Back to School: Real Estate Development of Off-Campus Student Housing Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

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

Merits of using current approach

Following are the merits:

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.
The method is including the financing cost into analysis.
The last merit is that this yield on cost approach is simple one.

Deficiencies of using current approach

Following are the deficiencies:

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.
Most of the costs like financing cost and construction cost are not adjusted according to the time when they will occur.
This method overstates the staring cash flow yield related to the property completion.
The systematic risk and rate of return on the equity related to the project is also not included.
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


Month		1	2	3	4	5
Revenue		0.05	0.1	0.15	0.2	0.25
Gross rental income	428,400.00	429,471.00	430,544.68	431,621.04	432,700.09	433,781.84
Parking income	17,550.00	17,593.88	17,637.86	17,681.95	17,726.16	17,770.47
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 income	432,571.50	433,652.93	434,737.06	435,823.90	436,913.46	438,005.75

Expenses
Real estate tax	86,725.25	86,942.06	87,159.42	87,377.32	87,595.76	87,814.75
Common area electric	3,500.00	3,508.75	3,517.52	3,526.32	3,535.13	3,543.97
Common area gas	2,000.00	2,005.00	2,010.01	2,015.04	2,020.08	2,025.13
Common area cleaning	2,600.00	2,606.50	2,613.02	2,619.55	2,626.10	2,632.66
Security system	860.00	862.15	864.31	866.47	868.63	870.80
Landscaping maintenance	1,800.00	1,804.50	1,809.01	1,813.53	1,818.07	1,822.61
Landscaping irrigation	696.99	698.73	700.48	702.23	703.99	705.75
Exterminating	600.00	601.50	603.00	604.51	606.02	607.54
Snow removal	3,000.00	3,007.50	3,015.02	3,022.56	3,030.11	3,037.69
Garbage service	2,400.00	2,406.00	2,412.02	2,418.05	2,424.09	2,430.15
HVAC service contract	2,100.00	2,105.25	2,110.51	2,115.79	2,121.08	2,126.38
General maintenance	3,000.00	3,007.50	3,015.02	3,022.56	3,030.11	3,037.69
Unit turnover cleaning	7,500.00	7,518.75	7,537.55	7,556.39	7,575.28	7,594.22
Insurance	10,000.00	10,025.00	10,050.06	10,075.19	10,100.38	10,125.63
Management fee	34,605.72	34,692.23	34,778.96	34,865.91	34,953.08	35,040.46
Total expenses	161,387.96	161,791.43	162,195.91	162,601.40	163,007.90	163,415.42

Net operating Incone	271,183.54	271,861.50	272,541.15	273,222.51	273,905.56	274,590.33
CapEx	54236.708	54372.29977	54508.2305	54644.5011	54781.112	54918.06513

Month	6	7	8	9	10
Revenue	0.3	0.35	0.4	0.45	0.5
Gross rental income	434,866.30	435,953.46	437,043.35	438,135.95	439,231.29
Parking income	17,814.90	17,859.44	17,904.09	17,948.85	17,993.72
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 income	439,100.76	440,198.51	441,299.01	442,402.26	443,508.26

Expenses
Real estate tax	88,034.29	88,254.37	88,475.01	88,696.20	88,917.94
Common area electric	3,552.83	3,561.71	3,570.62	3,579.54	3,588.49
Common area gas	2,030.19	2,035.26	2,040.35	2,045.45	2,050.57
Common area cleaning	2,639.24	2,645.84	2,652.46	2,659.09	2,665.74
Security system	872.98	875.16	877.35	879.54	881.74
Landscaping maintenance	1,827.17	1,831.74	1,836.32	1,840.91	1,845.51
Landscaping irrigation	707.51	709.28	711.05	712.83	714.61
Exterminating	609.06	610.58	612.11	613.64	615.17
Snow removal	3,045.28	3,052.90	3,060.53	3,068.18	3,075.85
Garbage service	2,436.23	2,442.32	2,448.42	2,454.54	2,460.68
HVAC service contract	2,131.70	2,137.03	2,142.37	2,147.73	2,153.09
General maintenance	3,045.28	3,052.90	3,060.53	3,068.18	3,075.85
Unit turnover cleaning	7,613.21	7,632.24	7,651.32	7,670.45	7,689.62
Insurance	10,150.94	10,176.32	10,201.76	10,227.26	10,252.83
Management fee	35,128.06	35,215.88	35,303.92	35,392.18	35,480.66
Total expenses	163,823.96	164,233.52	164,644.10	165,055.71	165,468.35

Net operating Incone	275,276.80	275,964.99	276,654.91	277,346.54	278,039.91
CapEx	55055.36029	55192.999	55330.981	55469.309	55607.9819
Month	11	12	13	14	15
Revenue	0.55	0.6	0.65	0.7	0.75
Gross rental income	440,329.37	441,430.20	442,533.77	443,640.11	444,749.21
Parking income	18,038.70	18,083.80	18,129.01	18,174.33	18,219.77
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 income	444,617.03	445,728.58	446,842.90	447,960.00	449,079.90

Expenses
Real estate tax	89,140.23	89,363.08	89,586.49	89,810.46	90,034.98
Common area electric	3,597.46	3,606.46	3,615.47	3,624.51	3,633.57
Common area gas	2,055.69	2,060.83	2,065.98	2,071.15	2,076.33
Common area cleaning	2,672.40	2,679.08	2,685.78	2,692.49	2,699.22
Security system	883.95	886.16	888.37	890.59	892.82
Landscaping maintenance	1,850.12	1,854.75	1,859.39	1,864.03	1,868.69
Landscaping irrigation	716.40	718.19	719.99	721.79	723.59
Exterminating	616.71	618.25	619.80	621.34	622.90
Snow removal	3,083.54	3,091.25	3,098.98	3,106.72	3,114.49
Garbage service	2,466.83	2,473.00	2,479.18	2,485.38	2,491.59
HVAC service contract	2,158.48	2,163.87	2,169.28	2,174.71	2,180.14
General maintenance	3,083.54	3,091.25	3,098.98	3,106.72	3,114.49
Unit turnover cleaning	7,708.85	7,728.12	7,747.44	7,766.81	7,786.23
Insurance	10,278.46	10,304.16	10,329.92	10,355.74	10,381.63
Management fee	35,569.36	35,658.29	35,747.43	35,836.80	35,926.39
Total expenses	165,882.02	166,296.73	166,712.47	167,129.25	167,547.08

Net operating Incone	278,735.01	279,431.85	280,130.43	280,830.75	281,532.83
CapEx	55747.0019	55886.3694	56026.085	56166.151	56306.566
Month	16	17	18	19	20
Revenue	0.8	0.85	0.9	0.95	0
Gross rental income	445,861.08	446,975.73	448,093.17	449,213.40	450,336.44
Parking income	18,265.32	18,310.98	18,356.76	18,402.65	18,448.66
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 income	450,202.60	451,328.11	452,456.43	453,587.57	454,721.54

Expenses
Real estate tax	90,260.07	90,485.72	90,711.93	90,938.71	91,166.06
Common area electric	3,642.66	3,651.76	3,660.89	3,670.04	3,679.22
Common area gas	2,081.52	2,086.72	2,091.94	2,097.17	2,102.41
Common area cleaning	2,705.97	2,712.74	2,719.52	2,726.32	2,733.13
Security system	895.05	897.29	899.53	901.78	904.04
Landscaping maintenance	1,873.37	1,878.05	1,882.74	1,887.45	1,892.17
Landscaping irrigation	725.40	727.21	729.03	730.85	732.68
Exterminating	624.46	626.02	627.58	629.15	630.72
Snow removal	3,122.28	3,130.08	3,137.91	3,145.75	3,153.62
Garbage service	2,497.82	2,504.07	2,510.33	2,516.60	2,522.89
HVAC service contract	2,185.59	2,191.06	2,196.54	2,202.03	2,207.53
General maintenance	3,122.28	3,130.08	3,137.91	3,145.75	3,153.62
Unit turnover cleaning	7,805.69	7,825.21	7,844.77	7,864.38	7,884.04
Insurance	10,407.59	10,433.61	10,459.69	10,485.84	10,512.06
Management fee	36,016.21	36,106.25	36,196.51	36,287.01	36,377.72
Total expenses	167,965.94	168,385.86	168,806.82	169,228.84	169,651.91

Net operating Incone	282,236.66	282,942.25	283,649.61	284,358.73	285,069.63
CapEx	56447.332	56588.4506	56729.922	56871.747

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


CapEx	20%
Growth annual	3.000%	Monthly growth	0.25%
Exit Cap	6.50%
Return of hosuing	5.60%
Hard cost	$2,576,550
Soft cost	$83,737.88
Interest rate	6%
LTV	4,281,934
Total cost
NPV	$(689,447.56)
IRR	-5%

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