These spreadsheet solutions relate to the case Back to School: Real Estate Development of Off-Campus Student Housing, Case #KEL854. ©2014 by the Kellogg School of Management at Northwestern University. This case was developed with support from the June 2009 graduates of the Executive MBA Program (EMP-73). This teaching note was prepared by Professor Craig Furfine with research assistance from Eric Nyman ’13. Teaching notes are developed solely to help academic faculty teach specific cases. Cases and teaching notes are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617783-7600 outside the United States or Canada) or e-mail
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evelopment of Off-Campus
case was developed with 3). This teaching note was n ’13. Teaching notes are ching notes are not effective or ineffective all 800-545-7685 (or 617ard.edu. No part of this heet, or transmitted in any herwise—without the
Building square footage Construction costs / SF Demolition Other hard construction costs Soft costs Total Development Costs (pre-financing) NOI if in-place Growth rate of NOI CapEx as a fraction of NOI DSCR of permanent financing Permanent financing interest rate Permanent financing amortization period Construction loan rate Months of construction
22,950 $109
3.25%
Case description Case description 75,000 ### 83,738 Case description 2,735,288 271,183.54 Exhibit 16 3% 20% 1.25 Case description 4.625% Case description 25 Case description 6% Problem 3 12 Exhibit 14
NOI Divide NOI by minimum DSCR = 1.25 Divide by 12 (monthly debt service) Supportable mortgage amount Divide by 75% LTV Construction cost Supportable site acquisition cost
($) 271,184 216,947 18,079 3,211,451 4,281,934 2,735,288 1,546,646
Construction loan rate 6.00% Date
Beginning Balance Interest
Draw
Total Debit
Aug-13
$0.00
$0.00
$75,000.00
$75,000.00
Sep-13
$75,000.00
$375.00
$214,712.50
$215,087.50
Oct-13
$290,087.50
$1,450.44
$214,712.50
$216,162.94
Nov-13
$506,250.44
$2,531.25
$214,712.50
$217,243.75
Dec-13
$723,494.19
$3,617.47
$214,712.50
$218,329.97
Jan-14
$941,824.16
$4,709.12
$214,712.50
$219,421.62
Feb-14
$1,161,245.78
$5,806.23
$214,712.50
$220,518.73
Mar-14
$1,381,764.51
$6,908.82
$214,712.50
$221,621.32
Apr-14
$1,603,385.83
$8,016.93
$214,712.50
$222,729.43
May-14
$1,826,115.26
$9,130.58
$214,712.50
$223,843.08
Jun-14
$2,049,958.34
$10,249.79
$214,712.50
$224,962.29
Jul-14
$2,274,920.63
$11,374.60
$214,712.50
$226,087.10
Aug-14
$2,501,007.73
$12,505.04
$214,712.50
$227,217.54
Total financing charges: $76,675.27
Ending Balance $75,000.00 $290,087.50 $506,250.44 $723,494.19 $941,824.16 $1,161,245.78 $1,381,764.51 $1,603,385.83 $1,826,115.26 $2,049,958.34 $2,274,920.63 $2,501,007.73 $2,728,225.27
Total development costs Construction loan interest NOI at project completion CapEx at project completion Cash flow at completion Targeted Yield on Cost Supportable site acquisition cost
$2,735,287.88 $76,675.27 $285,069.63 $57,013.93 $228,055.70 5.2% $1,573,723.46
Revenue Gross Rental Income Parking Income Vacancy Loss Credit Loss Total Income Expenses Real Estate Tax Operating Expenses Common Area Electric
Common Area Gas Common Area Cleaning Security System Landscaping Maintenance
Landscaping Irrigation Exterminating Snow Removal Garbage Service
2% 1%
HVAC Service Contract General Maintenance Unit Turnover Cleaning Insurance Management Fee 8.0% Total Operating Expenses Total Expenses Net Operating Income
$ $ $ $ $
Source 428,400.00 Exhibit 15 17,550.00 Exhibit 15 (8,919.00) Market estimate (4,459.50) Market estimate 432,571.50
$
86,725.25 2011 mill rate * estimated property value
$
3,500.00 Estimate based on comparable properties
$ $
EPA gas usage calculator. 3,000 heated sf, Madison WI census tract, $1.20/therm. Result doubled to account for high 2,000.00 circulation in entry and corridors. 2,600.00 $50 per week
$
$30 per month monitoring, $500 annual 860.00 maintenance
$
Weed, mulch, fertilize 6 times per year, 1,800.00 $300 per visit
$
Irrigation calculator. Inputs: 1,000 sf shrubs and flowers, water $2.81/gal, sewer 696.99 $2.33/gal
$
600.00 Estimate based on comparable properties
$ $
Plow parking lot and shovel walks. 30 3,000.00 snow days per year, $100 per visit $200 per month per Waste Management 2,400.00 estimate
$ $ $ $ $ $
2,100.00 $150 per system annually 3,000.00 Developer's estimate 7,500.00 $500 per unit annually 10,000.00 Estimate based on comparable properties Average of quotes from Madison area 34,605.72 managers 74,662.71
$
161,387.96
$
271,183.54
Occupancy:
Revenue Gross Rental Income Parking Income Vacancy Loss Credit Loss Total Income Expenses Real Estate Tax Operating Expenses Common Area Electric Common Area Gas Common Area Cleaning Security System Landscaping Maintenance Landscaping Irrigation Exterminating Snow Removal Garbage Service HVAC Service Contract General Maintenance Unit Turnover Cleaning Insurance Management Fee Total Operating Expenses
8.0%
Total Expenses Expense ratio Net Operating Income CAPEX Reserve
20%
Property Before Tax Cash Flow Cash Flow Gross Sales Price Exit Cap Rate Property Level Cash Flow Discount Rate PV (Aug 2014)
9%
Aug 2014
Aug 2015
Aug 2016
Aug 2017
Aug 2018
Aug 2019
Vacancy Loss Credit Loss:
2% 1%
2% 1%
2% 1%
2% 1%
2% 1%
Growth Rate:
3% $450,336 $18,449 $9,376 $4,688
3% $463,847 $19,002 $9,657 $4,828
3% $477,762 $19,572 $9,947 $4,973
3% $492,095 $20,159 $10,245 $5,123
3% $506,858 $20,764 $10,552 $5,276
$454,722
$468,363
$482,414
$496,887
$511,793
Growth Rate:
3% $91,166
3% $93,901
3% $96,718
3% $99,620
3% $102,608
Growth Rate:
3% $3,679 $2,102 $2,733 $904 $1,892 $733 $631 $3,154 $2,523 $2,208 $3,154 $7,884 $10,512 $36,378 $78,486
3% $3,790 $2,165 $2,815 $931 $1,949 $755 $650 $3,248 $2,599 $2,274 $3,248 $8,121 $10,827 $37,469 $80,840
3% $3,903 $2,230 $2,900 $959 $2,007 $777 $669 $3,346 $2,677 $2,342 $3,346 $8,364 $11,152 $38,593 $83,266
3% $4,020 $2,297 $2,987 $988 $2,068 $801 $689 $3,446 $2,757 $2,412 $3,446 $8,615 $11,487 $39,751 $85,764
3% $4,141 $2,366 $3,076 $1,018 $2,130 $825 $710 $3,549 $2,840 $2,485 $3,549 $8,874 $11,831 $40,943 $88,337
$169,652 37.3%
$174,741 37.3%
$179,984 37.3%
$185,383 37.3%
$190,945 37.3%
$285,070
$293,622
$302,430
$311,503
$320,848
$57,013.92 $58,724.34 $60,486.07 $62,300.65 $64,169.67
6.50% -$4,136,109
$4,136,109
$228,056
$234,897
$241,944
$249,203
$256,679
$228,056
$234,897
$241,944
$249,203
$256,679
Aug 2020
Aug 2021
Aug 2022
Aug 2023
Aug 2024
Aug 2025
2% 1%
2% 1%
2% 1%
2% 1%
2% 1%
2% 1%
3% $522,063 $21,387 $10,869 $5,435
3% $537,725 $22,029 $11,195 $5,598
3% $553,857 $22,690 $11,531 $5,765
3% $570,473 $23,370 $11,877 $5,938
3% $587,587 $24,071 $12,233 $6,117
3% $605,215 $24,793 $12,104 $6,300
$527,147
$542,961
$559,250
$576,028
$593,308
$611,604
3% $105,686
3% $108,857
3% $112,123
3% $115,486
3% $118,951
3% $122,520
3% $4,265 $2,437 $3,168 $1,048 $2,194 $849 $731 $3,656 $2,925 $2,559 $3,656 $9,140 $12,186 $42,172 $90,987
3% $4,393 $2,510 $3,264 $1,079 $2,259 $875 $753 $3,766 $3,012 $2,636 $3,766 $9,414 $12,552 $43,437 $93,716
3% $4,525 $2,586 $3,361 $1,112 $2,327 $901 $776 $3,879 $3,103 $2,715 $3,879 $9,696 $12,929 $44,740 $96,528
3% $4,661 $2,663 $3,462 $1,145 $2,397 $928 $799 $3,995 $3,196 $2,796 $3,995 $9,987 $13,316 $46,082 $99,424
3% $4,801 $2,743 $3,566 $1,180 $2,469 $956 $823 $4,115 $3,292 $2,880 $4,115 $10,287 $13,716 $47,465 $102,406
3% $4,945 $2,825 $3,673 $1,215 $2,543 $985 $848 $4,238 $3,391 $2,967 $4,238 $10,595 $14,127 $48,889 $105,478
$196,673 37.3%
$202,573 37.3%
$208,650 37.3%
$214,910 37.3%
$221,357 37.3%
$227,998 37.3%
$330,474
$340,388
$350,600
$361,118
$371,951
$383,606
$66,094.76 $68,077.60 $70,119.93 $72,223.53 $74,390.24 $76,721.12
$264,379
$272,310
$280,480
$264,379
$272,310
$280,480
$288,894
$297,561 $5,901,624 $288,894 $6,199,185
$306,884
Discount rate for soft costs (risk free expected and promised yield) Discount rate for building
Soft costs Draw schedule Property sale NPV of soft costs NPV of draw schedule to the bank NPV of building NPV of development project *Note, NPV is also the maximum you can pay for the land and still be NPV>=0 Construction loan repayment Total cash flow IRR
3% 9% 1 Jan-13 -$4,186.89
2 Feb-13 -$4,186.89
3 Mar-13 -$4,186.89
4 Apr-13 -$4,186.89
-$4,176.45
-$4,166.04
-$4,155.65
-$4,145.29
-$4,186.89
-$4,186.89
-$4,186.89
-$4,186.89
$921,851.38
-$921,851.38 23.39%
-$2,640,123.60
5 May-13 -$4,186.89
6 Jun-13 -$4,186.89
7 Jul-13 -$4,186.89
8 Aug-13 -$4,186.89 -$75,000.00
9 Sep-13 -$4,186.89 -$214,712.50
-$4,134.95
-$4,124.64
-$4,114.35
-$4,104.09 -$73,516.74
-$4,093.86 -$209,941.31
-$4,186.89
-$4,186.89
-$4,186.89
-$4,186.89
-$4,186.89
10 11 12 13 14 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 -$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89 -$214,712.50 -$214,712.50 -$214,712.50 -$214,712.50 -$214,712.50 -$4,083.65 -$4,073.46 -$4,063.30 -$4,053.17 -$4,043.06 -$209,417.76 -$208,895.52 -$208,374.59 -$207,854.95 -$207,336.61
-$4,186.89
-$4,186.89
-$4,186.89
-$4,186.89
-$4,186.89
15 16 17 18 Mar-14 Apr-14 May-14 Jun-14 -$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89 -$214,712.50 -$214,712.50 -$214,712.50 -$214,712.50
19 Jul-14 -$4,186.89 -$214,712.50
-$4,032.98 -$4,022.92 -$4,012.89 -$4,002.88 -$206,819.56 -$206,303.80 -$205,789.33 -$205,276.14
-$3,992.90 -$204,764.23
-$4,186.89
-$4,186.89
-$4,186.89
-$4,186.89
-$4,186.89
20 Aug-14 -$4,186.89 -$214,712.50 $4,136,108.86 -$3,982.95 -$204,253.59 $3,561,974.98
($2,728,225.27) $1,403,696.69
Risk Free Rate Volatility Dividend Yield Current Price Growth in construction costs Expected Return on Building Strike Price u d p q
3% 20% 5.51% $ 3,561,974.98 3% 9.0% $2,640,123.60 119.11% 79.84% 0.4527133616 0.5975264573
Option value
$
921,851.38
$
921,851.38 0% 1% 2% 3% 4%
Growth in construction costs
15%
20%
Volatility 25%
30%
35%
$
0 3,561,974.98 $ $
1 4,242,604.81 $ 2,843,903.05 $ $
2 5,053,290.86 $ 3,387,322.16 $ 2,270,589.95 $ $
3 6,018,884.55 4,034,578.97 2,704,459.16 1,812,853.19
$ $ $ $ $
4 7,168,985.95 4,805,514.99 3,221,233.03 2,159,257.07 1,447,393.30
$ $ $ $ $ $
5 8,538,851.20 5,723,763.13 3,836,753.16 2,571,852.56 1,723,964.32 1,155,607.85
$ $ $ $ $ $ $
6 10,170,473.24 6,817,472.09 4,569,888.21 3,063,287.67 2,053,383.13 1,376,423.88 922,644.52
$ $ $ $ $ $ $ $
7 12,113,869.14 8,120,169.32 5,443,112.27 3,648,627.27 2,445,748.00 1,639,433.91 1,098,945.41 736,645.14
$ $ $ $ $ $ $ $ $
8 14,428,613.30 9,671,788.73 6,483,193.87 4,345,814.81 2,913,086.79 1,952,700.47 1,308,934.27 877,404.88 588,142.08
$ $ $ $ $ $ $ $ $ $
9 17,185,663.76 11,519,894.92 7,722,016.49 5,176,222.45 3,469,725.67 2,325,826.67 1,559,048.24 1,045,061.29 700,525.53 469,576.31
$ $ $ $ $ $ $ $ $ $ $
10 20,469,537.34 13,721,141.21 9,197,556.01 6,165,306.17 4,132,728.31 2,770,250.63 1,856,954.53 1,244,753.85 834,383.46 559,303.96 374,912.65
$
0 1 2 921,851.38 $ 1,523,277.51 $ 2,252,383.74 $ $ 327,327.17 $ 616,140.68 $ $ 106,364.49 $ $
STRIKE $2,640,123.60
$2,719,327.31
$2,800,907.13
3 3,133,950.21 1,149,644.63 208,602.61 27,623.98
$2,884,934.34
$ $ $ $ $
4 4,197,503.58 1,834,032.62 404,787.71 57,753.80 4,214.95
$2,971,482.37
$ $ $ $ $ $
5 5,478,224.36 2,663,136.29 776,126.32 119,806.67 9,589.73 -
$3,060,626.84
$ $ $ $ $ $ $
6 7,018,027.60 3,665,026.45 1,417,442.56 246,204.40 21,818.27 -
$3,152,445.65
$ $ $ $ $ $ $ $
7 8,866,850.12 4,873,150.30 2,196,093.26 500,146.66 49,640.27 -
$3,247,019.02
$ $ $ $ $ $ $ $ $
8 11,084,183.72 6,327,359.15 3,138,764.28 1,001,385.23 112,940.07 -
$3,344,429.59
$ $ $ $ $ $ $ $ $ $
9 13,740,901.28 8,075,132.45 4,277,254.02 1,731,459.98 256,957.89 -
$3,444,762.47
$ $ $ $ $ $ $ $ $ $ $
10 16,921,431.99 10,173,035.86 5,649,450.66 2,617,200.82 584,622.96 $3,548,105.35
