Property Investment and Risk Management Report: Investment Analysis

This report presents a detailed investment analysis of a multi-tenant office building located at 11 Stanton Road, Seven Hills, New South Wales. The analysis utilizes a discounted cash flow (DCF) model to project cash flows over a ten-year period, incorporating various inputs such as rental rates, expenses, and vacancy rates. The report calculates the Net Present Value (NPV) and Internal Rate of Return (IRR) to assess the financial viability of renting the property to two tenants. The analysis includes detailed workings for revenue and expenditure calculations for each tenant, along with a sensitivity analysis based on different assumptions. Furthermore, the report discusses the impact of leverage, risk, and taxation on the investment analysis, providing a comprehensive evaluation of the property's investment potential. The report concludes with recommendations for the property owner based on the financial analysis.

Running head: PROPERTY INVESTMENT AND RISK MANAGEMENT
Property Investment and Risk Management
Name of the Student:
Name of the University:
Authors Note:

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Contents
Part 1: Introduction:.........................................................................................................................2
Part 2: Investment analysis:.............................................................................................................6
Projection of discounting cash flow:...........................................................................................6
Calculation of Internal rate of return (IRR) and net present value (NPV):...............................18
Part 3: Impact of leverage, risk and taxation on investment analysis:...........................................25
Part 4: Conclusion:........................................................................................................................26
References:....................................................................................................................................27

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Part 1: Introduction:
11 Stanton Road, Seven Hills, New South Wales 2147 property has a net floor area of 12,294
square meter and it was last sold in 2011 for $4,350,000. The property is an extremely attractive
property from the point of view tenants due to the attractive location of the property. The Seven
Hills area is an industrial area and since the property is located in there the demand for the
property is quite high with number of companies looking rent the property to use it as their front
offices. It has been assumed that the current owner of the property decided to rent the property to
two different tenants. In order to assess the desirability of renting the property to the tenants a
detailed calculative analysis is conducted here to calculate the net present value (NPV) and
internal rate of return of the property (Essential guide for European property business, 2015).
The following data about the property and rent agreement of the property at 11 Stanton Road,
Seven Hills, New South Wales 2147 have been accumulated along with certain assumptions to
calculate the discounted cash flows from the property over the next 10 years on the basis of
which NPV and IRR of the property shall be calculated in this document (Drejer, 2018).
Inputs to calculate projected discounted cash flows
Name of the property: 11 Stanton Road, Seven Hills
Address of the property: 11 Stanton Road, Seven Hills, New South Wales
2147
NSW 2147

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Type of property: Multi-tenant Office Bldg.
Total Building Area (Sq.Ft.): 12,294
Date of rent period starting: 01.01.2019
Number of years for the analysis 10
Rate of general inflation 4%
Vacancy rate 0%
Loss of credit / collection 0%
Expenses reimbursed
Common Area Maintenance $1.75 per sq.ft./yr.
Ad Valorem Tax $2,750 per yr.
Property Insurance $0.65 per sq.ft./yr.
Utilities $1.80 per sq.ft./yr.
Expense incurred on Administrative purpose $0.20 per sq.ft./yr.
Expenses not to be reimbursed
Management fee 2% of Annual gross rent

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Assumptions for Market Leasing
Market Rent $50.00 per sq.ft./yr.
Months Vacant (between tenants if the
tenant vacates before expiry of tenancy
agreement)
3 Months
Tenant Improvement Allowance $1.50 per sq.ft.
Term Length 10 Years
Resale Assumptions:
Terminal Cap Rate 10%
Resale Adjustment (Commission) 2%
Valuation Assumptions:
Appropriate rate of discount 10.00%
Tenancy agreements information

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Tenan
t 1
Tenant 2
Tenant Name John
Willis
Charles Atkinson
Rental Rate/Sq.Ft. $50.00 $50.00
Occupied Area in Sq.Ft. (tenants) 7,000 5,294
Beginning term 01-01-
19
01-01-19
Term in Years 10 10
Tenancy agreements information
Tenant 1 Tenant 2
Tenant Name John Willis Charles Atkinson
Rental Rate/Sq.Ft. $50.00 $50.00
Occupied Area in Sq.Ft. (tenants) 7,000 5,294

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Beginning term 01-01-19 01-01-19
Term in Years 10 10
Using the above information and assumptions let us calculate the discounted cash flows from the
property over the next 10 years to calculate NPV and IRR of the property.
Part 2: Investment analysis:
Projection of discounting cash flow:
Discounted cash inflows are calculated to project the expected net cash flows from a property
over an extended period by adjusting the cash inflows of the future by using an appropriate rate
of discount to adjust the time value of money. The discounted cash inflows are also used to
calculate the NPV of a project or property (Hodgson, 2017). In this case using the information
above a detailed discounted cash inflows from the property over the next 10 years is calculated in
the table below.
Year 1 Year 2 Year 3 Year 4 Year 5
Year ending Dec-19 Dec-20 Dec-21 Dec-22 Dec-23
Gross revenue
(Expected)
Revenue from rental $614,700 $639,288 $664,860 $691,454 $719,112
Less: Loss due to $0 $0 $0 $0 $0

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PROPERTY INVESTMENT AND RISK MANAGEMENT
absorption & Turnover
Vac.
Net rent receivable $614,700 $639,288 $664,860 $691,454 $719,112
Total Reimbursement
Revenue
$56,844 $58,688 $60,606 $62,600 $64,675
Effective Gross Revenue
receivable
$671,544 $697,976 $725,465 $754,054 $783,787
Operating Expenses
Reimbursable
Expenses
Common Area
Maintenance
$21,515 $22,375 $23,270 $24,201 $25,169
Ad Valorem Tax $2,750 $2,750 $2,750 $2,750 $2,750
Property Insurance $7,991 $7,991 $7,991 $7,991 $7,991
Utilities $22,129 $23,014 $23,935 $24,892 $25,888

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Administrative
Expense
$2,459 $2,557 $2,659 $2,766 $2,876
Non-reimbursable
Expenses
Management $12,294.00 $34,898.79 $36,273.25 $37,702.70 $39,189.33
Total Operating
Expenses
$69,138 $93,586 $96,879 $100,303 $103,864
Net Operating Income $602,406 $604,389 $628,586 $653,751 $679,923
Capital cost
Tenant Improvements $18,441 $19,179 $19,946 $20,744 $21,573
Total Capital Costs $18,441 $19,179 $19,946 $20,744 $21,573
Net cash flow after
meeting all expenditures
$583,965 $585,211 $608,640 $633,008 $658,349
PV factors @10% pa 0.909090909 0.826446281 0.751314801 0.683013455 0.620921323

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Discounted cash inflow
(Net)
$530,877.27 $483,645.10 $457,280.60 $432,352.70 $408,783.16
Projected cash inflow
Beginning 1/1/2019
Year 6 Year 7 Year 8 Year 9 Year 10
Year ending Dec-24 Dec-25 Dec-26 Dec-27 Dec-28
Gross revenue (Expected)
Revenue from rental $747,877 $777,792 $808,903 $841,259 $874,910
Less: Loss due to absorption &
Turnover Vac.
$0 $0 $0 $0 $0
Net rent receivable $747,877 $777,792 $808,903 $841,259 $874,910
Total Reimbursement Revenue $66,832 $69,075 $71,409 $73,836 $76,359
Effective Gross Revenue
receivable
$814,708 $846,867 $880,312 $915,095 $951,269
Operating Expenses

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Reimbursable Expenses
Common Area Maintenance $26,176 $27,223 $28,312 $29,444 $30,622
Ad Valorem Tax $2,750 $2,750 $2,750 $2,750 $2,750
Property Insurance $7,991 $7,991 $7,991 $7,991 $7,991
Utilities $26,924 $28,000 $29,121 $30,285 $31,497
Administrative Expense $2,992 $3,111 $3,236 $3,365 $3,500
Non-reimbursable Expenses
Management $40,735.42 $42,343.35 $44,015.61 $45,754.75 $47,563.46
Total Operating Expenses $107,567 $111,419 $115,424 $119,590 $123,923
Net Operating Income $707,141 $735,448 $764,888 $795,505 $827,346
Capital cost
Tenant Improvements $22,436 $23,334 $24,267 $25,238 $26,247
Total Capital Costs $22,436 $23,334 $24,267 $25,238 $26,247

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Net cash flow after meeting
all expenditures
$684,705 $712,114 $740,621 $770,267 $801,099
PV factors @10% pa 0.56447393 0.513158118 0.46650738 0.424097618 0.385543289
Discounted cash inflow (Net) $386,498.02 $365,427.34 $345,504.9
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$326,668.34 $308,858.35
Thus, from the above calculation the discounted cash inflows over the 10 years’ period from the
property if it is rented at an annual rent of $50 per square feet will be quite significant. However,
it is important to note that there are number of assumptions that have been made to calculate the
discounted cash flows from the property over the 10 years period in the future. Thus, all the
underlying assumptions have to be materialized in the future to give the above discounted cash
flows to the property owner in the next 10 years (Holtbrügge, 2017).
Workings:
The working necessary to calculate the above discounted cash inflows are shown below.
Rent revenue and expenditures related to tenant 1 are calculated in the following table:
Tenant #1