Assignment:
Vulture Capital has been recently approached by a landlord for an en-bloc office acquisition opportunity. The opportunity is a new vacant premium Grade-A office building with about 20,000sm located in Beijing CBD. The subject is about 10-minute walking distance from the closest subway station. The landlord is now asking for RMB 65,000/sm.
Vulture Capital plans to involve a separate account as their LP to invest into this property. Vulture Capital sets a 10% hurdle rate of return for the LP. When the LP's return excessed 10% hurdle, Vulture Capital will receive 20% of excess profit as promote.
As a GP, Vulture Capital's internal return requirement is IRR 15% in 5 year investment horizon. Please prepare a brief cash flow to estimate if RMB65,000/sqm can meet the return requirement and propose a counter-offer if RMB65,000/sqm is considered too high.
Below are some of the investment criteria:
a) Rental assumption: RMB12/sqm
b) Total operating expenses (VAT, property tax and Opex Included): 25% of EGI
c) LTV ratio: 50%
d) Interest cost: 5.5% annually; onshore loan
e) Equity contribution: GP - 10%; LP - 90%
f) Investment period: Exit in year 5 with 3.8% capitalization rate
g) LP Hurdle rate of return: 10%
h) Vulture Capital promote: 20% of any profit excessed 10% hurdle
i) Vulture Capital (GP) IRR: 15%
You may make your additional assumptions in the cash flow.