Information:

Name:

Back to School: Real Estate Development of Off-Campus Student Housing

Author: Craig Furfine

Product #: KEL854-PDF-ENG

Questions:

Part I: Due 10/21/2019 11:59 pm (Questions 1 and 2)

1. Qualitatively discuss the benefits and costs of choosing Madison, WI as a target market for the proposed luxury student-housing development. Provide an estimate for market size by identifying supply and demand for this type of housing, competition, and the expected market share this project could capture. Provide an analysis expected rents, rent growth, and caprates. Use the information provided in the case and criticize the information provided using CoStar data. If you believe the numbers in the case are off relative to the market data in CoStar, you may change it in order to improve your results. (15 points)

2. Explain the feasibility analysis provided in the case and critique it as a basis for decision-making. Your critique should include both a discussion of what is wrong with the technique as well as what may be wrong with the assumptions within the specific application of the technique. Make sure your discussion identifies all the construction costs. (15 points)

3. Suppose instead you were considering developing based on a yield on cost. In other words, you would be willing to make an investment in the development project as long as the annual cash flow of the property was at least 5.2% of the total development cost, where cash flow is measured at project completion and the timing of development cost is ignored (except for when calculating construction loan interest). Development costs include both hard and soft costs, as well as interest on any construction loan. Assume that Lenard can finance hard development costs with a construction loan that charges 5.5% interest to be repaid upon project completion. The first draw of the construction loan is made to pay for demolition, with twelve subsequent draws evenly spread to cover the remaining hard costs. You may assume that the propertys net operating income (NOI) is growing at 3% per year and that property CapEx is 12% of the Effective Gross Income (EGI). Discuss the merits and deficiencies of using this approach to determine the appropriateness of a real estate development project. Justify any additional assumptions you must make to complete your analysis. (20 points)

4. Develop a pro forma for the completed apartment complex and estimate its value at completion (i.e. after the construction). Justify any additional assumptions you must make to complete your analysis. (15 points)

5. Estimate the Net Present Value (NPV) of the development project as a function of the cost of land. Assume that you will always pay the soft costs and that you will definitely make the draws on the construction loan you calculated in Question 3. Further, assume that the construction loan itself was zero NPV to the lender and that the risk-free rate was 3%. How much can you pay for the land so that the development is zero NPV? What internal rate of return will a developer achieve with a zero NPV investment in this development project? Justify any additional assumptions you must make to complete your analysis. (25 points)

6. In light of your previous calculations (and any additional qualitative reasoning), describe whether or not you believe that Slater and Lenard will be able to earn an appropriate rate of return (or more) by pursuing this project. (10 points)

7. Imagine that Slater and Lenard do not have enough equity to start the project; they only have $100,000. You know that they can bring equity partners to their project by creating a syndicate and providing each equity partner a preferred return of 8%. Slater and Lenard hire you to analyze this opportunity and ask you to create the cash flows under this new structure. Please estimate how much each party will received in this deal. (15 points)