Pinckney Street - Overview and Investment Objectives

UGBA Case 1

Pinckney Street

Overview and Investment Objectives

Edward Lee is looking for a small income-producing apartment building to purchase with the objectives to both gain experience and build an equity base for future investments. Lee has $240,000 on hand and is looking into multiple financing options. After searching around Beacon Hills, Lee is now looking into a 4-unit apartment house on Pinckney Street. Although there are high costs associated with this project due to remodeling, mortgage payments, and management fees, this project is still attractive and potentially feasible for Lee. The asking price for the property is $1,000,000 and completing the renovation on the building would cost $450,000. After calculations, we believe that Lee should take the mortgage from Celia Bicego for $1,050,000 and the seller’s $200,000 option, include $240,000 out of his own pocket from savings, and borrow the remaining $16,451 from another entity, potentially a family member, such as his wife.

This case consists of several participants. Edward Lee is the potential buyer for the property and also the primary borrower who is looking to obtain a cash flow positive apartment complex for the long-term. There is an apartment broker who is anxious to sell the property at a premium and is willing to offer financing. In addition, two mortgage loan officers offer Lee loans. Celia Bicego, one of the mortgage loan officers, is offering a $1,050,000 loan for an adjustable 3.75% interest rate on a 30 year term. The next mortgage officer, Matthew Thaler, is offering Lee a $1,000,000 loan with an annual interest rate of 4% for 30 years. Michael Hopkinson, Lee’s family attorney, is offering legal advice to ensure that Lee is aware of all of his liabilities. Lee’s wife is also a factor in Lee’s decision making, as she argues that his plan of living in the complex will interfere with his ability to raise rent on tenants. She also has a higher annual salary of $95,000 which could help Lee cover the shortage in his financing. Finally, there is a contractor in charge of finishing the remaining $450,000 worth of renovations to the complex.

Investing in the Beacon Hill area is generally deemed as safe due to the low risk of depreciation for functional or economic causes. Due to redevelopment programs in the 1960s and 1970s, Boston’s property values generally increased. In addition to this, the legislation limiting new construction of buildings in the area means that these values will likely continue to increase and properties in the area will be deemed as more attractive. As such, many investors in Beacon Hill expect around 8% return.

The three story apartment that Lee is considering was originally purchased at a price of $850,000. However, after the seller decided that the costs to renovate