Canyon Johnson Urban Fund Harvard Case Solution & Analysis

Canyon Johnson Urban Fund

Does Each Project Meet the Filtering Criteria Specified

The Canyon Johnson Urban Fund raised $271.7 million in order to make investments in urban real estate and the company is considering two locations in Los Angeles.The first location is Hollywood Highland and second location is Sunset and Vine.

The management of the company has set certain requirements in order to evaluate the project before proceeding and if the desired project meets these underwriting requirements, then the management will evaluate the project for undertaking.

According to these underwriting requirements, it is expected that the company will only invest in the areas with a population of at least 250,000 individuals with percentage of 40% of minorities. Moreover, there must be excess demand for retail and housing, the developer must contribute at least 15% of the equity, there must be an exit strategy with no zoning risks and there should be an explicit support from the society.

It is expected that both projects are qualifying the underwriting requirements of the company as there is sufficient demand that exists with in society support and required level of population has significant level of minorities as well.However, the Sunset and Vine does not meet the requirement except the support from the community as there is a conflict between the developers and society due to greater increase of rentals and property prices, therefore Sunset and Vine also has certain drawbacks. In addition to this, difficult political environment could also create further hurdles for the company however, this issue could be resolved through negotiation, therefore both projects are approximately qualifying for company’s filtering requirements.

Projected Development Cost and Subsequent Financial Performance of Each of the Two Projects and the Value of Each Project at the Anticipated Time of Sale

It is expected that the proposed investment is from the reputable developer and both these projects include a 623000 square foot retail complex, a Theatre, a Hotel, Apartments and parking places, therefore there are multi sources of revenues under both these projects.

The capital of $271.7 million is raised by the company in order to facilitate investment up to $1 billion in real estate development in the metropolitan markets of US. It is expected that first project, Sunset and Vine, includes the construction of retail space of 87000 square foot, 833 parking places, 300 apartments, and many signage facilities that will generate greater return as compared to the project cost.

It is expected that in the project $115 million will incur and the company will finance the project through $37.1 million and against this investment, the company will achieve 85% equity stake in the project and remaining 15% equity stake will owned by developer.

The project is generating positive net present value of $64 million, which is significantly high. On the other hand, the project is generating 40% of internal rate return with respect to the company which is significantly higher than the company’s hurdle rate, therefore it could be value adding project for the company. As calculations are based on certain assumptions, therefore it is also possible that on different assumptions and different cost of capital, the project could generate positive net present value and higher internal rate of return than present internal rate of return.........................

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