another cyclical change on the horizon. Based on your research, please provide evidence regarding your thoughts on the national economic cycle over the next year. We’ve heard that the economy has done well over the past year or two, but not without various levels of controversy. Studies indicate that, with rising fuel and transit prices in general, more residents of Northeasternville would prefer to remain nearby for work versus having to travel to New York City. Also, the convenience of retail within the building for food and other basics, not to mention the availability of parking, may make the subject property very appealing to many users. History of Northeasternville, Northeastern U.S. Dating back to the mid-17th Century, Northeasternville began its presence in this section of the continent – not yet officially the United States of America – based on a diversity of immigrants from many nations. A predominant factor for growing its population resulted from one specific religious group that remains influential to this day in the community. Northeasternville has also been found in the history books for its contribution to various historical events. The greater area in which Northeasternville is located, Golden County, has approximately 1.5-million residents, with about 50% of its working population remaining nearby rather than taking the long and expensive ride to and from New York City. This, along with Northeasternville’s funding, has improved the housing prices and has led to more demand for new and renovated residences for couples and families seeking a utopian lifestyle. This is especially evident for the younger / Millennial generation of families who want the benefit of a major city nearby. The population and cultural diversity found especially within the Downtown area, the ease of local commuting, art and entertainment venues and events, access to transportation hubs and a plethora of retail centers and malls make this area even more desirable. One concern facing the community is the need for additional educational facilities to accommodate the increasing population. This is on the short list of items facing the local government to continue Northeasternville’s popularity as a place to live and raise a family. The Subject Property The subject consists of a one-half-acre improved site at the intersection of Main Street and Railroad Avenue in the incorporated municipality of Northeasternville. Surrounding the subject property are local retail stores, including a grocery store, a small condominium complex, a house of worship within two blocks, the railroad station, a small urban park, and some restaurants representing the diverse cultures existing within the city. The units found within the small condominium complex measure between 700 and 1,200 square feet, including a range of unit types between one- and three-bedrooms. Given the current economic conditions, the retail leases will be written on a short-term basis and at levels that may not consider the bubble anticipated due to the nearly 10-year economic up-cycle. Your analysis, based on your newfound knowledge about local real estate, will help you develop a reasonable conclusion. There are several local professionals specializing in a combination of office, retail, and mixed-use properties, from which you will gain access to data and you will derive your opinions of rents, expenses and the market vacancy factor that will be employed. History of Structures / Parking Areas


Since the multi-use structure and on-site parking area were developed approximately five years ago, this is not a matter of concern. The entire property is functioning well at the time, with some normal maintenance anticipated over the course of ownership. A management and leasing firm, Fury Management & Leasing Co. (FM&LCo.), will oversee these functions and charge 5% annually for their services. If a sale should occur in the future, FM&LCo. would charge a brokerage fee of approximately 4% of the sale price, if selected. Mortgage Consideration The investment will be subject to a mortgage from First Northeasternville Bank (FNB) upon its purchase, which will have to be considered relative to the acquisition. The intent is to qualify for a traditional 75% mortgage based on the appraised value at the current interest rate of approximately 4.75% over a 25-year period. The local lender, First Northeasternville Bank, is well known in this market and has a good reputation for commercial real estate lending. Based on the final opinion of value it will be necessary to decide if the ultimate return is enough to invest in this property. It is important to be sure that the mortgage rate is locked-in during its term to offset the possibility that an economic cycle could result in higher rates. General Market Information The most recent market data available is from year-end 2017. These include sales of multi-use properties built approximately three-to-ten years ago, and of similar size and quality to the current structure and parking areas. However, due to the locations of the sales, within or perhaps a few miles outside of the Downtown location, an adjustment would be required regardless of the current economic conditions. (See Schedule A to view the improved sales data.) Sales of land zoned for similar improvements, primarily located within adjacent communities, have been rare and did not occur within the past three years, The unemployment rate of Northeasternville has been noted at 5% for the past 12 months, which is a reasonable rate for the current economic times. However, there are rumors that an international fabric company will be returning to its country of origin, which will help drive the unemployment rate up and impact the supply and demand of homes in the area. This may also minimize the impact on over-crowding within the school, which has been a major concern of Mayor Steve Rogers due to the impact on local taxes that had been planned. Other data about Northeasternville, such as population, average size of stores and offices, occupancy rates and sales per square foot for offices and retail space are available through Old-Fashioned Forecasts (OFF). OFF is well-known for its data, but it is sometimes inconsistent (or off) with its assumptions on what to expect when either the physical or economic market changes, or both. This would relate to the uncertainty of the real estate cycle. The data provided by OFF may be found in Schedule B. The Challenge


There appears to be a discrepancy between the subject’s actual data and the data found to be available within the local marketplace. We are asking your team to take on the task of analyzing the existing subject multi-use property and the current market conditions to determine whether this is a worthy cause. Provide a fully developed analysis of the above scenario and deliver a thoroughly vetted recommendation that we can rely upon to decide. The group’s assignment is to examine the data, including sales and leases that will determine the next ten (10) years of the subject property and deliver a cohesive analysis supporting one of the options below:

• Option A: Invest in the subject property and hold until market improves before selling at a profit.

• Option B: Invest in the subject property, make improvements to upgrade the building, and sell at a profit before market downturn.

• Option C: Decline this investment opportunity.

Consider the following in the analysis - Will there be improvements required to upgrade the common areas and office space? Will there be an appropriate number of parking spaces within the on-site parking area, especially related to the alternatives available, such as the future need to drive one’s vehicle to and from work, the use of mass transit, such as SURR, and the availability of driverless cars and uber? Within the one story of retail space, will the three (3) stores currently leasing space be able to remain at their current rate or will there be a potential increase in rent possible that will benefit ownership? Will there be as much demand for office space in the future, based on the changing patterns of less space per employee and the growing strategy of employees working remotely? The ownership team will require quarterly analyses completed using the Altus Analytics’ ARGUS Enterprise software product. You must realize that your assumptions and ARGUS Enterprise runs will be examined and challenged, as appropriate, to ensure that the investment is reasonable and likely to produce the best return possible according to its Highest & Best Use.

Schedule A – Improved Sales Data (Multi-Use – Office and Retail)

Purchaser / Property Type Date Age

Price / Tenant Space

Size (# of Tenants /

Avg sf per

Tenant Space

Annual Avg Rent per sf

Vacancy Annual

Expense per sf

NOI per sf

Cap Rate

Subject - Office - 5 Years - 6 / 1,565 $29 0% $10 $17 -

Subject - Retail - 5 Years - 3 / 1,482 $31.66 0% $10 $20 -

1) Northeasternville Bank & Trust Co. Mixed Use (Office & Retail)

Apr. 2017

10 Years

$195 / 5

Tenants (4 Office

4 (Office), 1 (Retail) / 1,750 sf (Office),

$28 0% $9 $19 9.75%


/ 1 Retail)

7,000 sf (Retail)

2) P. Parker Law Firm, / Mixed Use (Office & Retail)

Dec. 2015

20 Years

$210 / 2 Tenants (1 Office

/ 1 Retail)

3 (Office), 3 (Retail) / 5,000 sf (Office), 2,500 sf (Retail)

$32 0% $12 $20 9.5%

3) Buck-Up Real Estate Agents, Mixed Use (Office & Retail)

July 2018

25 Years

$165 / 6 Tenants (4 Office

/ 2 Retail)

4 (Office), 2 (Retail) / 2,000 sf (Office), 2,000 sf (Retail)

$29

0% (Office) /

50.0% (Retail)

$12.35 $16.65 11%


Schedule B – Market Statistics

DATA FROM

OLD-FASHIONED FORECASTS (OFF) END-OF-YEAR 2017

POPULATION

The current population of Northeasternville is approaching 15,000. The density of the city is approximately 6,500 per square mile. The city is ranked on the lower end of the population overall and even lower on the population density ranking, which indicates that much of the area is tree-lined and has a multitude of parks for the residents’ enjoyment.

COMMUNITY APPEAL

The population of the subject location is less dense that most of the surrounding communities in Golden County. What makes Northeasternville more appealing is due to (1) the rebirth and revitalization of its Downtown, (2) the younger / Millennial trend toward communities with diversity, (3) lower housing costs and prices compared to more affluent, neighboring cities, and (4) a good educational program for growing families, although the influx of children has challenged the system’s availability of space.

OFFICE & RETAIL MARKETS

The office market in Golden County has seen a current dip in new development for office space. Current office vacancy, mostly for multi-tenant buildings, averages between 7.5% and 10.0%, depending on its location as either a smaller, insulated market or a more robust commercial market on a major highway. Retail space continues to flourish, especially within the live-work-play environments that would be representative of Northeasternville, especially with access to good transit.

AVERAGE SIZE OF RETAIL STORES AND OFFICES

Retail and Office spaces within mixed-use Office and Retail Buildings tend to be sized slightly larger for retail. Retail spaces range between 2,000 sf and 7,000 sf, with the average being almost 3,500 sf. Office space within the mixed-use buildings tends to be slightly less on average, or 2,600 sf, ranging between 1,500 and 5,000 sf in size. The office space is mostly designed for small, entrepreneurial, local tenants. The retail space has more national, well-recognizable tenants, which serve a large portion of the population, including national banks.


TYPICAL LEASING CONCEPTS – OFFICE & RETAIL

Office-tenant leases are typically full-service, whereby the landlord pays for all expenses in the first year, followed by annual increases throughout the remaining term of the lease of approximately 3% until a lease expires. Most leases are written between 5 and 10 years in this location. Most of the leases written are ranging between $25 and $30 per square foot. Vacancy rates for this quality office space average between 6.5% and 7.5%. Retail-tenant leases are typically Triple Net (NNN), whereby the tenant pays for all expenses in the first year, but the landlord pays for Structural Repairs, Management and Reserves on a pro rata basis of the total retail space. Annual increases throughout the remaining term of the lease for the tenant will be at a rate of approximately 3% until a lease expires. Most leases are written between 5 and 10 years in this market. Most of the leases written are ranging between $27 and $35 per square foot.

VACANCY RATES

Data indicates low average (5%) vacancy rates, with most offices being local tenants, tending to serve families over decades from one generation to another. Many of the mixed-use buildings, especially within the Downtown area, are fully occupied until a business closes due to retirement, ill health or worse. Vacancy rates for this quality retail space average between 3% and 5% in this good market, with medical office space currently filling the void of other types of retail space when a tenant moves out.

SALES PER SF FOR OFFICE & RETAIL BUILDINGS

Mixed-use buildings in this city, with special emphasis on the Downtown area, have ranged from approximately $150 to over $200 per sf over the past few years. Some of these buildings have been newly constructed, with others being approximately 20 years old. The established nature of the tenants has helped the older structures upon sale, given the well-known address and tenancy that people have relied upon.

CAPITALIZATION RATES / DISCOUNT RATES IN CURRENT MARKET

Based on data found within the sales shown above, similar multi-use properties sold at going-in capitalization rates ranging from 9.5% to 11.0%. These properties ranged between 10 and 25 years in age, with the oldest having a large vacancy in its retail space. Two of the sales were recent, with another being three years ago. Other data available for office space indicates lower going-in capitalization rates ranging from 7.25% to 7.75%. Information available regarding Terminal Capitalization Rates indicate an additional rate of approximately 50 basis points. This estimate is prior to thoughts regarding the real estate cycle and its potential impact. Discount rates over the past few years reveal a higher rate than the going-in capitalization rates ranging between 100 and 150 basis points.


Schedule C - Retail Stores – Mixed-Use Properties - Subject and Comparable Leased Space –

Most Recent Data Available

Location No. of Stores / Avg Size of Store (GLA)

Annual Rent per

Store / per sf

Type of Retail / Office Tenant

Lease Term (Start / Yrs Remaining)

Typical Expense Payments per sf (NNN /

Full Service)

Rentable Retail Space

(GLA) 4,445 Total $140,710

Total Various Various / Various

Tenant reimburses for all but Structural

Repairs, Management and Reserves and pays

3% Cost of Living Increase per year

Subject – Main St. &

Railroad Ave.

3 / 1,482 (Avg / tenant) $31.66 Avg Mixed

Various (See below) /

Increases of 3% per year

NNN

Subj. Tenant #1 – Titan

Fine Gems – 1,250 sf

$35 ($43,750) Fine Jeweler 5 / 4 NNN

Subj. Tenant #2 – Banner’s

Green Machine

Juices - 1,500 sf

$33 ($49,500) Fast Food 5 / 2 NNN

Subj. Tenant #3 – Stark

Bank & Trust – 1,695 sf

$28 ($47,460) Bank Branch 10 / 1 NNN

Comparable Leased Retail

Space

Shopping Center

5 / 4,000 sf $35 Avg

Mixed, including Indian Restaurant,

Tomato Technology, Center

Stage Movie Theater

Lease Term/ Yrs Remaining 7.5 / 7 (Avg)

NNN

Retail Outlet 10 / 2,500 sf $28 Avg

Mixed, including Clothing Store,

School Supplies, Jewelry Store, Etc.

Lease Term/ Yrs Remaining

5 / 3 (Avg) NNN

Office Park Square

3 / 3,000 sf $32 Avg

Mixed-Use, including Office Supplies, News

Outlet, Cream ‘N Sugar Coffee Shop


10 / 5 (Avg) NNN


Rentable Office Space 9,390 Total $272,310

Total Various Various / Various

Full Service -Owner pays all, except Tenant pays for annual Cost of Living Increases (3%)

Subject – Main St. &

Railroad Ave.

6 / 1,565 (Avg / tenant) $29 Avg Mixed

Various (See below) /

Increases of 3% per year

Full-Service - Landlord pays all

expenses

Subj. Tenant #1 – Knowhere To Go

– 1,565 sf

$24.51 ($42,212) Travel Service 10 / 5

Full-Service -Tenant pays

Annual Cost of Living Increases

Subj. Tenant #2 – Bifrost Transit

Services – 1,850 sf

$23.20 ($47,212) Mass Transit Operations 10 / 4

Full-Service - Tenant pays


Subj. Tenant #3 – Plant Your Groots

Real Estate Agents – 1,280 sf

$31.90 ($44,915) Realty Services 5 / 2



Subj. Tenant #4 – Shield Strategies, Ltd. – 1,565 sf

$29 ($45,385) Life Insurance 5 / 3



Subj. Tenant #5 –

Visionary Vanguard – 1,252

$34.80 ($43,570)

Retirement & Financial Services 10 / 1



Subj. Tenant #6 – Mjolnir

Renovations – 1,878 sf

$26.10 ($49,016) Residential Renovations 5 / 2



Comparable Leased Office

Space

Office Park Square

6 / 1,750 sf $30 (Avg)

Mixed-Use, including Medical Office, Wealth Management Services,

Tax & Audit Professionals, Estate

Planning, Etc.


7.5 / 7



Law Offices 4 / 10,000 sf $25 (Avg)

Law Firms (Criminal, Real Estate,

Employment)


10 / 1



Quality Services 1 / 3,000 sf $28 (Avg) Real Estate Appraisers


5 / 3



Schedule E – Actual and Typical Subject Income based on recent and local data


Income for Subject Property – See below for the most recent data available from the current owner relating to income as either a percentage of Effective Gross Income (following Vacancy & Credit Loss) or on a square foot basis. The right column of data is based on a range of recent comparable data that indicates a reasonable income for the subject property, including both office and retail tenants. It is important to follow the parameters of these types of tenant, however, regarding whether the landlord ultimately receives the income or, based on the result of recovery, which the tenant ultimately pays. There are certain expense items that may not be recovered, so it is important to follow the information in the template above to properly analyze this data. Where a vacancy exists, the landlord is not receiving income for this space until it is re-leased by a new tenant at a current rate. The ranges of income shown below result from comparable data within the local market that shows a range per square foot and percentage over the past 2 years.

Category Most Recent Actual Subject Income per Square Foot or Percentage

Recent Comparable Data per Square Foot or Percentage

Gross Leasable Area 4,445 (Retail NNN) + 9,390 (Office Full-Svc) = 13,835 sf

4,445 (Retail NNN) + 9,390 (Office Full-Svc) =13,835 sf

Gross Income – • Office Tenants • Retail Tenants

$413,020 or $29.85/sf • $272,310 ($29/sf Full-Svc) • $140,710 ($31.66/sf NNN)

$398,243 or $28.79/sf • $25-30/sf range or $27.50/sf Avg

Full-Svc ($285,225) • $28-35/sf ($140,018 or $31.50/sf

Avg NNN)

Overall Vacancy & Credit Loss $0/sf or 0%

6% - Office ($1.68-2.10/sf or $1.89/sf Avg Full-Svc) 5% - Retail ($1.25-$1.50/sf or $1.31/sf Avg NNN)

Effective Gross Rent • Office Space • Retail Space

$413,020 ($29.85 Total) • Office - $272,310 ($29/sf Full-Svc) • Retail - $140,710 ($31.66/sf NNN)

$374,673 ($27.08/sf Total) • Office - $240,478 ($25.61/sf Avg

Full-Svc) • Retail - $134,195 ($30.19/sf Avg

NNN) Recovery – • Office Space • Retail Space

• Office (Full-Svc) - $0 / $0 / sf • Retail (NNN)- $1.22+$.34+$1.45(5%

EGR)=$3.01 (Combined Avg)

• Office (Full Svc) - $0 / $0 / sf • Retail (NNN) - $2.90 / sf

Effective Gross Rent After Recovery

• Office (Full-Svc) - $272,310 ($29/sf) • Retail (NNN) - $31.66+$3.01=$34.67

• Office (Full-Svc) - $240,478 ($25.61/sf Avg)

• Retail (NNN) - $30.19+$2.90=$33.09


Schedule F - Typical Subject Expenses based on recent and local data

Expenses for Subject Property – See below for the most recent data available from the current owner relating to expenses as either a percentage of Effective Gross Income (following Vacancy & Credit Loss) or on a square foot basis. The right column of data is based on a range of recent comparable data that indicates a reasonable cost for the subject property, including both office and retail tenants. It is important to follow the parameters of these types of tenant, however, regarding whether the landlord ultimately pays for the expenses or, through recovery, the tenant ultimately pays. There are certain expense items that may not be recovered, so it is important to follow the information in the template above to properly analyze this data. Where a vacancy exists, the landlord is responsible for paying these expenses totally until the space is re-leased by a new tenant at a current rate. This amount would be in addition to the typical vacancy rate that the landlord would be responsible for in general. The ranges of expenses and vacancy rates shown below result from comparable data within the local market that shows a range per square foot and percentage over the past 2 years. Current State of the Local Economy Regarding Real Estate Taxes Real estate taxes in Golden County / Northeasternville are typically considered high compared to much of the country, but good services are provided, including education. During the present time, as indicated earlier, the schools need expansion, so taxes may accelerate upward during the near future.

Category Most Recent Actual Subject Expenses per Square Foot or Percentage

Recent Comparable Data per Square Foot or Percentage



Insurance $.46 / sf $.45-.50 / sf Utilities / Heat $4.30 / sf $4.25-4.50 / sf Common Area Maintenance

$1.84 / sf $1.80-1.90 / sf

Structural Repairs & Maintenance *

$1.22 / sf $1.20-1.25 / sf

Management & Leasing * 5% of EGR ($413,020 x .05 = $20,651 ($1.49/sf)

$1.35/sf (5% of Effective Gross Rent)

Legal & Professional $.27 / sf $.25-.30 / sf Reserves * $.34 / sf $.30-.35 / sf Real Estate Taxes $9.25 / sf $9.00-10.00 / sf Total $19.17 / sf (Full-Svc) $19.38 (Avg) (NNN)

*Recovery Items-Retail


Category Summary of Actual Subject Income and Expenses per Square Foot or Percentage

Summary of Recent Comparable Income and Expense Data per Square Foot or

Percentage



Gross Income $413,020 $398,243 or $29.85 / sf

Vacancy Rate (of Gross Income) 0% (Office & Retail)

6% - Office ($1.68-2.10/sf or $1.89/sf Avg Full-Svc) 5% - Retail 9 /($1.25-$1.50/sf or $1.31/sf Avg NNN)

Effective Gross Rent • Office Space • Retail Space

$413,020 ($29.85 Total) • Office - $272,310 ($29/sf Full-Svc) • Retail - $140,710 ($31.66/sf NNN)

$374,673 ($27.08/sf Total) • Office - $240,478 ($25.61/sf Avg Full-

Svc) • Retail - $134,195 ($30.19/sf Avg NNN)

Effective Gross Rent After Recovery

• Office (Full-Svc) - $272,310 ($29/sf) • Retail (NNN) - $31.66+$3.01=$34.67

or $154,108 Total - $426,418

$374,673 ($27.08/sf Total) • Office - $240,478 ($25.61/sf Avg Full-

Svc) • Retail - $134,195+$2.90= ($30.19/sf +

$2.90 = $33.09 Avg NNN) $147,085 Total - $387,563

Total Expenses $19.17 / sf or $265,217 $19.38 (Avg) or $268,122 Net Operating Income

$426,418-$265,217=$161,201 ($11.65/sf) $387,563-$268,122=$119,441 ($8.63/sf)


Appendix

2019 argus university challenge “the marvelous return … argus university...an increase in...

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