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

 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

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

 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%

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%..............

This is just a sample partical work. Please place the order on the website to get your own originally done case solution.