Financial Modelling

Vulture Capital has been recently approached by a landlord for an en-bloc office acquisition opportunity. The opportunity is a new vacant premium Grade-A office building with about 20,000sm located in Beijing CBD. The subject is about 10-minute walking distance from the closest subway station. The landlord is now asking for RMB 65,000/sm.

Vulture Capital plans to involve a separate account as their LP to invest into this property. Vulture Capital sets a 10% hurdle rate of return for the LP. When the LP’s return excessed 10% hurdle, Vulture Capital will receive 20% of excess profit as promote.

As a GP, Vulture Capital’s internal return requirement is IRR 15% in 5 year investment horizon. Please prepare a brief cash flow to estimate if RMB65,000/sqm can meet the return requirement and propose a counter-offer if RMB65,000/sqm is considered too high.

Below are some of the investment criteria:

  1. a) Rental assumption: RMB12/sqm
  2. b) Total operating expenses (VAT, property tax and Opex Included): 25% of EGI
  3. c) LTV ratio: 50%
  4. d) Interest cost: 5.5% annually; onshore loan
  5. e) Equity contribution: GP – 10%; LP – 90%
  6. f) Investment period: Exit in year 5 with 3.8% capitalization rate
  7. g) LP Hurdle rate of return: 10%
  8. h) Vulture Capital promote: 20% of any profit excessed 10% hurdle
  9. i) Vulture Capital (GP) IRR: 15%

You may make your additional assumptions in the cash flow.

Sensitivity Analysis Vs. Scenario Analysis

Explain the difference between sensitivity analysis and scenario analysis. Offer and argument for the proposition that scenario analysis offers a more realistic picture of a project’s risk than does sensitivity analysis.


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