The Return of the Loan Commercial Mortgage Investing After the 2008 Financial Crises Harvard Case Solution & Analysis

The Return of the Loan Commercial Mortgage Investing After the 2008 Financial Crises Case Study Solution

Adverse Economic Scenario:

As it has been discussed above that loan 2 (Four New York Plaza) contains the high probability of future losses that is why the company has high concerns about it. So we have applied the adverse economic effect upon this loan 2 to find out that in which situation it will provide the losses for the company.

You can see in Exhibit 5, it has been applied over this loan 2, the least and most interest rate effect and it has been obvious that when the interest rate starts to increase and reach up to between 10 to 10.5 percent, then in this scenario, company will face the losses from this loan because in this situation there can be a high probability that the investors will demand their money back or can demand high returns. In both situations the company will face trouble because in high required return, company will lose its profit margin and in case of money back the company will lose its ownership from its properties.

Expected Return for D-Bond:

As it has been mentioned in Exhibit 2, that D-bond provides 10% required rate of return. After using this required rate of return, the negative $ 18.62 million face value has been found. At this par value and required rate of return the price of the D-bond I have found is $ 14.88. In this scenario of D-bond, it is not recommended to prefer D-bond over direct mortgage investment. This decision has been taken by the detailed analyzation of cost and benefit of direct commercial mortgage backed securities over D-bond.

Recommendations:

It has been recommended to the company to use the South Plain Mall loan because after the detailed analyzation of all underwritten investment opportunities and the cost and benefit analyzation of direct commercial mortgage backed securities and D-bond, it has been concluded that South Pain Mall is giving the high net operating income amongst the all other underwritten options. It has also been providing the increased rate of occupancy. But except this, everything has its darker and brighter side. So, here the brighter side is South Plain Mall loan and darker side is Four New York Plaza loan because it is providing the least increase in occupancy rate with the low operating income as compared to the other underwritten investment opportunities. This Four New York Plaza loan is seeming to be too much risky to the company regarding its revenues, net operating profits and the company’s reputation. Company’s reputation is  based upon its profits and revenues otherwise in case of losses, the company’s reputation will have an extremely negative impact.

Exhibit 1:

Exhibit 2:

Exhibit 3:

Exhibit 4:

Exhibit 5:

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