back to school development of off-campus resedential project Case Solution
Financial Analysis:
The cost of the proposed project is same as the cost of the Juniper Vista project, it can be said that the cost of building an off campus residence in Madison is might be more than the cost to build an off campus residence in Florida. There are many factors which led to the change in cost of both projects, firstly, the project at Madison requires some additional features in terms of security and heating, weather conditions at Madison is very different from whether condition in Florida, the winters in Madison are generally a bot harsher than Florida. This might be the primary reason for the variance in cost. Furthermore, the security concerns of students at Madison are also too high and they requires close security to their valuable items, this might again is a cause of variance in the cost of both projects.
Construction cost can also be very different in Madison as compare to the construction in Florida because of natural environment, there are many hills around the construction area and a lake is also exist there as well. While the construction at Florida is very much straight forward, thus making the cost of construction of Florida irrelevant in this case. Furthermore, the projected income statement is made in current terms, it can be argued that at the time of completion of the project, the situation might be completely changed.
It is possible that the prices of real estates might be decreased at that time which can affect the amount of sales. Not only this inflation might also change the monetary figures of income statement, currently the inflation is not so high, however in the near future it is anticipated that the cost to construct a residence might increase substantially due to inflation. Little fluctuation in the costs mentioned in the income statement could easily affect the profits from the project drastically.
On the other hand the credit and vacancy loss is also appears to be low, now a days it is very usual for tenants to leave the property without settling the landlord, it can be said that assumptions to calculate credit loss seems to be very optimistic. In order to represent realistic market condition, Lenard and Slater have to update and change the figures ofcredit loss and vacancy loss. The fact that they will charge higher than any other off campus residence provider make the vacancy loss greater as the residence with higher rentals takes more time to occupy.(Kimmons, 2016)
Alternative Options:
There might be many options for Lenard and Slater regarding the investment in the real estate. Firstly, it can be said that there are many other areas in the real estate sector such as investing in the commercial shopping centers and other properties to be rent out to the domestic families for living. On the other hand it is also possible that there are many other locations where there is demand for the off campus residence will also be greater. Before making any final decision it is recommended that Lenard and Slater should have to consider the options as well.
However, it can be argued that the off campus resident is might be of more benefit for the investment because of the many factors such as profitability level and the increased demand for the living options for the students of university of Wisconsin. Currently, shortage for the resident options for the students and it is also expected that the number of students will also be increased substantially in the coming days due to increased reputation of the university and increased job opportunity. Furthermore, the students might also spends more in order to get the desired resident, given the facilities and luxuries it is highly likely that many students will occupy to get the facilities and luxuries.
On the other hand, by analyzing the income statement and back-of-the-envelope financial feasibility it can be said that the project of off campus resident for the University of Wisconsin appears to be quite profitable for the investors. However, the income statement can be based on various optimistic assumptions which may be rare to occur, it can be said that the actual results might be very different from the projected income statement. But, still the project is capable of generating healthy returns.
Financial Projections:
Apart from the property acquisition cost, the construction cost and other cost will be financed by the finance raised from the outside sources i.e. debt finance. The debt finance will result in some additional cost for Lenard and Salter such as interest cost and management fee for finding and obtaining the loan. Furthermore, both the partners have to repay the loan, the loan will be repaid from the income received from the tenants which again reduces the profitability of the project. In addition to this, if the property will be sold after ten years from the date of completion, the property will be sold for $2.5 million and the IRR of the project after ten years would be approximately seventeen percent. It can be said that the value of property will not raise as it was expected by Lenard and Slater, the primary reason for this little increase in the value of the property is debt finance which they have obtained. Amortization is expected to be twenty five percent on the site acquisition.
Assumptions:
- It is assumed that the building will be depreciated on straight line basis for twenty years from the date when the property is available for use.
- On the other hand the tax rate is also assumed to be almost thirty percent per year which is in line with the industry practices.
- The discount rate of 12% is used in calculating the NPV of the project.
BACK TO SCHOOL DEVELOPMENT OF OFF-CAMPUS RESEDENTIAL PROJECT Harvard Case Solution & Analysis
Recommendation:
As the financial projection appears to be positive but not high as they were expected by Lenard and Salter. Both the partners were expecting a substantial gain from the project, there desired profit margin will not be fulfilled if the debt level will be 75%. If they want to gain substantial returns from the investment it is recommended that they have to reduce the amount of debt. On the other hand, the current rentable space is 85%, in order to increase the returns from the off campus residential project, it is recommended that the rentable space should have to increase by five to ten percent. In conclusion, it is recommended that Lenard and Salter should have to undertake the project of off campus residential project for the students of University of Wisconsin..........................
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