GRAYBAR SYNDICATION CASE Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

GRAYBAR SYNDICATION CASE Solution

What are the key factors to consider when analyzing the rental income from this property? How would you evaluate operations?

The important factors to consider when analyzing the rental income from this property is the overall due diligence of this investment which could provide the internal rate of return from investing in the Real Estate Syndication business and the net present value of the business. It can be seen that previously the location of the business was the key concern in evaluating the investment. In the given case the building is located at the most favorable location which can help the business in getting more return.

In addition to this, the risk related to the natural disaster is also less because of its prime location which could not create problems for the company. Moreover as described in the potential advantages as well as disadvantages of investing in Real Estate Syndication business, the other very important point to consider is the issues related to the change in government policies that could negatively impact the rental income from this property.

In addition to this there is one more big issue which is related with the time and management constraints with the investors which require additional cost to bear in terms of payment of salary to the professional manager which could perform the related task in managing property. This additional cost would lower the amount of overall profitability of investment in the Real Estate Syndicate business.

In the given case the owner has leased the property to a lessee who has further leased it to a sub lessee and the chain continues which conveys the fact that the term of leasing agreement is very vital in getting the rental income from the property. Moreover, there could be significant risk involve in the default of payment from the sub lessee so this should be ensured in earlier times. Moreover, it can be seen that the present revenues generated from the building are more to cover up the rent provided in the Sub lease but by looking at the economic conditions, this cannot be ensured to maintain in the future. So the other very important factor in analyzing the rental income is related to the economic conditions in the country where the building is located.

However, in the presence of tax escalator clause, the additional revenue would be protected which would result in the increased profitability from the investment in Real Estate Syndication. IRR for the given case is calculated in the exhibits.

In evaluating the operations of the Gray Bar Building it can be seen that the operating cost which included both the management as well as renting services decreases as we move from the year 1953 to the year 1955 but then it starts increasing significantly as we move to the year 1956 and 1957. As the sub lessee is required to pay the full amount of about $2,540,000 per year which includes the sufficient amount to pay to Metropolitan Life Insurance, moreover that amount should be sufficient to pay to the New York Central. In addition to this, the additional amount to defray cost related with the administrative expense.

Due to the renewal of sub lease the annual amount to be payable to Metropolitan gets reduced significantly whose benefits are shared between the associates and sub lessee. With all such renewals the sub lessee gets the benefit in the reduction of the overall rent obligation which exceeds to about $ 600,000 in years up to the year 1976 and $ 1,356,000 thereafter...................

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