Conundrum Office Towers Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Conundrum Office Towers Case Solution

1. What is the Net Operating Income of Conundrum Office Towers from Year 1 to Year 5?

In order to calculate the net operating income of the towers, all the revenues that are generated from rentals of 10,000 square meters in Sandton Central at the rate of R4, 500 per annum are calculated. In addition to this, the revenues generated from the usage of parking area available in the tower, as well as the revenues generated from advertising are added. In order to arrive at the value of effective gross revenues, the value of vacancy credit is subtracted from the potential gross income.

From the value of potential gross revenues, all the operational expenses are subtracted in order to get the value of Net Operating Income. By using the assumption for income as well as expense growth in the subsequent years, which is 3%. In this case, future projections are made for the year 1 to year 5. Management fee is the only expense that is not subjected to an annual increment for the reason that it is calculated on the basis of potential gross revenue.

Property Value in the given case is calculated as follows:

Property Value = Net Operating Income / Capitalization Rate

It can be seen that in the given case, the net operating income is calculated to be 38,150,000 and with the capitalization rate of 8%, the property value is calculated to be 476,875,000 that is calculated by using values of year 2016. The value of before tax cash flow is also calculated by subtracting the amount of interest from the net operating income. Overall calculation is summarized in the table shown below:

	2016	2017	2018	2019	2020
	Year 1	Year 2	Year 3	Year 4	Year 5

Potential Gross Revenue	45,000,000	46,350,000	47,740,500	49,172,715	50,647,896
Vacancy Allowance	(4,500,000)	(4,635,000)	(4,774,050)	(12,293,179)	(12,661,974)
Scheduled Base Rental Revenue	40,500,000	41,715,000	42,966,450	36,879,536	37,985,922
Net Parking Income	300,000	309,000	318,270	327,818	337,653
Advertising Income	150,000	154,500	159,135	163,909	168,826
Effective Gross Revenue	40,950,000	42,178,500	43,443,855	37,371,263	38,492,401

Operating Expenses (OEX)
Utilities	300,000	309,000	318,270	327,818	337,653
Advertising Expense	50,000	51,500	53,045	54,636	56,275
Repairs & Maintenance	100,000	103,000	106,090	109,273	112,551
Management Fees	2,250,000	2,317,500	2,387,025	2,458,636	2,532,395
Insurance	100,000	103,000	106,090	109,273	112,551
Total Operating Expenses	2,800,000	2,884,000	2,970,520	3,059,636	3,151,425

Net Operating Income (NOI)	38,150,000	39,294,500	40,473,335	34,311,628	35,340,977

Less: Interest	21,459,375.00	21,301,941.48	21,130,338.95	20,943,292.19	20,739,411.23
Before Tax Cash Flow	16,690,625.00	17,992,558.52	19,342,996.05	13,368,335.61	14,601,565.40

2. What is the initial debt payment structure from ADF bank from Year 1 to Year 5?

In order to calculate the debt payment structure using the initial financing option, as proposed by ADF Bank to the young real estate fund manager. The real estate fund manager owns Conundrum Office Tower, which includes the fully amortized loan of 30 years at the interest rate of 9%, the overall calculation is summarized in the below given table.

The loan to value ratio as suggested was 50%, which is quite a typical financing structure that could lead the owner to go bankrupt. The company should arrange some other source of financing for sustainability. In addition to this, the owner should engage in some kind of hedging alternatives in order to meet the challenges of repayment of the overall loan...................

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