REAL 470 Wal-Mart Distribution Center Wal-Mart has approached you with the opportunity to develop a one million square foot warehouse for them. In typical Wal-Mart fashion, they have given you a “take it, or leave it” final offer. The key terms are: Facility Size 1,000,000 ft2 with 26,000,000 usable cubic feet Lease Term 6 years Rent $7 per ft2 Operating Expenses Wal-Mart pays all operating expenses, utilities, and property taxes Renewal Options 7 year extension at $8 per ft2; a second 7 year extension at $9.50 per ft 2; a third 7 year extension at $11.50 per ft.2. All at Wal-Mart’s choice (i.e. it’s Wal-Mart’s option). Wal-Mart pays all operating expenses, utilities, property taxes, and capital expenditures undertaken during all lease renewal periods. Penalties If the property has not received its Certificate of Occupancy within 9 months, rent falls to $5 per ft.2 during the first 4 years of the lease. If it is not received within 12 months, Wal-Mart is released from all obligations and receives a $3 million penalty payment from the developer. Property Specifications Must meet all design and quality standards associated with a top quality bulk distribution facility. You know the market and feel that the selected location is good, and that the warehouse market is in good supply/demand balance. Vacancy rates are 4% - 5% in quality facilities, while net rents in the market are running about $7.50 - $8 per ft.2. You estimate that your development costs to complete (and hence receive your Certificate of Occupancy) this project within 8 months are: 

Hard Costs $40 millio

Your Development Fee $ 2 millio

Interest Costs $ 3 millio

Land $16 millio

Other Soft Costs $ 9 millio

Total $70 million.

You have a $54 million construction loan lined up with a one-year term for a 7% interest rate. 

You believe that upon completion you can sell the property for a 9% cap rate with Wal-Mart credit as the tenant. Alternatively, you believe you could get a 10-year, 30-year amortization, 6% interest loan for $58 million upon completion (with Wal-Mart as the tenant). Lesser credit tenant quality distribution facilities sell at roughly 10% cap rates. You have a construction bid for the $40 million hard costs from a mid-sized local contractor that contains a guarantee of hard costs. You also have a contract to purchase the land for $16 million, which you can close with your $16 million of available equity (90% of your firm’s net equity). 

Your experience indicates that it should take 30-33 weeks to complete the project and receive your Certificate of Occupancy. It’s decision time. Do you accept their bid or walk away? More importantly, why or why not? Your written analysis should be at least 1 page, double spaced. You should include any calculations that support your answer.