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Angus Cartwright IV Case Solution & Answer

Angus Cartwright IV Case Solution  

Introduction

This report was prepared by Angus Wright, a Virginia based investment advisor having a conservative approach towards risk to provide assistance to Judy and John DeRight regarding property investments. Four properties were proposed for investment purposes, the first one was Alison Green, which was a 100 unit apartment located in Montgomery, Maryland, and the second property was 900 Stony Walk, which was an office building available for rent to small service firms. The third and fourth properties were Ivy Terrace and The Fowler Building, both of the properties were under construction and located in Arlington.

This report further provides detailed financial analysis and evaluation of each property to enable Judy and John to understand which of the suggested properties will provide maximum financial benefits, and will generate higher worth at the time of its sale, since the intention is to sell the properties in future. A minimum leveraged return of 10%on investments,excluding tax was set as the target return.

Alison Green was planned to be financed through a mixture of debt and equity. 900 Stony walk was financed through a commercial mortgage backed security, whereas Ivy Terrace and The Fowler Building were financed through a 10 year $7 million mortgage, and a 10 year $21 million mortgage respectively. While performing financial evaluation; conservative assumptions were used, and measures like capitalization rate, cash on cash return and investment multiples were used as the decision criteria.

Problem Statement

Both John Deright and Judy Deright had different approaches towards risk, while John was a risk averse, Judy was a risk seeker.None of both had any experience of retail investments and approached Angus to evaluate all the properties for them, so that they could a reach a decision regarding which property to purchase. The price of and financial benefits offered by each property has to be evaluated in detail, using proper techniques.However, to evaluate properties, various factors and assumptions have been taken, such as: inflation rates, growth rate, tax rates, occupancy rates etc. Any change in these factors or any illogical assumption will change the value of the properties, and hence will result in incorrect decision making by the investors. Therefore, Angus has to take logical assumptions, and has to evaluate the properties through multiple techniques to ensure that a right decision is made.

Property Valuation and Analysis

All of the four properties have been evaluated and analyzed in detail to assist both the investors in assessing which property to purchase for investment purpose, based on capital gains and profits earned by each property. The results of the analysis is dependent upon various key factors like occupancy levels, tax rates, interest rates, inflation rates determined by Angus. For the purpose of the analysis, it has been assumed that the properties will be hold by each investor for a period of 10 years.

Alison Green:

Alison green is a 100- unit garden apartment located in a country in Maryland. The cost of the building is estimated to be $20 million, which is financed through a mixture of debt and equity, and has an occupancy rate of 95%.

Upon evaluation, Alison Green’s generated positive NPV worth estimated to be $18, 03, 000 and its achieved internal rate of return is evaluated as 13.91%. The NPV was calculated at the discount rate of 10%, and a tax rate of 39.6% was used. This property achieved cash on cash return of 10.8%, capitalization rate of 7.25% and investment multiple of 3.6 million. It is likely that this property will be purchased on the basis of IRR and cash on cash return, as both the investors demand return of 10% and more. (See Appendix 1)

The loan to value ratio achieved by the investment project is 70%, which indicates that less finance will be borrowed as compared to its size, and the added margin of 28.8% achieved by the project makes it profitable as compared to other projects. However, comparison should be made with other properties before taking the final decision. (See Appendix 2)…………………….

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