The objective: Put yourself in Eric’s shoes and write an internal memo for the Investment Committee at NYCEDC. Eric’s memo should outline his counter-proposal to the developers’ initial proposal regarding the structure of the junior debt tranche. In the write-up, provide answers to the questions below.
Propose a mechanism that would help close the gap between the return expectations of NYCEDC and of the developers. Given this mechanism, recommend an appropriate yield for the NYCEDC junior debt tranche. Explain why it is a fair yield, given the risk they are taking on. Similarly, calculate the expected return of the developers under Eric’s proposal and explain why it is a reasonable return for them. Bear in mind the expectations of the developers. Simply telling them that their forecasts are not realistic and that under more reasonable cash flow projections they meet their target returns, may not get you very far. You will be evaluated based on the soundness of your argument and ultimately the likelihood you can convince all parties that this is a fair deal. To articulate and support your arguments, build a financial model and present it in the memo in a way that makes it easy to understand your assumptions, calculations, and reasoning. In particular, the model should include assumptions, projections (revenues, costs, and cash flows), a debt schedule, and returns analysis, as well as any other elements, such as showing different scenarios, that you find helpful in providing an answer.
NYCEDC’s mission is to serve the local community through its impact investment programs. Therefore, certain elements of the deal would typically not be included in a pure commercial setup. To that point, Eric would be interested in an answer to the following question: If the developers had executed this deal in a pure commercial setup (i.e. without the involvement of a non-profit organization such as NYCEDC), what would their expected return have been?
To answer this question you will need to:
- Show what could be a reasonable capital structure for this project in a commercial setup.
- Amend the financial model your built-in question
- PART II:
Comment on the social impact of the redevelopment of Spofford and on how you think an organization like NYCEDC should be run going forward.
The following questions can guide your discussion:
- How would you measure the social impact of this project? Who receives what benefits and who ultimately pays for them?
- What conclusions can you draw about the additionality of NYCEDC investments given your above analysis (comparing your answers to questions a and b)
- What are your views on Eric’s approach to impact investing? Is it a welcome change (to the old NYCEDC approach)? Why or Why not? What effect this change could have on the partnership between NYCEDC and the developers in the future?
- If you were in Eric’s position, would you have done anything differently? Why or why not?
Assume these developers are General Partners in a standard Limited Partnership and therefore the money they invest in Spofford comes from various asset owners (Limited Partners). Assume you are working for one of these LPs and need to write a memo to your investment committee to evaluate the pertinence of investing in one of these GPs. What are your expectations in terms of LPA clauses and in terms of returns? Explain carefully which clauses you expect to be in the LPA, their content, and why. Similarly, explain the risk and return profile you expect and discuss the metrics you would like to use to measure these.