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Essay On Real Estate Finance

Interest Rate Chosen


The interest rate that was chosen was equal to 2.831 percent which represented the yield on 10-year treasury bond in the US.
 

US Market Chosen


Memphis
 

Exit Cap Rate

 
The exit cap rate that was used was equal to 8 percent which represented the cap rate  environment of the Memphis locality in the US. 
 

Investment Made By GP

 
The GP should be required to contribute about 10% of the project's total equity. A co-investment of 10% would guarantee the GP's active engagement in the  project and minimal profit-sharing for the GP.
 

Pref taken by LP


The pref taken by the LP should be roughly around 8 percent which comprises of the risk-free rate of 2.831 percent and average market risk premium for US for the year 2022 equal to 5.6 percent (Statista 2022)
 

GP Promote

 
The promote split given to the GP should be equal to 5 percent for the first split, 15 percent for the second split and 0 percent for the third split. 
 

GP Promote Nominal And GP IRR

 
The nominal promote for GP is $3,743,443 and the GP IRR is equal to 23.84 percent.
 

Deal Profit For The GP

 
Based on the assumptions related to promote and hurdle rates, the GP earns around 14.2 percent of the total deal profit. A profit share of 14 percent is considered to be healthy and is sufficient for motivating the GP.
 

Variables Chosen For Sensitivity Analysis

 
The variables that were chosen for sensitivity analysis were Exit cap rate & Second GP promote split for GP Promote sensitivity and Exit cap rate & GP Co-investment for LP IRR sensitivity. Promote split of GP and exit cap rate has a significant influence of profit share between GP/LP and final deal value respectively.
 

References 

 
Average market risk premium in the U.S. 2011-2022 | Statista. (2022). Retrieved 25 July 2022, from https://www.statista.com/statistics/664840/average-market-risk-premium-usa/
 

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