Canyon Johnson Urban Fund Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Investment Memorandum

The Canyon Johnson Urban Fund (CJUF) is a partnership between the Johnson Development Corporation and the Canyon Capital Realty Advisors. The fund’s real estate operations achieve returns in excess of 25%. Currently, CJUF has raised $271.7 million in order to make investments in urban real estate, and is considering two projects in Hollywood, CA.

The first project is located in Hollywood and Highland, and is proposed by a reputable developer who wants to restore Hollywood to the glory it had in the past. This project includes a 640,000 square-foot retail complex, a Kodak Theatre and a hotel. The second project is a multi-use development on the Sunset and Vine. This property has a bad history of several failed development attempts in the past, thus making future high prices unacceptable to the community.

The capital raised by the company with a position to facilitate investments up to $1 billion in real estate development and revitalization in the U.S. metropolitan markets, the most suitable project of the company will be invested into. CJUF only invests in the areas with a minimum of 40% minority population and a density of at least 250,000 people. Furthermore, in order to qualify there must be excess demand for retail and housing, the community must support the project, the developer must contribute at least 15% of the equity, there must be an exit strategy and the zoning risks must not be entitled to CJUF.

Both the projects typically meet all of the criteria, except that the Sunset and Vine does not meet the criteria that emphasize the explicit support of the community. Due to the conflict of the community and previous developers, the community is highly critical with new development projects in Sunset and Vine. In addition to that, it is perceived that high rental prices might also be unacceptable to the community in this area.

Although the inner city markets in Hollywood generate high returns, however, they are highly risky, and there are a number of obstacles to low success rates here. The economic potential of these markets are difficult to determine as the markets are thin. Besides that, these markets are also affected highly by the political tensions in these areas. The low income generation in these areas has led to failures of retail development attempts in the past. In addition to that, the premier developer usually mismanages these projects by failing to hedge the market specific risks.

The CJUF has selected California for making its investments because the market fundamentals of California are attractive. The market meets the criteria of the fund as the demand of the market has exceeded heavily its supply. The Hollywood area is popular and interesting for the developers. The occupancy level of the retail market is 98% and the rents increase by 20% per year. In addition to this, the area meets the basic criteria of CJUF, as it has 55% of minority population and is denser than the other parts of the city.

The first project to be considered by the fund is the Sunset and Vine project, which includes the construction of 300 apartments, 87,000 square feet of retail space, 833 parking spots, and 20 signage opportunities. The developer will provide for the 15% equity financing of the project, and the design of the project is likely to reflect “Old Hollywood”.

Canyon Johnson Urban Fund Case Solution

However, the previous developments in the area have failed substantially, and therefore, the community has become critical to appreciation of the projects at the property. Thus, it is not likely to accept high rental prices associated with the project. The project is likely to generate an NPV of $10 million and IRR of 116% for the developer, whereas for CJUF, the NPV is ($9 million) and the IRR is only 8%, which is much less than the fund’s rate of returns of 25%.

The Second project in which the fund is interested in is the Hollywood and Highland project, which is one of the most strategically located sites. It includes the construction of 550,000 square foot of hotel, 640,000 square feet of retail space, a Kodak theatre, and several parking spots, pouring rights to Pepsi and signage opportunities. The developer will provide for the 15% equity financing of the project, and the design of the project is likely to reflect “42^nd Street in New York City”. .............

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