You have purchased your property and successfully operated it during its first year. Building on the financial statements that you have developed complete a ten year pro forma for the asset.
In order to construct the pro forma you will need additional information:
Revenues
Supermarket Lease:
Current term expires 12/31/2014. Has a renewal option for five years at 10% over the current rent. Assume the option is exercised.
Drug Lease:
Current Term expires 12/31/2010. Has a single five- year renewal option at 15% over the current rent. Assume the option is exercised.
At the end of the five year renewal period assume that the space is released to a new tenant at the then market rent.
To calculate the âthen market rentâ meaning the market rent at a specific time in the future:
1) assume that the rent is currently $5 below market
2) adjust to current market level
3) allow for CPI growth at 3.5% per annum
Assume that:
The space remains vacant for 6 months after the expiration of the renewal option lease.
The space requires a TA of $25 per foot (the cost $25 is stated in âtodayâs dollarsâ, to calculate the cost in the future adjust the level using the CPI).
You must pay 2% of the new ten year leaseâs rent as leasing commission.
Tile Store
Set up as per the prior exercise.
Expenses
Assume that insurance, legal, accounting and maintenance/repairs grow at CPI.
Assume utility costs grow at 1.5x CPI.
Assume that taxes pop up to 2.5% of FMV at the end of year five and that your property is reassessed at that time. Assume that the cap rate remains the same as that implied in the prior exercise for year one (cap rate = NOI/Purchase Price). Assume that he first payment impacted is that for the following June.
Capital Repairs
At the end of year seven the parking lot needs to be resurfaced. Assume that this costs $200,000.
Cash Flow
Add a cash flow statement to your analysis. Are you generating enough cash to cover your expenses and major cash items?
Can you pay a dividend to your equity holders? At what level?
If you are short on cash what are some of your options?
Sample Solution
divide the order across five factories in Thailand. Effectively we are customizing the value chain to best meet the customerâs needs. Five weeks after we received the order, 10,000 garments arrive on the shelves in Europe, all looking like they came from one factory.5 Li & Fung clients benefited in several ways: supply chain customization could shorten order fulfillment from three months to five weeks, and this faster turnaround allowed clients to reduce inventory costs. Moreover, in its role as a middleman, Li & Fung reduced matching and credit risks, and also offered quality assurance to its customers. Furthermore, with a global sourcing network and economies of scale, Li & Fung could offer lower cost and more flexible sourcing than its competitors. In addition, through acquisitions and global expansion, Li & Fung was extending this knowledge base to sub-Saharan Africa, Eastern Europe, and the Caribbean. Finally, Li & Fung provided up-to-date fashion and market trend information to clients. As a result of its Camberley acquisition in 1999, it started offering clients virtual manufacturing or product design services. According to Victor, âLi & Fung does not own any of the boxes in the supply chain, rather we manage and orchestrate it from above. The creation of value is based on a holistic conception of the value chain.â In recent years, however, Li & Fung had begun to improve operations by controlling or owning strategic links in the chain. In some cases, Li & Fung offered raw material sourcing. In the past when clients placed an order, Li & Fung would determine the manufacturer best suited to supply the goods, and that factory would source its own raw materials. But Li & Fung understood its clientsâ needs better than its manufacturing plants did, so by offering raw materials to its suppliers, the company both ensured greater quality control and bought larger and thus more cost effective amounts of raw materials, thereby producing cost savings for each manufacturer. In such cases, Li & Fung also earned revenue by charging its factories a commission on each raw material purchase they made. By mid-2000, nearly 15 percent of Group sales involved Li & Fungâs raw material sourcing service. Joan Magretta, âFast, Global, and Entrepreneurial: Supply Chain Management, Hong Kong Style, An interview with Victor Fung,â Harvard Business Review, September-October 1998, p. 106.>
divide the order across five factories in Thailand. Effectively we are customizing the value chain to best meet the customerâs needs. Five weeks after we received the order, 10,000 garments arrive on the shelves in Europe, all looking like they came from one factory.5 Li & Fung clients benefited in several ways: supply chain customization could shorten order fulfillment from three months to five weeks, and this faster turnaround allowed clients to reduce inventory costs. Moreover, in its role as a middleman, Li & Fung reduced matching and credit risks, and also offered quality assurance to its customers. Furthermore, with a global sourcing network and economies of scale, Li & Fung could offer lower cost and more flexible sourcing than its competitors. In addition, through acquisitions and global expansion, Li & Fung was extending this knowledge base to sub-Saharan Africa, Eastern Europe, and the Caribbean. Finally, Li & Fung provided up-to-date fashion and market trend information to clients. As a result of its Camberley acquisition in 1999, it started offering clients virtual manufacturing or product design services. According to Victor, âLi & Fung does not own any of the boxes in the supply chain, rather we manage and orchestrate it from above. The creation of value is based on a holistic conception of the value chain.â In recent years, however, Li & Fung had begun to improve operations by controlling or owning strategic links in the chain. In some cases, Li & Fung offered raw material sourcing. In the past when clients placed an order, Li & Fung would determine the manufacturer best suited to supply the goods, and that factory would source its own raw materials. But Li & Fung understood its clientsâ needs better than its manufacturing plants did, so by offering raw materials to its suppliers, the company both ensured greater quality control and bought larger and thus more cost effective amounts of raw materials, thereby producing cost savings for each manufacturer. In such cases, Li & Fung also earned revenue by charging its factories a commission on each raw material purchase they made. By mid-2000, nearly 15 percent of Group sales involved Li & Fungâs raw material sourcing service. Joan Magretta, âFast, Global, and Entrepreneurial: Supply Chain Management, Hong Kong Style, An interview with Victor Fung,â Harvard Business Review, September-October 1998, p. 106.>
