Subject: Hollywood Real Estate Development Recommendation I recommend that we invest in the project at Hollywood and Highland over the project at Sunset and Vine. The Hollywood and Highland project meets all five underwriting requirements for investment criteria, whereas the Sunset and Vine project does not have the same community support and as a result could encounter complications that could delay construction. Furthermore, the Hollywood and Highland project yields a five-year Internal rate of return of 47%, and the Sunset and Vine project will only yield 26%.
If we follow our typical exit strategy and sell after here years, the internal rates of return increase to 69% and 36%, respectively. According to the Boston Consulting Group, there is an unmet retail demand in inner cities of approximately 25%, and believe that those figures can be as high as 40% in certain markets. To accompany that, it is well documented that retail sales per square foot are substantially higher in Inner clues. As an example, a typical Home Depot sees sales of about $400 per square foot. The Home Depot In Queens, NY reports sales of nearly $1 ,500 per square foot.
The Hollywood and Highland project ill better take advantage of this, as it provides 640,000 square feet of retail space compared to Sunset and Vine’s 87,000. One advantage to the Sunset and Vine project is that anchor retailers Bed, Bath, and Beyond and Borders have signed lease agreements. The remaining 270,000 square feet at Sunset and Vine will be reserved for 300 rental units. As a result, we can expect that the Hollywood and Highland project will create far more Jobs for local residents, both entry level and moderately skilled.
Furthermore, the income per square foot is greater at Hollywood and Highland when compared to Sunset and Vine. The retail space in the Hollywood and Highland project is projected to yield a net income of $36, whereas Sunset and Vine’s combined retail/residential spaces will yield an average of $24 per square foot. Aside from the retail space, the Hollywood and Highland project also boasts a theater and hotel that will be a major tourism draw. It Is also the site of a new metro station (built In 2000), providing easy access via public transportation.
The sunset and Vine project includes an apartment complex, so it cannot be expected to increase tourism to the same degree. Another issue with the Sunset and Vine project is that previous placement attempts have been met with resistance from local residents who want more affordable housing options. The Hollywood and Highland project does not appear to have any of these complications. In fact, there has already been positive media attention surrounding the project and there Is significant commercial interest.
Kodak, Pepsi, and another third party have signed agreements for rights and signage totaling $4. 25 million. We also have agreements with the city of Los Angles to provide $148 million In financing and the Community Redevelopment Agency of Los Angles has agreed to provide a $13 million loan for the project as well. He property at Sunset and Vine ($45. 1 million vs… $37. 1 million), however, since the city of Los Angles is a non-equity investor in the Hollywood and Highland project, the value of our 85% equity is worth much more in relation to our initial investment.
Specifically, the Hollywood and Highland project will have an equity valued at 3. 23 times the initial investment, but the Sunset and Vine project will only yield 1. 83 times the initial investment. A final risk is the ability to secure financing for Sunset and Vine. The Hollywood and Highland project has received support from the city of Los Angles and other community organizations, and it is documented that Community Based Organizations can facilitate the needs of new development projects like this by connecting developers to existing local resources (e. . , South Brooklyn Development Works have assisted developers in Red Hook, Brooklyn). There is a possibility that some resistance for the Sunset project could delay financing (which has not yet been secured). The Hollywood and Highland project is projected to have a substantially greater internal rate of return than Sunset and Vine, and while it does require a greater initial investment, it arguably comes with less risk due to community support and secured sponsors.
