Valuing Property: L.A. Heir (Collett Property) Harvard Case Solution & Analysis

Valuing Property: L.A. Heir (Collett Property) Case Study Solution

Market Analysis

The property West 92^nd/94^th was situated in the Los Angeles neighborhood. The neighborhood was predominated by African American which makes around 45 percent and Latin American which makes around 52 percent. The median income of households from this region was around $31272. There are only 21.6 percent that hold diploma and there are less than 52 percent of adults having less than a high school education. There are less than 6 percent residents having four year college degrees. The area was surrounded by two cities that were independent. There were high level of gang activities in these neighborhoods. These neighbors were served as center point for 1992 LA riots. In 1992 LA riots there were 58 deaths, 16000 arrests, 2500 personal injuries, burning of more than 1000 buildings and worth of more than $1 billion of property was damaged.

In response of riots, a five-year mandate was announced to attract new capital and build public-private partnerships. Result of riots resulted in changing demographic makeup that shifted to immigrated Mexicans and Latin Americans from African American. Majority of population was identified as African Americans in the 1990 census.However according to projection there would be 75 percent Latinos of the neighborhood’s population.

Alternatives

• Borrow, repay existing mortgage, and continue to hold property:

For this option, Stenphanie Collett made some assumptions to work out ten-year cash flow. It is assumed that the existing tenants would stay and rents for property would increase by 2 percent per annum. The cash flows were unfavorable despite of increase in rent by 2 percent per annum because there was also increase in costs by 3 percent. Only first year was marginally profitable which was followed by losses till 2019. Extraordinary repairs were required but these are not incorporated for working of cash flows. Despite of this company was only managed to break even. Coverage ratio was also seems unfavorable. Cash flows were not enough to pay current debt obligations. So there seems no objective to hold property and mortgaging the family home for borrowing.

• Sell and Pay-off the mortgage

According to broker’s report the total value of the property West 92^nd/94^th amounted to $258,727 which includes land value of $97,017. The number seems to be unfavorable as outstanding mortgage is $415,485. Proceeds from selling the property were less than outstanding mortgage.

• Converting to Fair Market Value

It would be huge profit if rent was supposed to increase with fair market value. That increase in fair market value makes around 36 percent increase. However process would be more complicated because of Section 8. Colletts also have to pay hefty fees to tenants like $9000 per each adult and $6000 per each child. Total estimated fees would be around $100,000. According to calculations done by Collett’s, there would be 10-year IRR of 28 percent despite of this costs.

However this option seems to be impracticable because evicting the grandparents of gangsters would not be favorable and cause violence. Moreover it is not necessary that all the apartments would be occupied at that increased rent.

• Applying for a Fair Rent Increase

Stephanie Collett considered middle ground option by estimating of $200 increase as compare to $250 suggested under fair market value.

• Default on the mortgage

If they default on the mortgage then lender would take the possession. As Colletts did not want giving up the property because of emotional attachment of the family to property since decades.

Recommendations

Applying for a Fair Rent Increase can be considered as best solution because it would result in profits. It is also practical approach as current tenants are not asked to leave or to pay that increase of rent. That increase in rent would be compensated by government as subsidy.........

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