Bonnie Road Harvard Case Solution & Analysis

Background:

The case was related to a person named Victor Alexander, who was a resident of Argentina, but then he migrated to Los Angeles, USA and completed his graduation from the Yale University in 1997. Then he moved to NYC as a worker in Goldman Sachs and joined HBS for his post-graduation in 2004.

After completing his graduation, he was recruited in research associate at his university and then positioned as AT Reality with the core focus on merger and acquisition. In 2012, he considered himself experienced enough and ready for making his own real estate investment equity.

For this purpose, he tried to convince his friends to put forward up to $200,000 each in addition to his own $200,000 as they were agreed to obtain and to invest in one or two troubled and disturbed properties. Alexander was more focused on the acquisition of warehouse properties, since it has a relatively high and strong historical return background and was small in size.

On the other hand, Mr. Alexander also has some sort of relevant experience. He explained to his friends about his area of concern and his goal towards earning a reasonable return on his investment plus appreciation in the value invested.

Overview of Bonnie Road:

Bonnie Road was manufactured in 2000 in Distribution Center in Somerset County, New Jersey, having a total of 160,000 square foot area, multi-tenant industrial building with both functional and divisible warehouse distribution space, built on 10.55 acres. The building offered 21 dock heights and 3 drive-in column spacing and loading doors. Mr. Alexander liked this building because of its interior and exterior structure, which was made up of glass, aluminum and was shaped as a high level curb and had an appealing look in front of the office of tenants. The building also had a traditional warehouse look.

On the brighter side, the building was built with multiple energy saving features and water saving features. On the basis of those outstanding features, it was believed that the building would be helpful in reducing the operating cost of the building and will also be meaningful for marketing purposes.

Problem Statement:

The New Jersey real estate market was continuously receiving aftershocks of the economic recessions and was trying to recover from it, for this reason, the Garden State Bank had offered to sell this building with an offered price tag of $9.7 million, and wanted a quick sale in the next 45 days-time period. Mr. Alexander had already convinced his friends and already managed to collect $200,000 from each of his 10 friends.

Mr. Alexander was concerned about the qualitative as well as the quantitative side of his investment estimates and was also concerned about the riskiness of his investment in real estate, as the real estate market in the city was not so good considering the economic conditions. Mr. Alexander wished to earn at least minimum of 10% IRR, because he already knew the economic condition of the city and he was worried about the type of property in which he was investing and the accuracy of his estimations.

Evaluation:

After evaluating and conducting a careful analysis of the proposed investment plan, we have seen that if Mr. Alexander wants to hold his investment in the property like Bonnie Road then he should generate good return after deducting tax. At the assumed discount rate of 15%, he would be able to get around $1.63 million on his initial $1.94 million investment. On the other hand, the proposed investment will generate around 43% IRR after tax, which is again a favorable result from the point of view of Mr. Alexander, who wanted to earn at least 10% IRR after tax.

On the other hand, the need for a 5 % increase in the annual return after tax cash flows would not be fulfilled as the investment is expected to generate an average of 4.5% increase in the annual return after tax cash flows, which is far below the required increase in the annual after tax cash flows.

Advantages of the Bonnie Road Property:

There were so many advantages in investing in a real estate like Bonnies Road. The building was situated in the prime location where the people of the United States can enjoy easy access. It was situated between Philadelphia metropolitan regions and New York City, along with Boston-to-Washington, D.C......................

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