The Trouble with Lenders: Subtleties in the Debt Financing of Commercial Real Estate Harvard Case Solution & Analysis

Problem Diagnosis

The interest rates in 2015 have been at an all-time low and Stanley Cirano was considering to take advantage of this opportunity and reconsider the financing of the two core properties in his commercial real estate portfolio. Cirano properties was the general manager on two properties with private equity investments in the suburb of Chicago. The first property is the Brookline Road Shopping Center that he had acquired in 2006 and has successfully managed it through the real estate downturn and the financial crisis of 2008(Furfine, 2016).

The performance of this property was good and Cirano was considering whether he should refinance this property or sell it now to take advantage of the higher revenues and the net operating income. The second property in which, Cirano had invested is the Columbus Festival Plaza and this was acquired in 2010 in a bankruptcy auction when Cirano’s bid had been the lowest of all the bids. This property was also generating a good amount of the net operating income, however, it required a good amount of capital improvements since its acquisition in 2010(Furfine, 2016).

Each of these two properties represented different management issue and their performance had also been different with different rent roll patterns, however, there were also many common factors in both the properties. For instance, both the properties were financing in part by debt and since the first property was acquired in 2006 and the second property was acquired in 2010, therefore, Cirano has chosen the most attractive financing options of that time and chose debt financing that provided him with the lowest interest costs(Furfine, 2016).

The central problem for Cirano now is to decide whether he should refinance the debt portion of both the properties or he should sell the properties now to take advantage of the higher revenues and the net operating income. There are different debt financing alternatives available for each of the two properties, therefore, we would analyze all the financing alternatives for the two properties an also determine the valuation of both the properties based on an assumed holding period. Each of the debt financing alternatives has a fixed schedule and minimum required debt service coverage ratio (DSCR). Therefore, final recommendations would be made after analyzing all of these issues in detail.

The Trouble with Lenders Subtleties in the Debt Financing of Commercial Real Estate Harvard Case Solution & Analysis

Analysis

We begin our analysis by discussing the current performance of both the properties and then, we proceed with the further analysis.

Current Performance of Cirano Properties

The first property is the Brookline Road Shopping Center that he had acquired in 2006 and he has successfully managed it through the real estate downturn and the financial crisis of 2008. This is a newly constructed property and the location of the property is also highly attractive between the Brookline and Mundee roads. The NOI of the property has significantly grown from $754,000 to $900,000 between 2006 and 2015.

The leasing of the property to Chipotle was the major factor in the huge income growth of the property and the property performed well and came out of the 2008 financial crisis.............

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The Trouble with Lenders: Subtleties in the Debt Financing of Commercial Real Estate

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