Angus Cartwright Case - Executive Summary

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Portfolio Management & Advisory Services
Executive Summary
Recommendations for John DeRight & Judy DeRight

Prepared by, Vijay Sundar
* M.P.S in Real Estate, Class of ‘12
Cornell University, NY, USA

* B.E. in Civil Engineering, Class of '07
Anna University, Chennai, India Talk: +1 - 949-385-0403 Write: vs328@cornell.edu Principles of Real Estate Development – HA6620 - Angus Cartwright / Assignment 4

John DeRight & Judy DeRight both members of the long standing DeRight family based in Arlington, Virginia are looking to diversify their portfolio of investments and are contemplating investing in real estate to achieve their investment goal. Both are in a different stages of their life and are considering one of the four real estate investment options available to them expecting an after tax minimum leveraged return of 12% on their investment. John DeRight was a business owner until recently when he sold off his business to another medium sized public company for $18 million worth of stock in that company. John wants to diversify his investments and is primarily looking for stable periodic returns that will comfortably accommodate his retirement lifestyle. John DeRight, currently in retirement, will have $9 million from the sale of stock to invest in a property. He is comfortable with his retirement savings, but would like to diversify his retirement funds in real estate. He requires a 12% return. John's networth is depicted in the chart below.

It can be seen that adding another investment vehicle, i.e. Real Estate here to his portfolio reduces his dependance on the performance of his stock which is currently comprised of 95% of his overall portfolio vis-a-vis 48% after the investment.

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Judy DeRight is the president and the sole stockholder of a small sized chemical company. Her company generates a minimum before tax return of $1.6 million and an after tax return of $1.1 million and it has been consistent throughout the last ten years. As a profitable and stable company, she received many takeover offers for her company which she rejected since she was confident on the inherent inclusive growth potential of her company.

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Judy DeRight has $16 million available to invest. She is at the peak of her career and is likely interested in longer-term possibilities compared to John. She also requires a 12% return on her investment.

Table 1 expresses the complete information available about the properties. When profiling the suitability of each property to both the investors, certain qualitative factors were considered that will have an effect on the returns. They are, 1) The building moratorium that was in place in Montgomery county, 2) Depreciation benefits, 3) Tax Implications, 4) Physical conditions of the properties, 5) Neighborhood location, 6) Current market conditions, 7)Existing tenant profiles, 8) Status of the underlying land, 9) Liquidity risk, 10) Inflation risk, 11)Management risk and 12) Information risk. The most important calculation is the before-tax cash flow calculations. Of the four properties, Alison Green has the greatest before tax cash flow at $434,300 annually. Stony Walk, an established office building, brought in returns of $331,060. The Fowler Building, another new project, had the smallest before tax cash flows of $90,250. This property has longer term potential and the cash flows

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are less reliable because it’s a new development. On a cash flow perspective, Alison Green is recommended for its better before tax returns and Stony Walk is recommended for balance between cash flow, end of holding period return and stable NPV. Table 1

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The table above helps us compare the properties to each other. The apartments compare best with each other, as they are listed by number of units. Likewise the office buildings compare best with each other, which are compared by rentable square foot. Stony Walk and Ivy Terrace have the greatest expenses...
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