Conundrum Office Towers Harvard Case Solution & Analysis

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...................

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

Share This


Save Up To




Register now and save up to 30%.