Back to School: Real Estate Development of Off-Campus Student Housing Harvard Case Solution & Analysis

Back to School: Real Estate Development of Off-Campus Student Housing Case Solution

Merits of using current approach

Following are the merits:

  1. The time value of the money is a partial adjust. In this approach, the property cash flow and the net income are estimated to level they can reach upon the completion of projects, which account for time to build.
  2. The method is including the financing cost into analysis.
  3. The last merit is that this yield on cost approach is simple one.

Deficiencies of using current approach

Following are the deficiencies:

  1. The yield of cash flow is calculated on the basis of cost. It will be appropriate to the comparison of the value of property with the cash flow. In this way, the assumption of the analysis is that the value of the project will equal to the completion cost.
  2. Most of the costs like financing cost and construction cost are not adjusted according to the time when they will occur.
  3. This method overstates the staring cash flow yield related to the property completion.
  4. The systematic risk and rate of return on the equity related to the project is also not included.
  5. Develop a pro forma for the completed apartment complex and estimate its value at completion. Justify any additional assumptions you must make to complete your analysis.

Pro-Forma

       
Month12345
Revenue0.050.10.150.20.25
Gross rental income428,400.00429,471.00430,544.68431,621.04432,700.09433,781.84
Parking income17,550.0017,593.8817,637.8617,681.9517,726.1617,770.47
Vacancy loss (2%)-8,919.00-8,941.30-8,963.65-8,986.06-9,008.53-9,031.05
Credit loss (1%)-4,459.50-4,470.65-4,481.83-4,493.03-4,504.26-4,515.52
Total income432,571.50433,652.93434,737.06435,823.90436,913.46438,005.75
Expenses
Real estate tax86,725.2586,942.0687,159.4287,377.3287,595.7687,814.75
Common area electric3,500.003,508.753,517.523,526.323,535.133,543.97
Common area gas2,000.002,005.002,010.012,015.042,020.082,025.13
Common area cleaning2,600.002,606.502,613.022,619.552,626.102,632.66
Security system860.00862.15864.31866.47868.63870.80
Landscaping maintenance1,800.001,804.501,809.011,813.531,818.071,822.61
Landscaping irrigation696.99698.73700.48702.23703.99705.75
Exterminating600.00601.50603.00604.51606.02607.54
Snow removal3,000.003,007.503,015.023,022.563,030.113,037.69
Garbage service2,400.002,406.002,412.022,418.052,424.092,430.15
HVAC service contract2,100.002,105.252,110.512,115.792,121.082,126.38
General maintenance3,000.003,007.503,015.023,022.563,030.113,037.69
Unit turnover cleaning7,500.007,518.757,537.557,556.397,575.287,594.22
Insurance10,000.0010,025.0010,050.0610,075.1910,100.3810,125.63
Management fee34,605.7234,692.2334,778.9634,865.9134,953.0835,040.46
Total expenses161,387.96161,791.43162,195.91162,601.40163,007.90163,415.42
Net operating Incone271,183.54271,861.50272,541.15273,222.51273,905.56274,590.33
CapEx54236.70854372.2997754508.230554644.501154781.11254918.06513

 

Month678910
Revenue0.30.350.40.450.5
Gross rental income434,866.30435,953.46437,043.35438,135.95439,231.29
Parking income17,814.9017,859.4417,904.0917,948.8517,993.72
Vacancy loss (2%)-9,053.62-9,076.26-9,098.95-9,121.70-9,144.50
Credit loss (1%)-4,526.81-4,538.13-4,549.47-4,560.85-4,572.25
Total income439,100.76440,198.51441,299.01442,402.26443,508.26
Expenses
Real estate tax88,034.2988,254.3788,475.0188,696.2088,917.94
Common area electric3,552.833,561.713,570.623,579.543,588.49
Common area gas2,030.192,035.262,040.352,045.452,050.57
Common area cleaning2,639.242,645.842,652.462,659.092,665.74
Security system872.98875.16877.35879.54881.74
Landscaping maintenance1,827.171,831.741,836.321,840.911,845.51
Landscaping irrigation707.51709.28711.05712.83714.61
Exterminating609.06610.58612.11613.64615.17
Snow removal3,045.283,052.903,060.533,068.183,075.85
Garbage service2,436.232,442.322,448.422,454.542,460.68
HVAC service contract2,131.702,137.032,142.372,147.732,153.09
General maintenance3,045.283,052.903,060.533,068.183,075.85
Unit turnover cleaning7,613.217,632.247,651.327,670.457,689.62
Insurance10,150.9410,176.3210,201.7610,227.2610,252.83
Management fee35,128.0635,215.8835,303.9235,392.1835,480.66
Total expenses163,823.96164,233.52164,644.10165,055.71165,468.35
Net operating Incone275,276.80275,964.99276,654.91277,346.54278,039.91
CapEx55055.3602955192.99955330.98155469.30955607.9819
Month1112131415
Revenue0.550.60.650.70.75
Gross rental income440,329.37441,430.20442,533.77443,640.11444,749.21
Parking income18,038.7018,083.8018,129.0118,174.3318,219.77
Vacancy loss (2%)-9,167.36-9,190.28-9,213.26-9,236.29-9,259.38
Credit loss (1%)-4,583.68-4,595.14-4,606.63-4,618.14-4,629.69
Total income444,617.03445,728.58446,842.90447,960.00449,079.90
Expenses
Real estate tax89,140.2389,363.0889,586.4989,810.4690,034.98
Common area electric3,597.463,606.463,615.473,624.513,633.57
Common area gas2,055.692,060.832,065.982,071.152,076.33
Common area cleaning2,672.402,679.082,685.782,692.492,699.22
Security system883.95886.16888.37890.59892.82
Landscaping maintenance1,850.121,854.751,859.391,864.031,868.69
Landscaping irrigation716.40718.19719.99721.79723.59
Exterminating616.71618.25619.80621.34622.90
Snow removal3,083.543,091.253,098.983,106.723,114.49
Garbage service2,466.832,473.002,479.182,485.382,491.59
HVAC service contract2,158.482,163.872,169.282,174.712,180.14
General maintenance3,083.543,091.253,098.983,106.723,114.49
Unit turnover cleaning7,708.857,728.127,747.447,766.817,786.23
Insurance10,278.4610,304.1610,329.9210,355.7410,381.63
Management fee35,569.3635,658.2935,747.4335,836.8035,926.39
Total expenses165,882.02166,296.73166,712.47167,129.25167,547.08
Net operating Incone278,735.01279,431.85280,130.43280,830.75281,532.83
CapEx55747.001955886.369456026.08556166.15156306.566
Month1617181920
Revenue0.80.850.90.950
Gross rental income445,861.08446,975.73448,093.17449,213.40450,336.44
Parking income18,265.3218,310.9818,356.7618,402.6518,448.66
Vacancy loss (2%)-9,282.53-9,305.73-9,329.00-9,352.32-9,375.70
Credit loss (1%)-4,641.26-4,652.87-4,664.50-4,676.16-4,687.85
Total income450,202.60451,328.11452,456.43453,587.57454,721.54
Expenses
Real estate tax90,260.0790,485.7290,711.9390,938.7191,166.06
Common area electric3,642.663,651.763,660.893,670.043,679.22
Common area gas2,081.522,086.722,091.942,097.172,102.41
Common area cleaning2,705.972,712.742,719.522,726.322,733.13
Security system895.05897.29899.53901.78904.04
Landscaping maintenance1,873.371,878.051,882.741,887.451,892.17
Landscaping irrigation725.40727.21729.03730.85732.68
Exterminating624.46626.02627.58629.15630.72
Snow removal3,122.283,130.083,137.913,145.753,153.62
Garbage service2,497.822,504.072,510.332,516.602,522.89
HVAC service contract2,185.592,191.062,196.542,202.032,207.53
General maintenance3,122.283,130.083,137.913,145.753,153.62
Unit turnover cleaning7,805.697,825.217,844.777,864.387,884.04
Insurance10,407.5910,433.6110,459.6910,485.8410,512.06
Management fee36,016.2136,106.2536,196.5136,287.0136,377.72
Total expenses167,965.94168,385.86168,806.82169,228.84169,651.91
Net operating Incone282,236.66282,942.25283,649.61284,358.73285,069.63
CapEx56447.33256588.450656729.92256871.747

 

  1. Estimate the net present value (NPV) of the development project as a function of the cost of land. Assume that you will always pay the soft costs and that you will definitely make the draws on the construction loan that you calculated in Question 3. Further assume that the construction loan itself was zero NPV to the lender and that the risk-free rate is 3%. How much can you pay for the land so that the development is zero NPV? What internal rate of return (IRR) will a developer achieve with a zero NPV investment into this development project? Justify any additional assumptions you must make to complete your analysis.

NPV and IRR

CapEx20%
Growth annual3.000%Monthly growth0.25%
Exit Cap6.50%
Return of hosuing5.60%
Hard cost$2,576,550
Soft cost$83,737.88
Interest rate6%
LTV4,281,934
Total cost
NPV$(689,447.56)
IRR-5%

 

  1. In light of your previous calculations (and any additional qualitative reasoning), describe whether or not you believe that Slater and Lenard will be able to earn an appropriate rate of return (or more) by pursuing this project.

Recommendations

The NPV is negative. So it’s mean that the lower the rate of the expenses the NPV will stay negative. I think this is even less likely because having a luxurious residence means more maintenance. Maintenance costs are around 45% of the total profits, which is significant. There could also be a large difference between the assumption and reality in terms of rates, which are the main causes for cash flow changes. This means that they will need an extra 10 years to make up for the 45% losses in profit, if 10 years of operation generates an IRR of -5%..............

 

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