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Equity Contribution for Pilgrim Assurance Building Essay

On behalf of David Bailey, there have been individuals looking into the property located at 795 Atlantic Avenue. As an investor, Bailey is interested in making an offer on the property however he is trying to make his offer look more attractive than the competitors. With thorough research, he has found ways that would improve the building and in turn generate a larger yearly cash flow while still being able to improve the building. Bailey was also considering converting the current office space building into condominium units but that was strictly dependent on the revenue that could be generated from doing so.

I.EXECUTIVE SUMMARY OF FACTS:

The Pilgrim Assurance Building has a total of 175,000 net rentable space. As of the right now the minimum bid on the building is $15 million dollars. Pilgrim currently occupies 100,000 square feet of the building. The building was completed in the 1920’s and was constructed with a steel frame and masonry curtain wall system. Recently, the building has undergone an upgrade which included the addition of high speed elevators, heavy insulated rubber membrane, built-up gravel roof, a bronzed aluminum window system energy efficient heating, ventilating and air-conditioning systems as well as updates fire, life and safety systems. The building also includes a large 5,000 square foot atrium.

The David Bailey Company is a limited liability company that is one the largest private property owners in the greater Boston Area. Since 1985, Bailey has accumulated 5,000 apartment units and of 1.2 million square feet in office space in Boston. His specialty is in updating older apartment houses and office buildings and converting apartments into condominiums.

II. TASK AND ANSWERED QUESTIONS

If able to purchase the building for 19 million dollars, Bailey should then convert the units into condos in order to increase his revenue and generate the most profit for the building given the location and the current status of the economy.

III. POSSIBLE SOLUTIONS

If Bailey were to outbid the competitors and successfully purchase the building there are a variety of options that Bailey could engage in in order to improve the building. The first option would be to keep Pilgrim as a tenant in the building. By doing this he would secure 100,000 square feet of space at $26 /sq. ft generating about $2,600,000 in rental income just from Pilgrim. Also with keeping the space as office space, Bailey found that he would be able to fill in two out of the four floors of the atrium adding an additional 10,000 in rentable square footage. This was something that none of the other competitors had noticed. Bailey also noticed that he would be able to renovate all 20 bathrooms within the building but that his renovation would be about 15,000 cheaper than his competitors.

Continuing with the renovations, Bailey saw that the atrium would need to be upgraded and instead of it costing him around $200,000, which would be the cost to his competitors, he had the ability to save $50,000 by reusing the marble in the bathrooms as the floor and walls of the atrium. Taking into consideration all of the upgrades and renovations, as well as the fact that Bailey would be able to manage the building at 0.50/ sq ft compared to his competitors which were managing at $1.25/ sq ft, the value at which Bailey would place on keeping the building an office space would be $3,433,649.13 (see Exhibit C). The projected cash flows and Net Operating Income of the Office Space over the period of five years, would be approximately $1,283,714.18 at the end of the fifth year (see Exhibit A).

The second solution available to Bailey if he were to successfully outbid his competitors would be to convert the current office spaces into condominiums. While the entire conversation process would take about two years and that would be 2 years that he is missing out on revenue, in the end the revenue generated by the condo income is well worth taking a loss the first two years. When converting the space into condos, he would be taking in a profit of about $350 to $400 per square foot. This conversion would include 150 units with an average size of the unit being 1,060 square foot and cost him about $200 per square foot to convert.

By doing this he would be reducing the total saleable area because he would need to create more new common areas and hallways, but even so, Bailey would still generate an enormous profit. Taking all of this into account, the projected value of the building 5 years from the purchase date with the interior consisting of condos would be $17,979,598.21. Also by converting the building into condos, yes there would be a loss of net operating income in the first 2 years, but in the third year the income would be $16,326,807.50 (see Exhibit B).

IV. RELATIVE DATA

With the conversion of the Pilgrim Assurance into condos, it is a 159,000 square foot project with approximately a 30% vacancy rate. Using the value of $600 per square foot as the rate was calculated. Below is a list of Office Buildings that were converted into condominiums and what the $/sq ft ratio is for those condos.

Square Footage
$/ SQ FT
DEVELOPMENT
1573
$1071
Folio Boston
1510
$1076
Waterfront Intercontinental
2500
$516
112 Beach Street
1852
$485
South Boston
1255
$681
South End
1708
$430
210 South Street

Calculating the average $/sq foot of all five properties, it comes to be around $700/square foot. In the analysis used in Exhibit B, due to the smaller size of the condo, 1060 square feet, the estimated price per square foot was $600. With this number the potential revenue of the condominium property at 100% occupancy would be $95,400,000.00. Due to economic time we are aware that there is the possibility for of vacancy rates to reach about 30% this would reduce the yearly revenues from $31,800,000.00 to $22,260,000.00. See Exhibit B.

V. SUPPORTED CONCLUSION AND RECOMMENATION

After looking at the information the best suggestion for Bailey would be to place a bid in for the building for $19 million dollars. This will be the proper amount to be attractive to the seller and it will be a better offer than his competitors. If he does win the bid and has the ability to purchase the property, the next suggestion would be to then to convert the office space into condos because while he will be losing out on profit for the first two years due to construction he will make those losses back in the first year due to the cost of the rent. Also due to the fact that Bailey has experience in the industry of conversion to condominiums and he has the ability to lower his management expenses while still increasing the value of the building through the improvement of the atrium therefore increasing the value of the land and making the area where he owns more attractive for residents.


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