Back to School: Real Estate Development of Off-Campus Student Housing Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Back to School: Real Estate Development of Off-Campus Student Housing Case Solution

Critique the Back-of-the-Envelope Financial Feasibility (Exhibit 17). You should include both a discussion of what is wrong with the methodology as well as what may be wrong with the assumptions used.

Referring to the Exhibit 17 provided in the case;it discloses the results of the financial feasibility calculation of Slater and Lenard. Firstly, the net operating income of $271184 indicates that the property would generate $271184, whereas the amount that must be spent by Slater and Lenard is up to $1624084 for the site’s acquisition. The problems related to the financial feasibility are as follows:

First and foremost, Slater and Lenard didn’t stress over the significance of the time value of money concept or that it can be number of years before the first tenant moves in to the property. When no one is there to rent the property, the owner either spend his own capital or draw on the loan for construction to complete the project. They didn’t included that cost in the feasibility analysis.
Additionally, Slater and Lenard didn’t include the expense and income of the property that is more than likely change with the passage of time, because of the certain changes in inflation and real estate market, which means that the net operating income of the property would differ than what it would be in the near future.
The assumption of vacancy is low, but it does not deviate completely from the market. However, students would assess and evaluate whether the high-priced apartments would be having similar vacancy as moderately-pricedapartments. Slater and Lenard must consider whether students would be willing to pay for parking if they are close to campus.
Furthermore, the assumptions of rent is high. Even though the tenants are willing to pay higher for the luxury properties, but the ability to charge high amount is also dependent on the location. Thus, the rents are highly sensible to location, which hasn’t been determined by Slater and Lenard yet.
Slater and Lenard didn’t consider the valuation of the constructed buildings. The calculation of the financial feasibility expects that the value of building would be equivalent to the sum of cost, including: site & construction. Thus, there would be no one who risks their capital on development as the building would not create value for them.So, the value of real estate development must be higher than the cost of building.

Perform your own Back-of-the-envelope pro-forma and state whether you would invest further time in pursuing this development idea.

With the use of the various assumption; the valuation of financial feasibility is performed. The assumptions are provided below;

It is assumed that gross rental income will steadily grow at 4%.
Parking income would expected to be increased by 5%.
The vacancy loss would be 4% of total gross income in first 3 years and then decline from 3% in years 4 to 6, to 2% in years 7 to 10, because not all rooms of the apartment would be rented as soon as the building gets completed and starts operating.
The credit loss would be increased at 2.5 percent, thus providing the space for error.
The expenses are increased at 2% to make the NOI more realistic.
The growth rate is assumed to be 5% and hurdle rate is 10%.

Combining all the assumptions; the net present value of the project would be $4917498.096.

Prepare a pro-forma analysis of this project under the following assumption.

Taking under consideration the provided assumptions; the NPV of the project is $5153361, while the maximum amount that can be spent on the land purchase to achieve an IRR of 20% is $ -1300000. Additionally, the IRR of the project, if the land purchase cost estimate of $1,100,000 is correct is 25%. Furthermore, the maximum amount of loan using 1.25 DSCR is $271183, while the maximum amount of loan using 75% LTV is $162710....................

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Back to School: Real Estate Development of Off-Campus Student Housing Harvard Case Solution & Analysis