New Lab 2.0 +CO-LIV

New Lab 2.0 + CO-LIV Beatriz Bettinger Dukyung Yoo Wanyi Wei Justin Lui Yujing Cui Alvin Kong Christian Ochaita Sean Menkes Nicolas Knockaert

April 22, 2015 Spring 2015 Development C ase Studies – Module 3 GSAPP MSRED C olumbia University

Executive Summary Reviewing the business model for New Lab we went through what we thought the strengths of the concept are and how we believe the company needs to refine its vision for future growth.

1) We believe that New Lab’s model is excellent and needs to be replicated in postindustrial sites in tech heavy cities. Similar to companies such as WeWork, the business model should encompass multiple locations.

2) With regards to finding sites, we make a case that using GIS type tools to locate potential sites, we could construct a unique method to create opportunity. By overlaying a series of requirements to find that have the pre-­‐required requisites New Lab needs for development (large post industrial sites, in urban areas, with a growing tech community, GDP growth, etc).

3) The only change to New lab’s program should be the addition of light warehousing space to cater to warehousing needs for tech startups and other businesses that need additional SF to support their growth.

4) A New avenue for growth could be the addition of a co-­‐living component to a “catchment” of 25% of the jobs being created by New Lab projects. We see this as beneficial on the level of a business model but especially beneficial as a way of attracting residents to blighted areas in cities and creating incredible urban renewal.

5) We additionally feel that in order to create a more scalable structure, we propose a more traditional GP/LP structure, in which Macrosea is the GP and also owns a subsidiary company that manages the asset.

New Lab 2.0 within the Navy Yards, proposal.

•

Light Industrial (Top) and Residential (Bottom)

Gross Area

256,000 S F

Net Income OpEx Staffing Ground L ease Overhead Management Fee CapEx Reserve Investment Hard Cost Soft Cost Pre-­‐Opening Operations Purchase Closing Cost Residual/Exit Exit Y ear Exit Caprate Closing Cost Capital S tack/Debt Mortgage + Construction L oan Interest R ate Equity Tax Credit

•

$61.22 per S F $14.33 per S F $0.00 per S F 23% 5% 4% $215 per S F $70 per S F $22 per S F $150 per S F 3% 7 6.00% 3% 75% 5.0% 25%

Annual Growth 2.8% Annual Growth 2.0% 4.0% of net income of net income of net income

of Purchase Price

of S elling Price 88,641,019.43 19,307,006.48 10,240,000

Residential

Concept and Strategy We started with the initial idea of reviewing the business model for New Lab. We went through what we thought the strengths of the concept are and how we believe the company needs to tweak its proposal for future growth.

To begin, we redefined the mission statement of New Lab to read as follows: New Lab is a provider of shared workspace, community, and services for light industry entrepreneurs, freelancers, startups and small businesses.

The company should continue on the focus of creating a multi-­‐city business model hub that can cater to light industrial startups in major urban areas.

That said we outline specific points that we proposed and should be modified at different scales within the company.

Business model proposals: 1) Conceptually change the company’s mission to become a multiple location type business model as opposed to site specific—not just Brooklyn, as conveyed on the current mission statement.

2) Target communities with high potential for future light industrial tech or high-­‐tech green manufacturing (as already done in NYC) in tech-­‐heavy “urban” areas. As a potential future phase, continued growth into the Biotech sector, as light industrial spaces present a great advantage for this.

3) Search for post-­‐industrial sites in urban areas of cities for space. Find heavy industry sites that are out of place and convert them to light industry spaces. Use market research and local knowledge as a means to economize scales and implement the same model we created at the Brooklyn Navy Yards into the new sites. GIS tools can be a different way of locating sites with potential value. For the purpose of simplicity, found that walkabilityscore.com could be useful, by inversely using the website’s scorecard for locating potential sites.

Building program level: 4) At a building level, expand into other under-­‐utilized buildings within Brooklyn Navy Yards and increase the amount of amenities and space that is currently provided in New Lab’s existing building. This includes an addition in total SF of event space, private and shared studio space, fabrication labs, conference rooms, flex space, etc.

5) An introduction of light warehousing space to cater to warehousing needs for tech startups and other businesses that need additional SF to support their individual growth. The inclusion of warehousing space will allow for sustainable growth of existing tenants and can potentially prevent successful tenants from moving into more independent offices (which would perpetuate the misnomer of New Labs as an incubator space).

Partnerships: 5) Continue partnering with cities that want to remove out of place heavy industrial that can be easily changed into light industry.

New avenue for growth: 6) Add a co-­‐living component to a “catchment” of 25% of the jobs being created by New Lab projects. This is usually seen as a good use by a city and also creates more vibrant locations where projects will be developed.

7) An addition of a co-­‐living component can help stabilize both the Brooklyn Navy Yards and any other city that adopts this model. Whereas a strictly light industrial model can only succeed as much as light industry itself succeeds, including a residential component will allow for future community growth and development of other assets and amenities (i.e. retail, nightlife, restaurants, etc.). This will help stabilize the development of light industry space and prevent a similar deterioration of the area as the previously existing heavy industry model that New Lab is replacing.

Development Program for Navy Yard For the Brooklyn Navy Yards, we identified two locations that are either under-­‐utilized or not yet designated for redevelopment by the navy yard redevelopment projects. One location is to be developed as an expansion of New Lab’s existing building and meant to increase the SF of co-­‐ working space. The other location is to be developed as a residential component that will help anchor the space for future community growth.

The site for New Lab 2.0 is currently used for as a car-­‐pound (Brooklyn tow pound facility). The site for the residential component is what we believe to be an under-­‐utilized pier. Both sites sit at the far eastern end of the Brooklyn Navy Yards, which is the opposite end in relation to the current new lab development.

New Lab 2.0 We selected an existing building within the Navy Yards to take over, that is currently being used by the NYC Police department as a car impound parking lot.

The site program follows the same logic as New Lab 1 and adds an additional light warehousing space to the buildings program 5%. The project will be around 3x times the size of New Lab 1.

New Lab 2.0 program

Length

Depth

Total

Floor s

400

160

64,000

4

New Lab 1.0 New lab 2.0

84,000

256,000 3.05x SF

Total SF 256,000

18,816.00

32,602

99,358.48

3 Open private studios

6226

18,974.48

4 FAB LAB

6834

20,827.43

600

1,828.57

2014

6,137.90

7 Co-­‐working (desks)

128

390.10

8 Flex space (desks)

60

182.86

5%

5,916.65

1 Event space 2 Private studios

5 Café Kitchen 6 Conference rooms

9 Warehouse space = % of studio space

6174

New-­‐Live The residential building and the whole concept of co-­‐living space seems to be an ideal partnership for the growth of the business model of New Lab to multiple cities. Co-­‐living units will be between 1 and 2 bedroom with shared amenity spaces (e.g. kitchen, bathrooms, communal living rooms, etc.). The shared housing is designed to support around 25% of the jobs being created by New Lab. An inclusion of a residential component is an ideal move for the Brooklyn Navy Yard. There are many precedents of industrial space becoming rezoned for residential use in New York including Brooklyn Bridge Park, the Domino Sugar Factory, the neighborhood of Dumbo, etc. By including a New Live component, we are positioning ourselves to be ahead of the curve and assimilating with the rest of the waterfront rezoning that has gradually occurred on the Brooklyn side.

This residential component is also necessary to attract the tenant base we are looking for as the closest transportation hubs are approximately 30 minute walks from the current New Lab building.

If this is to become a lasting model, there needs to be a space defined that will house the tenants within the yards.

A residential building would also provide a soft use that can generate better urban environments and mixed-­‐use growth. As the New Lab proposal creates jobs in areas of blight, residential units

captured by people taking jobs in the locations that area being created (somewhat of a campus model). With residential inflow, we can expect to see an increase in community development from retail, restaurants, and other amenities that will be created to cater to the residents.

The New Live program follows the logic of offering 200 rooms dispersed in 1 and 2 bedroom apartments (80% to 20%) in a 75,000sqft building. We selected this number based on the largest co-­‐living project we found being done at the moment: a We-­‐Work project in Washington.

We estimated and analyzed a few co-­‐living projects and found a net rentable area of 80% which is what we used in are model. 20% additional space is due to the large amount of amenity space needed for shared living style units.

Market analysis – Office and Industrial Summary As startup companies and entrepreneurs keep growing, there has been an increasing demand for creative co-­‐working spaces. New Lab’s strategy is to target design and its related technology industry and provide suitable studios and workshop spaces for them. With its good artistic atmosphere, Brooklyn has become the new hub for design industry. The number of design firms and employees in Brooklyn has been growing rapidly in the past ten years. High-­‐tech industry is one of the fastest growing sectors in New York. Job growth in the high-­‐tech industry (33%) has

been 4 times faster than the rate of the rest of City’s economy (8%)1. In terms of location, Brooklyn Navy Yard is one of the hotspots for high-­‐tech industries.

Co-­‐working spaces in Brooklyn are mainly located in Dumbo, Williamsburg and Industrial City area.

New Lab is the first co-­‐working workshop space in the Navy Yard neighborhood. As for the rental rates, price for an open desk is usually around $150-­‐250 per month and private desks/studios are usually over $400 per month, depending on the size.

Demand Analysis The target market for New Lab space is entrepreneurs and start-­‐up companies in design, architecture and its related technology industries. According to Bureau of Labor Statistics, the number of jobs in architect, art and design, computer and information technology will grow by 11,900, 33,200 and 532,700 respectively from 2012 to 2022, nationwide.

When we look at New York City, Manhattan is still very much the center of the city’s design sector.

However, Brooklyn has outpaced Manhattan in the growth of design firms. Brooklyn experienced a significant spike in firms in nearly every design field, including architecture (149 percent increase), fashion design (+119 percent) and graphic design (+115 percent). From 2003 to 2012, total number of design firms in Brooklyn has been growing by 101%, compared to 16% of city average rate, and the number of employees in design firms of Brooklyn has doubled.

High-­‐tech industry has seen fast growth in New York City. Job growth in the high-­‐tech industry (33%) has been 4 times faster than the rate of the rest of City’s economy (8%). By 2013 3Q, New York City was home to 6,970 high-­‐tech firms, 103,100 jobs. More than half of the jobs (56,000 jobs) were located in business primarily engaged in designing, managing and operating computer

1

New York City’s growing high-­‐tech industry http://www.osc.state.ny.us/osdc/rpt2-­‐2015.pdf

systems. This segment of industry has grown by 35% (14,400 jobs) during the economic recovery.

As for location, Brooklyn Navy Yard is one of the hotspots for high-­‐tech firms.

Supply Analysis Co-­‐working spaces in Brooklyn are mainly located in Dumbo, Williamsburg and Industrial City area.

New Lab is the first co-­‐working workshop space in the Navy Yard neighborhood. It is also one of the few co-­‐working spaces that provide integrated workshop and studio spaces, which is one of its competitive edges. Most of the co-­‐working spaces in New York City offer office desks, conference rooms and related services only. The studio type art spaces, on the other hand, are rather scattered around in warehouses, lofts or even residential building.

Co-­‐working spaces in Brooklyn:

We found two co-­‐working spaces comparable to New Lab. SPark Workshop Brooklyn is located in in Sunset Park at 34th Street/2nd Avenue, Industrial City. It offers collective creative space located in a newly renovated warehouse for artists and makers. SPark occupies over 10,000 square feet and features a shared workshop, conference room, individual storage, kitchen, private and semi-­‐private studios ranging from 200 to 400 square feet. It charges $675-­‐820 per month for a private space.

Dumbo Startup Lab is located at 68 Jay St # 718 in Dumbo, Brooklyn. It offers startups, small businesses and freelancers things they need to stay focused on building their businesses: beautiful open space, a supportive community of innovators, reliable services and flexible membership options that meet the needs of today’s entrepreneurs. A dedicated desk costs $429 per month and a 4-­‐member workstation costs $1499 per month.

In general co-­‐working spaces of Brooklyn, price for an open desk is usually around $150-­‐250 per month and private desks/studios are usually over $400 per month, depending on the size. They usually provide reception services, high speed internet, meeting rooms, kitchen/cafeteria and many of them open 24 hours 7 days a week for its members.

Market Analysis – Co-­‐living Space Although WeWork has made the concept of co-­‐working space quite well known throughout the industry, when it comes to co-­‐living spaces, there are not many precedents in the market. There are a couple of operators in New York City that specialize in co-­‐living spaces, such as Campus and Krash, but their co-­‐living models are much smaller in scale in comparison to the residential component of this proposal. Another model with similar size would be more appropriate to analyze for the purposes of projecting residential performance even if the property is located farther away.

In that sense, the new WeLive building developed by Vornado and WeWork in Arlington, VA, expected to be completed in mid-­‐2015, is a good comparable product as it houses similar number of units as the proposed co-­‐living building of this project.

WeLive building will have a total floor area of 158,377 square feet, among which 127,569 square feet will be allocated for residential use. There will be 216 residential units, which is close to the proposed number of residential units for the proposed project, or 200. WeLive’s 216 units will be spread to nine floors, with 24 units per floor2.

2

Crystal City, Plaza 6 – Major Site Plan Amendment Including Office Floors. Feb 10, 2015.

WeLive Typical Floor Plan (Source: Arlington County)

The typical floor plan of WeLive is clear and simple: a series of small residential units organized around the central core and shared living space. Studio sizes range from 300 square feet to 356 square feet, with an average of 313 square feet. This is roughly 60% of normal studio size in the area.

This plan gives provides approximately 670 square feet of shared space per floor, or 6% of the entire rentable area of the floor, excluding circulation and mechanical spaces. Each unit gets a share of 28 square feet. Our proposal will aim a slightly larger floor area for shared spaces, approximately at 10% of the rentable area.

WeLive Shared Living Area Concept (Source: Arlington County)

As WeLive is still under development, there is no public information available about its unit pricing.

Existing or planned co-­‐living space models in New York were analyzed in order to derive a reasonable pricing methodology for the proposed project.

The advantage of co-­‐living property for the owner is that more rent can be charged for per square foot basis in comparison to regular studios. This is possible because co-­‐living space tenants get smaller units and pay less rent, but the rent is not proportionate to the unit size they live in. This is clear in Campus’s pricing of its co-­‐living units. In its Upper East Side building, average floor area a tenant gets, including pro-­‐rata share of common area, is 35% of the average size of nearby studio units. The monthly rent, on the other hand, is roughly 80% of the average rent for studios in the neighborhood. This unproportionate relationship between the unit size and rent is similar in the Madison Avenue property of Campus as well.

From these above analyses, the co-­‐living building is proposed to be designed and operated with the following parameters: • • •

Building efficiency: 80% (shared living space is calculated as rentable area) Average studio size including per unit share of shared living space: 60% of nearby studio size Average rent: 80% of nearby studio rent

National Expansion Our New Lab 2.0 scheme is geared towards specific target audience and therefore would require specific criteria when considering expanding to locations outside of New York. Target cities should be able to sustain the development for the foreseeable future, meaning they should have growing population base and economy. As our proposal’s primary target tenant group is tech entrepreneurs, potential cities for expansion should demonstrate growing tech industry to support our program.

Finally, those cities should ideally have had strong industrial sectors in the past but not much so today. This would indicate there is a fair amount of old industrial building stock available, which would be ideal for attracting tech and creative companies when converted.

The following data were considered in selecting cities for future expansion in the United States: • • • •

Population growth by numbers, 2010-­‐2014 (US Census) CAGR of GDP growth, 2008-­‐2013, among top 50 cities in 2013 GDP (Bureau of Economic Analysis) Technology sector employment growth by numbers, 2010-­‐2014 (Bureau of Labor Statistics) Manufacturing sector employment, 1967 (US Census)

With the public data available, we ranked top 15 cities in the United States according to the criteria set above.

1 2 3

Population Growth

GDP Growth

Houston, TX Dallas, TX New York, NY

Portland, OR Austin, TX San Jose, CA

Tech Employment Growth Chicago, IL San Jose, CA Seattle, WA

Historic Manufacturing Employment New York, NY Chicago, IL Los Angeles, CA

4 Los Angeles, CA Houston, TX Dallas, TX Detroit, MI 5 Washington, DC Nashville, TN New York, NY Philadelphia, PA 6 Miami, FL San Antonio, TX San Francisco, CA Boston, MA 7 Atlanta, GA Columbus, OH Phoenix, AZ Cleveland, OH 8 Phoenix, AZ Raleigh, NC Houston, TX Pittsburgh, PA 9 San Francisco, CA Salt Lake City, UT Atlanta, GA St. Louis, MO 1 Seattle, WA Charlotte, NC Baltimore, MD Dallas, TX 0 1 Austin, TX Dallas, TX Philadelphia, PA Milwaukee, WI 1 1 Riverside, CA Seattle, WA Portland, OR Baltimore, MD 2 1 Denver, CO Indianapolis, IN Washington, DC Minneapolis, MN 3 1 Orlando, FL Baltimore, MD Minneapolis, MN Buffalo, NY 4 1 San Antonio, TX Boston, MA San Diego, CA Seattle, WA 5 15 US cities by different criteria (Source: US Census, Bureau of Economic Analysis, Bureau of Labor Statistics) Top

Interestingly enough, there are only two cities that made the top 15 list in all of these four criteria: Dallas and Seattle. Even New York didn’t make it to all four lists, although it was one of the top five in three categories except GDP growth. This analysis reveals that Dallas and Seattle are the most apt for potential geographic expansion of New Lab in the future. Houston and Baltimore could be next after Dallas and Seattle.

SEATTLE

NEW YORK

DALLAS

Population growth GDP growth Technology employment growth Historic manufacturing employment

Top 15 US cities by different criteria on a map

As these selected cities are more suitable for expanding the New Lab model, certain areas in those cities would be more appropriate as potential project sites. The proposed New Lab model will repurpose existing industrial space into creative office spaces, but it doesn’t mean any industrial space would work. To capture young creative professionals who are primary target audience for New Lab, subject properties should be located close to active urban centers. It would be preferable,

however, to select a property that is not in the core of those urban centers, as it will likely have much higher cost for acquisition and more competing workspace operators. Furthermore, activating a less developed neighborhood as an economic driver would align better with the mission of New Lab, as opposed to providing work space within areas which are already fully developed. Therefore, ideal candidate sites would • • •

be an industrial space, preferably in a former industrial district for future growth to adjacent sites; be located in proximity to existing urban centers; and be in a slightly less developed neighborhood.

To seek areas within target cities that can satisfy these measures, we used the Walk Score metric available online at www.walkscore.com. Walk Score measures the walkability of any address, by analyzing how long it takes to walk from the address to nearby amenities. To locate suitable project sites, we found areas that have former industrial background and are close to highly developed urban neighborhoods with high Walk Scores, but show low walkability, which indicates the area is not fully developed.

Design District

East Williamsburg Industrial District

Brooklyn

Seattle

Dallas

In the Walk Score maps above, green indicates high walkability and yellow indicates low walkability. As seen in the maps, East Williamsburg, Industrial District, and Design District in each of three strongest target cities all fulfill above criteria for suitable project site locations. The three neighborhoods all have relatively low walkability, but are close to highly walkable urban cores— Williamsburg, Downtown Seattle, and Downtown Dallas, respectively—and have been industrial areas in the past.

Property 154 Scott Ave 1150 Metropolitan Ave 4727 Denver Ave S 7272 W Marginal Way 1323 N Stemmons Fwy 960 Dragon St

Location Brooklyn Brooklyn Seattle Seattle Dallas Dallas

Floor Area 97,940 sf 83,600 sf 104,786 sf 98,028 sf 23,350 sf 30,000 sf

Price $24,000,000 $16,128,000 $8,650,000 $11,900,000 $3,250,000 $2,550,000

Above chart shows industrial spaces in the three neighborhoods currently on sale or that was sold recently. Price per square foot is roughly $220 for East Williamsburg, Brooklyn, $100 for Industrial District, Seattle, and $110 for Design District, Dallas.

Financial Analysis Capital Stack The capital stack is formed by and equity Sources Uses contribution in form of a loan by Equity Hard Costs 18.1 Neutrino/Macrosea, an equity Goldman Sachs 3.75 Soft Costs 5.9 contribution by BNYDC (which funds Brooklyn Navy Yard Dev. Corp. 8.75 Financing Costs 2.2 come from 2 grants), Goldman Sachs tax Neutrino II, LLC 3.5 Pre-­‐Opening Costs 1.9 equity, and finally a EB-­‐5 loan. This Debt structure is hard to replicate, because it 12.0 is not certain that additional grants will EB-­‐5 Lender be given for future developments, and that projects outside Navy Yard will be 28.0 Total Uses 28.0 developed in historic preservation sites Total Capitalization or have other tax incentive structures. For the projects inside Navy Yard we will consider a similar tax credit.

Income Assumptions We reconstructed the income statement using the assumptions provided by New Lab. In summary, the projected annual income at stabilization is $5,142,211, equivalent for $ 61PSF if we consider the gross building area of 84,000 SF. Our analysis shows that the biggest sources of income are the private studios and flex membership. In terms of upside, the event space presents the most potential. We assumed that the event space was lease 100 over 365 days in a year, accounting for a 27% occupancy. Any increment in this number will reflect direct into the total income at stabilization.

INCOME ASSUMPTIONS Area

Event Price

Event S pace

6,174 S F

7k to 10k

Private S tudios Opern Private S tudios Cafe Kitchen Fab L ab

Area 32,602 S F 6,226 S F 600 S F 6,834 S F

Annual R ent $35 $35 $35

Area Conference R oom

2,014 S F

Coworking

Units 128 desks Units

Flex S pace

60 desks

Avera price per Ave. Price Events per event per S F Year $8,500 $1.38 100 CAM $5 $5

Ave. Conference # Conference Room S ize Rooms 200 S F 10.07 Month Price $450 Membership Price 10k to 50k

Average membership 30,000

Rent per hour $50

Weekly Hours 40

Occupancy %

Total Income

27%

$232,877

95% 95% 95%

$1,238,876 $236,588 $19,950 $0

67%

$1,047,280

95%

$656,640

95%

$1,710,000

Income at S tabilization Total per Area

New Lab Cash Flow and Returns

$5,142,211 $61 per S F

Analyzing the cash flow provided by New Lab we arrived to 2 main conclusions. First, the development yield over the total investment is close to 7.5%, and in order to the investment to make sense the exit caprate should experience at least a 25% compression, which means an a 6% exit caprate. The second conclusion is that in order for this business model to work without the support of government grants, it is required considerable low ground leases or its equivalent in purchase price. In the cash flow the average rent for the first 5 years is $ 4.8 per gross building area.

2013 2014 2015 2016 2017 2018 93,733 111,799 114,491 3,518,589 4,287,672 5,046,151 Income Growth % 21.9% 17.7% OPERATING EXPENSES Beta Expenses (88,012) (107,255) (109,615) Management Fee (175,929) (214,384) (252,308) % of Total Income 5.0% 5.0% 5.0% Staffing (172,000) (814,080) (1,254,722) (1,203,410) (1,227,478) % of Total Income 35.7% 28.1% 24.3% Overhead Rent to BNY -­‐ -­‐ -­‐ (250,000) (350,000) (350,000) Rent PSF 3.0 4.2 4.2 Total Overhead -­‐ (96,000) (148,320) (1,229,357) (1,393,550) (1,470,714) % of Total Income 35% 33% 29% Overhead Growth 13.4% 5.5% EXPENSES TOTAL (88,012) (375,255) (1,072,015) (2,660,008) (2,811,344) (2,950,500)

2019 2020 5,234,469 5,391,504 3.7% 3.0%

(450,000) 5.4 (1,613,336) 31% 9.7% (3,126,672)

(600,000) 7.1 (1,797,376) 33% 11.4% (3,344,019)

NOI AFTER R ESERVE Development Yield Operating R eserve NOI AFTER R ESERVE Debt S ervice CF BEFORE S TARTUP ALLOCATIONS Operating Deficit R eserve CF BEFORE S TARTUP ALLOCATIONS

INCOME TOTAL

5,721 (263,456) (957,524) 858,581 -­‐0.94% -­‐3.42% 3.07% (30,020) (85,761) (192,801) 5,721 (293,476) (1,043,285) 665,780 (570,000) 5,721 (293,476) (1,043,285) 95,780 -­‐ 293,476 1,043,285 -­‐ 5,721 -­‐ -­‐ 95,780 0

PROPERTY L EVEL -­‐ L EVERED

Investment Tax Equity CFAD Net R esidual Value Debt LEVERED CF LEVERED IRR EQUITY MULTIPLE

1

(261,308) (269,575) 5.0% 5.0% (1,252,028) (1,277,068) 23.9% 23.7%

1,476,328 5.28% (196,908) 1,279,420 (570,000) 709,420 -­‐ 709,420

2,095,651 7.49% (207,240) 1,888,411 (570,000) 1,318,411 -­‐ 1,318,411

2,107,797 7.53% (214,101) 1,893,696 (570,000) 1,323,696 -­‐ 1,323,696

2,047,485 7.32% (219,522) 1,827,963 (570,000) 1,257,963 -­‐ 1,257,963

2

3

4

5

709,420 -­‐ -­‐ 709,420

1,318,411 -­‐ -­‐ 1,318,411

1,323,696 -­‐ -­‐ 1,323,696

1,257,963 33,589,059 (12,000,000) 22,847,022

(27,983,446) 3,750,000 95,780 -­‐ 12,000,000 -­‐ (12,233,446) 95,780 17.64% 2.15

Considering an exit caprate of 6%, the levered IRR for Newlab will be 17.64%. For this calculation we consider an equity contribution of $16, equal to the sum of Brooklyn Navy Yard Development Corp. ($8.75M) plus the capital provided by Neutrino structured as a loan ($3.5M). Clearly, the returns depend on the exit caprate as showed in the following table.

Exit Caprate Levered IRR Equirty Mult.

4% 5% 6% 7% 8% 9% 30.0% 23.2% 17.6% 12.9% 8.6% 4.7% 3.52 2.70 2.15 1.76 1.46 1.23

New Industrial Space Project The new industrial space project contemplates the construction of a 256,000 SF of new shared industrial space. In the order to build the model we used the same assumptions of the cash flow provided by Newlab.

In terms of capital structure, we considered a total equity contribution $ 26.3 million, corresponding for a 25% of the total investment.

The project is levered 75% and considers an interest rate of 5.0%.

The use of capital is split between renovation costs (hard and soft), pre-­‐operating expenses, closing costs, financing costs, and purchase price.

0 INVESTMENT Investment

1

2

3

4

5

6

7

(118,188,026)

INCOME Net Income PSF % S tabilization Net Income

-­‐

62.93 64.69 66.50 68.37 70.28 72.25 74.27 50% 60% 70% 80% 90% 95% 95% 8,055,151 9,936,834 11,917,576 14,001,449 16,192,676 17,570,853 18,062,837

EXPENSES Ground L ease Management Fee Staffing Over Head Total Expenses

-­‐ -­‐ -­‐ -­‐

-­‐ (402,758) (3,740,886) (1,852,685) (5,996,328)

-­‐ (496,842) (3,815,704) (2,285,472) (6,598,017)

-­‐ (595,879) (3,892,018) (2,741,042) (7,228,939)

-­‐ (700,072) (3,969,858) (3,220,333) (7,890,264)

-­‐ (809,634) (4,049,255) (3,724,316) (8,583,205)

-­‐ (878,543) (4,130,240) (4,041,296) (9,050,079)

-­‐ (903,142) (4,212,845) (4,154,452) (9,270,439)

3,338,817 33.60% 2.83%

4,688,637 39.34% 3.97%

6,111,185 43.65% 5.17%

7,609,472 46.99% 6.44%

8,520,774 48.49% 7.21%

8,792,397 48.68% 7.44%

61.22

NOI % of Net Income Dev. Yield

-­‐

2,058,823 25.56% 1.74%

CapEx RESIDUAL/EXIT Residual/Exit

-­‐

(322,206) (397,473) (476,703) (560,058) (647,707) (702,834) (722,513)

CFBD

(118,188,026) 1,736,616 2,941,343 4,211,934 5,551,127 6,961,765 7,817,940 154,738,526

Unlevered IRR Equity Multiple

-­‐

Levered IRR Equity Multiple

-­‐

-­‐

-­‐

-­‐

146,668,642

7.03% 1.56

DSCR CFAD

-­‐

0.46

0.75

1.06

1.38

1.72

1.92

1.98

(19,307,006) (2,695,434) (1,490,708) (220,117) 1,119,076 2,529,714 3,385,889 61,665,456 17.60% 2.90

The property level returns shown above assume a purchase price of $150 per gross built area (which will be equivalent to a lease of $8 per gross built area) and an exit caprate of 6%. This 2 assumptions significantly impact the returns, which is shown in the following sensitivity analysis.

Purchase Price ($PSF)

Property Level IRR vs Exit Caprate and Purchase Price.

17.60% 100 150 200 250 300

4% 36.6% 30.8% 25.7% 21.1% 16.8%

5% 30.2% 23.9% 18.3% 13.0% 7.8%

Exit Caprate 6% 24.5% 17.6% 11.2% 4.7% -­‐2.1%

7% 19.2% 11.4% 3.7% -­‐5.0% -­‐16.5%

8% 13.9% 4.8% -­‐5.4% -­‐20.9% # ¡NUM!

9% 8.5% -­‐2.9% -­‐20.4% # ¡NUM! # ¡NUM!

Regarding these two variables, the purchase price (or its leasing equivalent) is obviously know before purchasing. The bigger risk will be how the market, specifically the institutional investors, will underwrite this new asset type. This will be reflected in the exit caprate. For instance an industrial building in Sunset Park Brooklyn was sold at cap rate 4.32%. A similar caprate will allow New Lab to pay almost $200 PSF plus the $300 PSF renovations, and still achieve a property level levered IRR of almost 20%.

Residential Co-­‐living space.

Assumptions for the residential cash flow are shown to the rights.

The rents per square foot are higher that the in the industrial project (79 vs. 61 $PDF). The renovation costs are also higher (322 vs. 300 $PSF), but in a smaller proportion than the rents. This improves the returns, and thus, allows to pay higher prices for the buildings. In terms of exit value, residential caprate are between 4 and 5% in Brooklyn, but we are not sure if this rates con be exported to Navy Yards.

Following the cash flow and a sensitivity analysis of IRR vs purchase price and exit caprate.

Gross Area Efficiency Net Area

Net Income OpEx Fixed Ground L ease Overhead Management Fee CapEx Reserve Investment Hard Cost Soft Cost Pre-­‐Opening Operations Purchase Closing Cost Residual/Exit Exit Y ear Exit Caprate Closing Cost Capital S tack/Debt Mortgage + Construction L oan Interest R ate Equity Tax Equity

75,000 S F 80% 60,000 S F

$79.20 per S F $5.00 per S F $0.00 per S F 25% 5% 5% $215 per S F $85 per S F $22 per S F $200 per S F 3% 7 6.00% 3%

Annual Growth 2.0% Annual Growth 2.0% 4.0% of net income of net income of net income

of Purchase Price

of S elling Price

75% 29,717,686.61 5.0% 25% 9,905,895.54 3,000,000 3,000,000

0 INVESTMENT Hard Cost Soft Cost Pre-­‐Opening Operations Purchase Closing Cost Investment

1

2

3

4

5

6

7

(16,124,595) (6,375,000) (1,673,988) (15,000,000) (450,000) (39,623,582)

INCOME Net Income PSF % S tabilization Net Income

-­‐

80.78 82.40 84.05 85.73 87.44 89.19 90.98 50% 60% 70% 80% 90% 90% 90% 2,423,520 2,966,388 3,530,002 4,114,974 4,721,933 4,816,371 4,912,699

EXPENSES Ground L ease Management Fee Staffing Over Head Total Expenses

-­‐ -­‐ -­‐ -­‐

-­‐ (121,176) (306,000) (484,704) (911,880)

-­‐ (148,319) (312,120) (593,278) (1,053,717)

-­‐ (176,500) (318,362) (706,000) (1,200,863)

-­‐ (205,749) (324,730) (822,995) (1,353,473)

-­‐ (236,097) (331,224) (944,387) (1,511,707)

-­‐ (240,819) (337,849) (963,274) (1,541,942)

-­‐ (245,635) (344,606) (982,540) (1,572,780)

1,912,671 2,329,139 64.48% 65.98% 4.83% 5.88%

2,761,501 67.11% 6.97%

3,210,225 67.99% 8.10%

3,274,430 67.99% 8.26%

3,339,918 67.99% 8.43%

79.20

NOI % of Net Income Dev. Yield

-­‐

1,511,640 62.37% 3.82%

CapEx RESIDUAL/EXIT Residual/Exit

-­‐

(121,176) (148,319) (176,500) (205,749) (236,097) (240,819) (245,635)

CFBD

(39,623,582) 1,390,464 1,764,352 2,152,639 2,555,752 2,974,129 3,033,611 58,169,539

-­‐

Unlevered IRR Equity Multiple

-­‐

-­‐

-­‐

-­‐

-­‐

55,075,255

9.94% 1.82

DSCR

1.02

CFAD

1.29 1.57

1.86

2.16

2.20

2.25

(9,905,896) (95,420) 278,468 666,755 1,069,868 1,488,244 1,547,727 26,965,968

Levered IRR Equity Multiple

19.53% 3.20

Rent ($PSF)

Property Level IRR vs Exit Caprate and Purchase Price.

29.13% 100.0 150.0 200.0 250.0 300.0

4% 47.7% 41.5% 36.4% 31.8% 27.8%

5% 42.0% 35.6% 30.1% 25.2% 20.7%

Exit Caprate 6% 37.3% 30.5% 24.6% 19.2% 14.1%

7% 33.1% 25.9% 19.5% 13.4% 7.4%

8% 29.2% 21.5% 14.4% 7.3% -­‐0.3%

9% 25.6% 17.2% 9.1% 0.3% -­‐11.1%

Proposed Corporative Structure The current structure is quite particular. The developer Macrosea, participates in the deal in different levels; as the manager with a commission fee of 5% over income, as an equity partner structured as a loan, and also in the construction company. In order to create a more scalable structure, we propose a more traditional GP/LP structure, in which Macrosea is the GP and also owns a subsidiary company that manages the asset. Each Newlab project could be structures as SVP, and in a second phase sell the SVPs to a REIT, in which Macrosea will also maintain some kind of interest. This is shown in the following diagrams.