Project Sun Devil and Project Paris: Case Study Analysis
Introduction
The case discusses the evaluation process of ‘Howard Street Capital (“HSC”)’ for its selection of one real estate case out of the two cases under consideration. The case study provides insights of analysis done by Tony lee who is at a duty of advocating Project Sun Devil with his strong observations including relevant financial forecasts like expected returns of the project. The other project that HSC is considering is “Project Paris” which is a completely different project than ‘Project sun Devil.”(Lietz, 2013)
Problem statement
In this case, the HSC requires strong financial analysis on two different real estate investment projects under consideration. The first case is ‘Project Sun Devil’ which is being advocated by Tony Lee. This project requires investment in making of a new students housing center mainly for.
‘Arizona State University (ASU)’. For advocating this investment, Tony is required to provide a strong financial analysis of the project(say potential risks included and expected return). On the other hand, one of the colleagues of Tony would be advocating Project Paris which is the investment to acquire a company named Le Meilleurin France. HSC could only invest in one of these two projects based on the comparison of the risk-return tradeoff of these projects.
Situational analysis
Executive summary for the Project Sun Devil
From the analysis, it is observed that ‘American Student Properties (ASP)’ enjoys the rights of the acquisition of a community-based housing facility for the students near ‘Arizona State University ASU’. This project is referred as ‘the Sun Devil’. The ‘Arizona State University ASU’ is considered to be the biggest public university in the U.S. which is situated in Tempe, Arizona. This property was built about eleven years ago. After several biddings and various negotiations, the ASP and HSC finally ended their negotiation came for an agreement including the terms that The investment structure would be including fifty basis-point acquiring fees to cover all of the diligence expenses without any management fees, and a waterfall on the basis of the following structures,
“Pari- passu (HSC-93.8%, ASP-6.2%), until a 12% preferred return”
“83.8% HSC, 16.2% ASP, until a 16% HSC return (no catch-up)”
“68.6% HSC, 31.2% ASP, above a 16% HSC return (no catch-up)”
The project is a community housing project that is consists of 225 units, 640 beds, and would be 4 stories building. The rooms would also include 1 to 4 bedding and bathing units with high-quality appliances and other facilities. These units would also be fully furnished. The project would also hold various other facilities like a swimming pool, volleyball court and a separate room for multimedia purposes. The location for this project is decided to be at the distance of 1.5 miles from the ASU’s main campus. The project was considered on the basis of increasing demand for student housing facilities in the town. Although by doing the market analysis it could be said that the increasing demand in the industry is an immense number of competitors as well but with the support of ASP and aim of building a quality-oriented facility and also various appealing facilities it is expected that the project would beableto appeal a great number of tenants to avail this property. Also, the pricing of these projects has been decided to be very reasonable as compared to its competitors.
Internal rate of return (IRR) analysis:
Based on the case evaluation the IRR for the Project Sun Devil is determined to be 20% after determining the annual cash flows of the project based on the information provided in the case. Whereas the IRR for Project Paris is determined to be 15%. On the basis of IRR the Project, Sun Devil seems to be a better investment opportunity for HSC with higher returns, although to obtain this return the project would have to be based on 70% debt, because of the promising 20% returns the debt could be taken. It also includes a 5% premium which is not a much high premium but the investment in the Project Sun Devil is justified.
Critical analysis
For an effective evaluation of both the projects SWOT analysis of both investment opportunities is need to be done. It will provide insights in to the strengths, weaknesses, opportunities, and threats of both investments...…
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