Millegan Creek Apartments Case Study Solution
Recommendations
After the deep analysis of the overall competition and real estate market in Austin, as well the analysis of JPI’s ability to fulfill its debt obligations under various scenarios, the bank is recommended to provide loan to JPI for its apartment project. The project is expected to be quite successful on the basis of location, pricing and products offered. Along with it, the company is capable of generating positive cash flows except in one sensitivity scenario. Austin is also a great opportunity for real estate business due to increase in employment rate and population growth. On the basis of these factors the bank is recommended to grant loan to JPI.
However,the bank should set terms and conditions of the project which benefit the bank and the company both and reduces the default risk. It should set an average interest rate of 8%, as the company would be quite profitable even at the higher interest rates. It should set an average interest coverage ratio in between 1.25 and 1.1.
Conclusion
Indeed, the project would be a great success for the Bank as it is a large fiancé opportunity for the Bank on the basis of the increasing Austin employment and population growth, the viability of the location and the presence of giant companies across the area. Along with it, the ability of the company to pay its debt service under various scenarios except declining rental income shows the feasibility of the project. Therefore on the basis of above analysis the bank is recommended to finance the loan to JPI.
Exhibits
Exhibit A: Sensitivity Analysis
| Proforma Cash Flow Statement (Senstivity Analysis) | |||||
| Normal | Sensitivity Analysis | ||||
| Decrease in Rent Income | Increase in Operating Expenses | ||||
| Rental Income (336,094 sf @ $ .83/psf per month)a | 3,344,697 | 2862109 | 3344697 | ||
| Other income | |||||
| Garages (160 @ $75/month) | 144,000 | 144,000 | 144,000 | ||
| Carports (98 @ $20/month) | 23,520 | 23,520 | 23,520 | ||
| Other ($9/unit/month) | 42,336 | 42,336 | 42,336 | ||
| Total potential gross revenue | $3,554,553 | 2862109 | $3,554,553 | ||
| General vacancy (7%) | $ (248,819) | $ (248,819) | $ (248,819) | ||
| Effective gross revenue | $3,305,734 | 2613290 | 3305734 | ||
| Operating expenses | |||||
| Administrative | $ 26,888 | $ 26,888 | 29577 | ||
| Repairs/maintenance | 134,438 | 134,438 | 147882 | ||
| Marketing | 40,331 | 40,331 | 44364 | ||
| Salaries | 255,431 | 255,431 | 280974 | ||
| Utilities | 107,550 | 107,550 | 118305 | ||
| Taxes | 477,253 | 477,253 | 524978 | ||
| Insurance | 33,609 | 33,609 | 36970 | ||
| Management | 134,438 | 134,438 | 147882 | ||
| Total operating expenses | $1,209,938 | $1,209,938 | 1330932 | ||
| Cash flow from operations | $2,095,796 | 1403352 | 1974802 | ||
| Leasing & capital costs | |||||
| Structural reserve | $ 33,609 | $ 33,609 | $ 33,609 | ||
| Replacement reserve | 78,000 | 78,000 | 78,000 | ||
| Total expenses | $1,321,547 | 1321547 | 1442540.8 | ||
| Cash flow before debt service | $1,984,187 | 1291743 | 1863193 | ||
| Debt Service | $1,440,852 | 1440852 | 1440852 | ||
| Cash Flow After Debt Service | $543,335 | ($149,109) | $422,341 | ||
Exhibit B: Sensitivity Analysis Scenarios
| Scenario 1: | |
| Decrease in Rental Income | |
| Decrease in sf | 10% |
| Decrease in Rent Per month | 5% |
| Scenario 2: | |
| Increase in Total Operating Expenses | 10% |
Exhibit C: Increase in Interest Rate
| Proforma Cash Flow Statement (Increase in Interest Rates) | |||||
| Interest Rates | |||||
| Agreed | Senstivity Analysis | ||||
| 7.75% | 8% | 9% | |||
| Rental Income (336,094 sf @ $ .83/psf per month)a | $3,344,697 | $3,344,697 | $3,344,697 | ||
| Other income | |||||
| Garages (160 @ $75/month) | 144,000 | 144,000 | 144,000 | ||
| Carports (98 @ $20/month) | 23,520 | 23,520 | 23,520 | ||
| Other ($9/unit/month) | 42,336 | 42,336 | 42,336 | ||
| Total potential gross revenue | $3,554,553 | $3,554,553 | $3,554,553 | ||
| General vacancy (7%) | $ (248,819) | $ (248,819) | $ (248,819) | ||
| Effective gross revenue | $3,305,734 | $3,305,734 | $3,305,734 | ||
| Operating expenses | |||||
| Administrative | $ 26,888 | $ 26,888 | $ 26,888 | ||
| Repairs/maintenance | 134,438 | 134,438 | 134,438 | ||
| Marketing | 40,331 | 40,331 | 40,331 | ||
| Salaries | 255,431 | 255,431 | 255,431 | ||
| Utilities | 107,550 | 107,550 | 107,550 | ||
| Taxes | 477,253 | 477,253 | 477,253 | ||
| Insurance | 33,609 | 33,609 | 33,609 | ||
| Management | 134,438 | 134,438 | 134,438 | ||
| Total operating expenses | $1,209,938 | $1,209,938 | $1,209,938 | ||
| Cash flow from operations | $2,095,796 | $2,095,796 | $2,095,796 | ||
| Leasing & capital costs | |||||
| Structural reserve | $ 33,609 | $ 33,609 | $ 33,609 | ||
| Replacement reserve | 78,000 | 78,000 | 78,000 | ||
| Total expenses | $1,321,547 | $1,321,547 | $1,321,547 | ||
| Cash flow before debt service | $1,984,187 | $1,984,187 | $1,984,187 | ||
| Debt Service | $1,440,852 | $1,455,491 | $1,582,557 | ||
| Cash Flow After Debt Service | $543,335 | $528,696 | $401,630 | ||
Exhibit D: JPI 10% Cap Rate
| JPI 10% Cap Rate | ||
| Total Cost of the Development (Exhibit 7) | $19,644,000 | |
| NI After Interest | $1,882,694 | |
| Cap Rate | 9.58% | |
| NI at 10% | 1,964,400.00 | |
| Difference between Actual and Required | 81,706 | |
| Increase % | 4.34% | |
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