# Capstone: Underwrite Northgate Commons

> Illustrative teaching case. Northgate Commons is not a real property, this is not a real transaction, and the term sheet is not a real financing quote. Every figure is fabricated for instruction.

## The situation

You are the acquisitions analyst at a value-add multifamily sponsor. A broker has
sent you Northgate Commons: 120 units, built 1986,
garden style, in Fairhaven, a mid-size US market (fabricated). Guidance is
**$17,400,000**, which is $145,000
a unit. The seller has owned and self-managed it since 2009 and is retiring.

Your investment committee meets in a week. The partner wants a recommendation,
and the first question in the room will be whether the deal clears the firm's
hurdle of a 15.0% levered IRR
over a five-year hold.

Everything you need is in this folder. Nothing is hidden from you, but not
everything is labeled, which is the point.

## What you have to produce

Four numbers, and the reasoning that gets you to them.

| # | Deliverable |
|---|---|
| 1 | **Normalized year-one net operating income.** The gate. Every number below depends on it. |
| 2 | **The supportable loan amount, and which of the lender's three tests binds.** |
| 3 | **Unlevered IRR and levered IRR** over a five-year hold with a sale at the exit cap. |
| 4 | **Equity multiple** on the sponsor's equity. |

Then an investment committee memo that says whether to proceed and at what price.

## What makes this hard

The seller's operating statement describes how the property has been run. It does
not describe how it will be run by a buyer with a loan on it. Three differences
between those two things are sitting in the documents you have. None of them is
labeled as a trap, and one of them moves the answer in the opposite direction
from the other two, so guessing tends not to work.

The broker pro forma is a professional document that is also optimistic in ways
you can measure. Measure them. Do not argue with them in prose.

## How to work it

1. Read `12-build-order-guide.md`. It sets the order of operations and tells you
   which assumptions to hold fixed so your answer is checkable against ours.
2. Read `10-underwriting-assumptions.md`. Those are the house rules. Use them
   exactly, or your numbers will not tie to the key even if your method is sound.
3. Build in `11-model-template-blank.csv`.
4. Write the memo in `13-ic-memo-template.md`.
5. Only then open `18-self-check-key.md`.

## Files in this packet

Deal documents you receive:

- `02-offering-memorandum-summary.md` and its pro forma
- `03-rent-roll.csv`, all 120 units
- `04-operating-statement-t24.csv`, monthly, twenty-four months
- `05-statement-notes-and-disclosures.md`
- `06-sale-comparables.csv` and `07-rent-comparables.csv`
- `08-market-survey.md`
- `09-lender-term-sheet.md`

Your working files:

- `10-underwriting-assumptions.md`, `11-model-template-blank.csv`,
  `12-build-order-guide.md`, `13-ic-memo-template.md`

The solution, for after you have attempted it:

- `14-solution-normalized-noi.csv`, `15-solution-loan-sizing.md`,
  `16-solution-cash-flow-model.csv`, `17-solution-walkthrough.md`,
  `18-self-check-key.md`, `19-broker-pro-forma-diagnosis.md`

## Time

Plan on three to five hours if you build it yourself. Less if you have
underwritten before, more if this is your first full model. Splitting it across
two sittings, normalization first and returns second, tends to work better than
one long push.

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*Illustrative teaching case. Northgate Commons, the market, the broker, the lender, the comparables, and every figure in this packet are fabricated for instruction. Nothing here is a real property, a real transaction, or a real financing quote.*