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  • You are evaluating an asset for outright acquisition or mezzanine lending. The asset is a 100 unit student housing apartment project. The apartment is located one stop away on a metro line to a major University. The University caters mostly to Co-Op type students and mature learners who take 6 years to graduate instead of the typical 4 years. This is because 70% of the students work to pay their way through school. 50% of the students who work drive to their work places located between 5-20 kms away from the University.
  •  Here are the salient facts:
  •  Potential Gross Income = 3M
  •  Vacancy = 5%
  •  Operating Expenses = 750k/yr. (you ask around and find that normal operating expenses are only 20% of Gross Income for a well maintained facility)
  •  Allocation for Major Upgrades/repairs = 100k/yr (You ask around and find that most apartment owners only allocate about 1-2% of Potential Gross Income for a reasonably new property towards the replacement reserve)
  •  Make reasonable assumptions, based on any real-estate market you are knowledgeable about, for any information you have not been given.


  1. What would you pay for this asset as an outright purchase? What assumptions did you have to make?
  1. Assume senior debt at 50% LTV @ 5% interest, 5 year term, 25 year amortization, exists on the asset. How much would you be comfortable lending to this asset as a mezzanine lender. What assumptions did you have to make?

  1. A market research study told you that rental assets in this market went through a relative cap rate compression of 150bps, since this building was originally financed. You find that this compression was mainly a result of a central bank interest rate drop coupled with significant quantitative easing. Making a few calls you find that rental rates and vacancies for student housing have not materially changed.

    • Would that factor in your calculation of mezzanine loan amount? Is your loan amount higher or lower? Would you reduce or increase your interest rate?

    • How much will this impact your purchase price of the asset?

  1. The government increased business taxes by 1000bps. In this environment – do you prefer mezzanine lending to this asset or buying it?

  1. Carbon taxes and climate change increased your operating expenses by 10%.  How sensitive is your asset valuation calculation to this increase?

  1. The government is forcing a carbon tax, new energy code, environmental requirements and a drywall tariff amounting to a construction cost increase of 10% per door going forward on construction of new assets. Does this change how much you would be willing to pay for this asset / how much you would mezzanine lend to this asset?

  1. The alternative opportunity you are evaluating is buying USD denominated Saudi bonds which for a 10 year bond coupons about 170bps higher than US treasuries. A quick google search shows that the bonds were oversubscribed and for the 10Y bond are about 3.44% – about 20bps lower than expected. Should you go for this opportunity?

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