Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Conclusions from Argus Analysis and the Hypothetical Facts

In our hypothetical scenario, as initially set forth in Chapter 2, Diamond Jack bought Diamond Medical Center for $10,200,000 and is now selling it to Steven Stable for $14,500,000 after a two-year holding period on a cash investment of $2,550,000. Jack's profit is $4,300,000, an 84 percent return per annum! The buyer, Steven Stable, is acquiring the asset at $14,500,000. The Argus run reflects this value if the projected cash flow is discounted at a rate of 7.81 percent. Stable's IRR is 13.29 percent, based upon a cash investment of $3,625,000.

Please note that when determining the Annual Cash Flow to discount, as shown on page 5 of Exhibit B.1, the figures are derived from the Schedule of Prospective Cash Flow found on page 1 of Exhibit B.1. The Prospective Cash Flow is reduced by Leasing and Capital Costs to arrive at Annual Cash Flow. In other words, the Annual Cash Flow is the cash flow before debt service and before taxes; that is, it is as if the property is being purchased for all cash.

From the buyer's perspective, several conclusions can be drawn from this Argus analysis. First, in the third and ninth year of operations, given the large amount of maturing leases, the projections indicate that the releasing costs will result in a break-even cash flow and a negative cash flow, respectively. Second, based upon an initial capital contribution of $3,625,000, the leveraged cash-on-cash return varies from a negative ...