Financing of Commercial Real Estate Case Study Solution
Cirano Properties, is an investment company focused on investments in commercial real estate. The founder of Cirano Properties, Stanley Cirano, built up his interest towards trading when he earned $8 million by smartly selling his shares at peak point. After leaving his employment from Ariba,on suggestion of some private wealth managers, Stanley invested $500,000 in a real estate through triple-net lease and earned a handsome return. Success in real estate investment encouraged Stanley to establish his own real estate management company,Cirano Properties, through which it acquired two more properties, through a mix of equity and debt financing.
Brookline Road Shopping Centre was acquired by Cirano in 2006, with a mixed funding of 35% equity and 65% debt. Equity holders included Cirano and some of his friends and debt was financed by Skyline Bank. A recourse loan of $6.5 million, was acquired in 2006 with an interest rate of 6.7% and a prepayment penalty clause of 3% over 5 year lockout period. Skyline is willing to continue this relationship for another 10 year period by lending 65% loan-to-value (LTV) with an interest rate of 4.375% and the same prepayment penalty clause.
However, this time, Cirano’s successful management has attracted more wealth investors, who are also willing to invest in Brookline Shopping mall through LTV finance and offered Cirano more attractive deals than Skyline Bank.
The second property was Columbus Festival Plaza, which existed in the suburban area. After few years of success in Brookline, Cirano decided to spread the focus with the addition of Columbus, which was acquired through a bidding process.With a tight debt market, Cirano decided to increase the equity share in this project and managed $8.7 million property through 45% equity and 55% debt. The non-recourse debt contained a defeasance clause, which required Ciranoto provide sufficient securities, which should cover the remaining payments in case Cirano went default unless Cirano continues with the debt payments until the end of 9 year loan period.
Financing of Commercial Real Estate Harvard Case Solution & Analysis
Cirano now needs to know what decision would give best results, regarding expansion in Loan of Brook line and refinance of Columbus. As mentioned above, Cirano has more than one option to deal each property, but financial implications of each option vary as defined in the following report.
BROOK LINE ROAD SHOPPING CENTERE
Root Cause:
After experimenting investment in US postal service’s real estate, Cirano initiated its business by purchasing Brook line Road Shopping Centre. 65% of the paid amount composed of debt borrowed through Skyline Bank for a 10 year period. The reason for involving a lender with amajor part of investment was the lack of availability of funds. Cirano gathered a total of $3.5 million funds (included $0.5 million of his own) and looked up to lenders for the remaining amount. Cirano has performed very well in managing Brookline and has raised its annual income from $754,000 in 2006 to $900,000 in 2015. The $6.5 million loan is about to expire in 3 months and Cirano has three alternate options at its disposal.
Alternates:
Skyline Bank has agreed to provide an extension ofloan for another 10 years with a nominal service charge of $20,000 but unlike the original loan, this extension would be a 65% loan-to-value; a minimum Debt Service Coverage Ratio (DSCR) of 1.25; interest rate of 4.375% and amortization over 30 years.
Another alternate is Fourth Second Bank, whose loan officer has offered Cirano with 60% LTV with an interest rate of 3.625% unless DSCR exceeds the limit of 1.3.
The third option available to Cirano is Regional Liberty Life Insurance Company. Regional Liberty has agreed to refinance Brookline with a non-recourse loan for 20-year maturity and 30-year amortization for up to 70% of LTV. Since it’s a non-recourse with higher LTV, the interest rate to be charged is also a little higher than other lenders. The interest rate of 4.625 will stand until DSCR is maintained above 1.2. A five year lock-out period is followed by prepayment penalty under the5-4-3-2-1 policy for next 5 years.
Evaluation:
Based on the given information, all three options are evaluated as follows:
Since no specific projections are available, it would be appropriate to forecast the movement of cash on the basis of historical data. Continuing the revenue growth rate of 1.8% we can evaluate that our rental income in 2016 from Brook line would be around $1.6 million leading to projected cash flow of $0.911 million. To facilitate Loan-To-Value, we have used ending investment balance of around $3 million as our project value at the beginning of 2016.
Our first option of lenders, who is also our existing creditor, has agreed to compose a new and similar loan plan with nominal fees of $20,000. Imposing an assumed constant discount rate of 12% throughout the 10-year loan period and an average tax rate of 9% and with the incorporation of deal factors,we have evaluated that with a refinance of $1.9 million the Net Present Value (NPV), based on 10 year loan period, would be $0.9 million. And that does not justify the investment......................
This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.
Related Case Solutions & Analyses:
J. C. Penney: Reinventing Fair and Square Deals B
Steven Carpenter at Cake Financial
The Wright Brothers and Their Flying Machines
Performance Pay at Safelite Auto Glass (B)
Netflix Inc. 2011
Saskferco products Inc.
GENENTECH-CAPACITY PLANNING
PEPSICO’S TURNING POINT: ESTABLISHING A ROLE IN SUSTAINABLE SOCIETY
Faith And Work: Hobby Lobby And AutoZone
Midwest Regional Hospital
