As you are aware, we are in the process of evaluating this building for purchase. We have assembled information pertaining to the building including 3 years of tax returns, a capital improvement budget and recent sales in the area (comps). We are purchasing the property as follows:
1. Purchase price $5,700,000
2. Down Payment $1,710,000
3. Closing cost $28,500
4. Cash reserves $261,500
Total Cash Into the Project $2,000,000
We anticipate getting a loan on the project for the remaining 70% of the purchase price at 4% interest rate with a life of 30 years and monthly payments to the bank at the beginning of the month
I need your help in the following areas:
1. Prepare a single Balance Sheet containing all 3 years information in proper GAAP format so we can share with the potential owners. Be careful this is going to be a partnership not a corporation!
2. Prepare a single Income Statement containing all 3 years information in proper GAAP format so we can share with the potential owners.
3. Prepare a single Statement Of Cash flows containing all 3 years information in proper GAAP format so we can share with the potential owners.
4. Prepare an analysis of the key ratios for the proposed project which measure Liquidity, Debt Service and other factors
5. Finally, provide me with a detailed memo regarding your advice if we should purchase the building. Your memo should not exceed 5 pages, double-spaced, and should be well written and grammatically correct. Include a two paragraph executive summary at the front of the memo. Also include a 5 year annual projection of the future operations of the building assuming we take title to the property on January 1 2017. I am very interested in the annual cash flow from the project for the next 5 years.
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This memo presents an analysis and evaluation of the building purchase being evaluated based on the federal statements and partnership tax returns provided by the current owners. Methods of analysis include trend and ratios developed from the partnerships financial statements created from the data that was provided. From the financial statements, information such as annual growth in both rental income and expenses was obtained and this was in turn used to develop projected annual cash flow from the project for the next 5 years. The provided breakdown of the building purchase along with the information about annual interest and expected loan duration was used to calculate annual interest and principal repayments to gain a clearer picture of how the project will perform.
The memo draws attention to the fact that the previous owners have been spending about a third of their annual expenses on debt financing, so the financial performance of the building is not as bad as the income statements for the period 2013 to 2015 imply. According to the information you provided in the purchase breakdown our annual interest payments will be 30% less than what the current owners are paying, and once principal repayments are factored in net cash flows will be positive over the next five years. Cash on cash return is projected to grow steadily from 2017 to 2021...
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