CMU 2020 Student Housing Project Financial Analysis

Financial Analysis of the
2020 Student Housing Project at CMU
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Andrew J. Wilhelm 04 October 2020
2020 Student Housing Project at Carnegie Mellon University
Written By:
Andrew J. Wilhelm
Instructed By:
Professor David A. Berezov
Engineering Management 6800
Vanderbilt School of Engineering

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Abstract
The goal of this research is to evaluate funding for the 2020 student housing project
undertaken by Carnegie Mellon University (the “University”). This project includes the
construction of new student residences at two locations in Pittsburgh, PA. Project funding is in
the form of “AA” rated bonds (the “Bonds”) offered by the Allegheny County Higher Education
Building Authority (the “Authority”). Analysis begins with an explanation of the bond offering
and the financial position of relevant parties, via respective consolidated financial statements.
Once the offering is established as financially feasible, focus moves to an investigation of current
debt held by the University and the consequences of acquiring additional capital. Along with
this, scenario analysis is utilized to evaluate the project and the expected return on the Bonds.
Capital budgeting metrics are based on previous student housing accommodations, which gives
insight into future cash flows. The expected net present value is $93.4 million with a coefficient
of variation of 32.78%, indicating moderate risk. In all, the 2020 student housing project at
Carnegie Mellon University is financially possible and will add value to the university.

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1.0 Introduction to the 2020 Student Housing Project
The 2020 project is a student housing development project currently underway at
Carnegie Mellon University. The goal is to construct new residence halls, which aim to
incorporate a community setting. Labeled as “neighborhood commons” by Vice President for
Student Affairs and Dean of Students Gina Casalegno, the University hopes to create inviting
spaces, allowing students to collaborate and explore common interests (Gerson, 2020).
Casalegno went on to highlight “the power of a built environment in cultivating a sense of
community” (Gerson, 2020). Given these statements, it is clear the University plans on creating a
sense of belonging in future housing projects. The scope of this research includes two new
developments specifically. The first of which is located at the corner of Fifth Avenue and Clyde
street, complimented by a second at Forbes Avenue and Beeler Street.
Beginning with the Fifth and Clyde residence, referred to as the Fifth Avenue
Neighborhood Commons, this location is planned to host 265-beds spread out on six-stories
(Carnegie Mellon University, 2019). Built around 5,000 square feet of common space, including
laundry and kitchen facilities, the intent is to offer a unique neighborhood identity. Architectural
work is to be done by New York based LTL Architects and PWWG Architects, local to
Pittsburgh. The design qualifies for the LEED Gold certification for environmental sustainability
and air quality considerations (Carnegie Mellon University, 2019). The building will be open to
students in August 2021.
In addition to the Fifth Avenue Neighborhood Commons, the 2020 project includes new
student housing at the intersection of Forbes and Beeler. This hall is also planned to contain 265-
beds and conform to the environmentally friendly LEED Gold rating (Belko, 2020). Highlights
of the design include operable windows, low-flow plumbing, and LED lighting. This location is

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currently occupied by the Doherty apartment building, which will be demolished. Construction is
set to begin in spring of 2021 and finish in summer of 2022 (Belko, 2020).
In summary, the addition of two new residence halls is designed to modernize student
life. As a nonprofit institution, success of the University is measured by different criteria than
traditional for-profit entities. This project looks to further facilitate an environment that
cultivates learning, which is essential to operating activities. Improving student moral leads to
better academics and an easier transition into the professional world. Also, this will assist in
attracting prospective students, as well as financial sponsorships.
2.0 Overview of the Bond Offering
Once the scope of the project is understood, the funds needed for implementation are
considered. The Bonds face value totals to the amount of $45.6 million with a yield of 1.4% and
maturity date of February 1st
2030 (Diaz et al., 2020). Offered by the Allegheny County Higher
Education Building Authority, the Bonds are authority bonds, similar to municipal bonds, which
are rated “AA” under the S&P rating scale. Given this classification, the yield is slightly lower
than the national average of 2.4% (Stoever Glass, 2020). The difference between the Bonds yield
and the national average is indicative of higher demand, or lower risk for this offering. The yield
of 1.4% allows for a sales price of $60.8 million (Diaz et al., 2020).
Along with the sales price, interest payments are a concern for potential buyers. The
interest is calculated on a 360-day year basis, at a 5% rate (Diaz et al., 2020). The Bonds
distribute funds semiannually, on the 1st
of February and August, and are offered in
denominations of $5000.00. A call option is included in the offering, which can be executed at
any time. The call penalty is the greater of the amortized value, based on the initial price of the
bond, or the value calculated at the current yield of similar securities, minus 15 basis points. This

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does allow for redemption of the Bonds, without penalty, should economic conditions lessen the
value of the Bonds by more than 15 basis points (Diaz et al., 2020).
2.1 The Underwriters
A critical party to the funding, the underwriter is the organization willing to assume the
risk involved. The bonds are initially purchased by the underwriter and then sold to individual
investors via their distribution network (Banton, 2020). In this offering, there are two companies
backing the bonds, J.P. Morgan Securities LLC and PNC Capital Markets LLC (collectively, the
“Underwriters”). The Bonds will be bought in full, less a discount of $74,217.93, incentivizing
the buy. Furthermore, the Underwriters may offer and sale the Bonds at prices lower, or above,
the public offering price (Diaz et al., 2020).
The Underwriter’s nature of business revolves around dealing governmental and market
securities, as well as underwriting various types of debt and equity (J.P. Morgan Securities LLC,
2019). While the financial statements of this company are complex, a simplified analysis ensures
it can buy the Bonds with limited risk. It should be noted, due to the financial nature of the
operation, most assets and liabilities are considered to be easily liquidated. Furthermore, a
significant portion of total assets is valued using a fair value assessment, deviating from other
financial statements discussed. With these considerations, total assets less total liabilities is
$35,786 million. In this case, assets are mostly securities bought, similar to the Bonds, which are
subject to default risk. The Underwriter can have up to $35,786 million, about 10%, of held
financial positions default before facing bankruptcy (J.P. Morgan Securities LLC, 2019). The
Bonds will increase the default risk, however, only slightly. The $60.8 million acquisition is
0.15% of the asset to liability ratio.

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2.2 The Authority
Working with underwriters, the authority links the underwriter to institutions seeking
funds. In this case, the authority is the Allegheny County Higher Education Building Authority.
This organization was incorporated in 1981 and is designed to finance the construction, or
operation, of educational facilities (Allegheny County, 2020). While the Bonds do originate from
the Authority, all debt is supported by the credit of the institution requesting the funds. The
Authority is not responsible for any debt incurred by bond issuance. It only means to establish a
connection between each respective institution and bond underwriter, who ultimately assumes
the risk. Neither the general credit, or the taxing power of the Authority are pledged for
repayment (Allegheny County, 2020).
Moving to the financial position of the Authority, the lack of default risk does not ensure
survival of the organization. The cost burden of administrative services is $200,000, which is due
to Allegheny County (Allegheny County, 2020). The Authority generates cash flows by charging
administrative fees on outstanding debt. The operating cash flow was ($16,199) in 2018 and
$22,989 in 2019. Total cash on hand, at the end of 2019, was $569,940 (Allegheny County,
2020). The negative operating cash flow in 2018 should be noted, but is not a large enough
percentage of total cash to disrupt operation. Though, the Authority must cover these costs to
ensure sustainability throughout the life of the Bonds.
3.0 Financial Analysis of Carnegie Mellon University
3.1 Overview of Financial Statements
Considering the financial position of the University is a key component of the bond
offering. The University is a nonprofit organization, which is subject to different rules than other
corporations. There is no equity or retained earnings. Rather, yearly net income is marked as net

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assets gained year over year (Keating & Frumkin, 2001). Also, a distinction between operating
and nonoperating activities is made. In this analysis, only the operating activities are considered
as they are more relevant to performance.
Given the nonprofit status, ratio analysis is slightly different than traditional for-profit
organizations. Profitability ratios are of little use as they go against the purpose of a nonprofit.
However, since nonprofits are normally debt financed, liquidity ratios are relevant (Keating &
Frumkin, 2001). The current ratio, current assets divided by current liabilities, is the first
indicator of nonprofit stability. In the case of the University, the current ratio is 6.85, indicating a
healthy asset to liability margin (Diaz et al., 2020). Along with this, the days cash on hand is
useful in evaluating the University. This value is the number of days a nonprofit can support its
operations with only available cash (Keating & Frumkin, 2001). At the 2019-year end, the
University had $514.7 million in cash and an annual expense of $1,255.5 million, indicating 150
days with cash on hand (Diaz et al., 2020). The final evaluation is simply a positive net asset
account (Keating & Frumkin, 2001). If net assets are positive, the nonprofit has more total assets
than total liabilities. The University has $3,398.3 million in net assets, or 77% of total assets
(Diaz et al., 2020).
Considering the described financial position, the University has the resources to obtain
additional debt. It has far more current and total assets than current and total liabilities,
respectively. Also, it has almost half a year of operating expense in cash. This is a strong
financial position, with a good amount of operating cash flow. However, the total outstanding
debt is an area of concern, which is common among nonprofit organizations (Keating &
Frumkin, 2001). Steps must be taken to ensure the total outstanding debt is paid on schedule and
that new debt does not cause future concerns.

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3.2 Outstanding Indebtedness
Following understanding of the financial position, the total indebtedness is expanded
further. The University has a mix of fixed and variable rate debt. These debts are summarized in
Figures 1 and 2 of Appendix 1. In the 2019 financial year, total debt obligations equaled $540.8
million (Diaz et al., 2020). The addition of the Bonds, issued in 2020, increases this amount by
$45.6 million, or less than 10%. Along with this, the Bonds are offered at a coupon rate
comparable to other fixed rate investments, complimenting the debt portfolio.
More important that the total outstanding debt, the debt schedule details the yearly
payments necessary to meet all debt requirements. Since the goal is to understand the impact of
the Bonds, the debt schedule is only considered over their duration, or until 2030. Also, it does
not include taxable notes, or any other debt, the University is expecting to offer in the future.
Given these considerations, the debt schedule is defined by Figure 3 of Appendix 1. As shown,
the University has an average operating cash flow of $129.0 million, over the past five years
(Diaz et al., 2020). This provides a baseline as the maximum amount available for yearly debt
repayment. Utilizing this metric, it is evident that the year 2028 will be a critical financial year.
In this year, the debt repayment scheduled is $111.6 million, nearly all of the operating revenue
(Diaz et al., 2020). Due to the maturity of both Series 2017 and Series 2019 A bonds, the
University must be cautious this year to avoid default. Furthermore, this is a limiting factor for
issuance of new debt. Driving the debt schedule any higher will make it difficult to satisfy the
debt payment required in 2028. If more capital is needed in the future, the University should try
to call the Series 2017 bonds a year early, in 2027, when the debt schedule is lower. The Bonds
are due 2030, which is scheduled to require $82.5 million of debt repayment (Diaz et al., 2020).
This is another high repayment year but not as restrictive as 2028.

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4.0 Return on Invested Capital
4.1 Methodology
Once the ability to secure additional funding is established, an estimation of future cash
flows is necessary to evaluate whether the Bonds will increase the value of the University. This
process utilizes scenario analysis, which incorporates three separate cases (Brigham & Houston,
2020). These represent the base, best, and worst-case situations. Each is constructed around a
discounted cash flow model, evaluating construction of additional student housing. This
evaluation is based on five components of capital budgeting including, net present value (NPV),
internal rate of return (IRR), modified internal rate of return (MIRR), payback and discounted
payback (Berezov, 2020). NPV is the sum of future cash flows discounted to present values
using the average cost of capital. IRR and MIRR are expected yearly rates return. IRR assumes
funds generated are reinvested at the IRR rate, while MIRR assumes they are reinvested at the
cost of capital. This causes the IRR to generally overestimate the value of a project when
compared to MIRR (Berezov, 2020). Payback indicates how long it will take to recover the cost
invested in the project. However, it does not consider the value of cash flows produced after the
payback period, or the time value of money. Discounted payback overcomes the later limitation
by discounting future cash flows by the average cost of capital in the calculation.
Following analysis of each scenario, a weight average calculation is performed. This
weighs each outcome with the likelihood it will occur, accounting for a range of possibilities
(Brigham & Houston, 2020). In turn, this provides the expected results of the student housing
project. Also, the standard deviation, and coefficient of variance, give insight into the risk
involved. While three cases do not cover all possible outcomes, it is designed to cover the
extremities. Scenario analysis focuses on finding the best, and worst, case and relating it to the

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most likely case. This reduces the number of situations necessary to adequately estimate the
outcome. If more scenarios are needed to model the project, advanced techniques, such as Monte
Carlo Simulation, are necessary (Brigham & Houston, 2020). This type of evaluation is not
incorporated in this discussion.
4.2 Base-Case Analysis
The base-case model is the basis for scenario analysis. It represents the mostly likely
outcome of the desired event. For this project, financial success is driven by variables including
sales price, cost of sales, opportunity costs, building life expectancy and cost of capital. The
calculation of each attribute is subjective and based on information from comparable sources.
Beginning with the sales price, since these developments utilize new technology, the
sales price is expected to be 10% higher than any other housing offered by the University. This
price is estimated as a double living arrangement and is valued at $12,936 per year per unit
(Carnegie Mellon University, 2020). Furthermore, the cost of housing is expected to increase at a
rate of 1.4% annually for the duration of use. Similarly, due to the new construction,
maintenance costs are expected to be lower than typical approximations, or 50% of total sales
revenue (Homeunion, 2020). These costs will begin at 25% for the first ten years of operation,
then increase by 10% every subsequent ten years, until a maximum of 50%.
In addition to the cost of sales, an opportunity cost is considered. This cost includes $20
million for land use and sales lost by demolishing Doherty apartments. While Doherty
apartments is an old housing facility, it generates 150 unit sales (Carnegie Mellon University,
2013). The sales price is calculated at the lowest double living arrangement offered by the
University, or $9,210 per year per unit (Carnegie Mellon University, 2020). Maintenance costs
are higher for Doherty apartments and are considered 50% of total sales (Homeunion, 2020). The

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net opportunity cost of demolishing Doherty apartment is $4,605 per year per unit and is only
incorporated into the first 20 years of the model.
Finally, the life expectancy of the new housing plan and cost of capital are needed to
complete the model. The life expectancy is expected to be 50 years. Cash flows are considered
for this time period and include increasing operating costs as units age. Also, the cost of capital
is approximated at the yield to maturity of the Bonds. This is the cost to obtain the funds for the
project and is the best metric for capital costs.
Applying these inputs to the discounted cash flow model gives insight into project
feasibility, which is detailed in Tables 1 and 2 of Appendix 2. The 50-year NPV is $90.6 million
and is plotted in Figure 4 of Appendix 1. Along with this, the IRR and MIRR are 4.86% and
2.82%, respectively. The payback period is 19.6 years and the discounted payback period is 22.9
years. These outputs show good upside for this project. The 50-year NPV is positive, and both
the IRR and MIRR are above the cost of capital.
4.3 Best-Case Analysis
The best-case scenario makes small modifications to the input variables, mostly revolving
around sales price and cost per unit. In this situation, the new residence hall commands a
premium to students. As such, rent is 25% higher than any other housing offered by the
University, or $14,700 per year per unit. Also, the operating costs are reduced due to adherence
to the LEED standards. Instead of growing 10% every ten year, the cost only increases 5% to a
maximum value of 50%. Making these modifications improves the financial performance of the
project. The 50-year NPV is $139.2 million. Along with this, the IRR and MIRR are 6.20% and
3.31%, respectively. The payback period is 16.6 years and the discounted payback period is 18.8
years.

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4.4 Worst-Case Analysis
The worst-case scenario makes similar adjustments as the best-case, only with a negative
impact. In this situation, the quantity of new units is greater than the number of students seeking
housing. As such, the Fifth Avenue Neighborhood Commons is estimated to be half full the first
year of operation. Residency increases equally each year until it is fully occupied in year 10. In
addition, the complex LEED standards increase operating costs to 35% the first year, increasing
by 10% every subsequent ten years, until a maximum of 50%. Making these modifications
decreases the financial performance of the project. The 50-year NPV is $60.0 million. Along
with this, the IRR and MIRR are 3.36% and 2.34%, respectively. The payback period is 26.6
years and the discounted payback period is 32.2 years.
4.5 Expected Return and Project Risk
Once the outcome of each scenario is understood, they are combined using a weighted
average calculation. The base-case is most likely and weighted as such at 50%. The best and
worst cases are equally weighted at 25% each. Together, these values provide expected returns
on the project. For simplicity, only the NPV is taken into consideration and is expected to be
$93.4 million. The standard deviation of the scenario analysis is $30.6 million with a 32.78%
coefficient of variation, indicating moderate risk. This risk is associated with the ability to fill
additional housing to capacity and the maintenance costs of the facilities. These variables are
driving factors to financial success of the student housing project and are the biggest unknowns.
Steps should be taken to ensure a larger incoming class size and high operational efficiency.
However, even under the worst-case scenario, the NPV is well positive. It should be noted, the
University intends to sell additional taxable notes to finance this project, which will increase

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investment cost. While the outputs are appealing, they may not include all debt necessary to
finance the project. This would account for the better than expected worst-case situation.
5.0 Conclusions
In conclusion, the 2020 student housing project at the University is financially feasible.
The Authority, the Underwriters and the University all have satisfactory financial positions,
enabling offering of the Bonds. However, the University must be cautious in 2028 as the
scheduled debt due is nearly equivalent to the yearly operating cash flow. Given the outlined
conditions, the student housing project will be financially successful. The base-case NPV is
$90.6 million and the MIRR is 2.82%, both above necessary levels. To better understand project
risk, a scenario analysis incorporates best- and worst-case situations. This changes the expected
NPV to $93.4 million with a standard deviation of $30.6 million. The coefficient of variation is
32.78%, indicating moderate risk in the project, mostly driven by uncertainty in unit sales and
operating costs. While the worst-case still meets project funding requirements, other externalities
could influence project performance and should be explored further. The Bonds may not
sufficiently cover the entire cost of the student housing project, but, considering the large NPV,
there is a cushion for additional debt. Most importantly, the renovation of student facilities
improves student moral and attracts new prospects. Although this does not show on the balance
sheet, it is one of the Universities mission goals and factors heavily into financial decisions (Diaz
et al., 2020). In all, the 2020 student housing project improves the value of Carnegie Mellon
University.

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References
Allegheny County. (2020). Funding for Higher Education Construction.
https://www.alleghenycounty.us/economic-development/authorities/heba.aspx
Banton, C. (2020, August 19). Underwriter Definition. Investopedia.
https://www.investopedia.com/terms/u/underwriter.asp
Belko, M. (2020, February 7). CMU to build 265-bed residence hall on Forbes Avenue |
Pittsburgh Post-Gazette. Pittsburgh Post-Gazette. https://www.post-
gazette.com/business/development/2020/02/07/Carnegie-Mellon-residence-Hall-Forbes-
Avenue-Beeler-Street/stories/202002070079
Berezov, D. (2020). Capital Budgeting Concepts. Vanderbilt University.
Brigham, E., & Houston, J. (2020). Fundamentals of Financial Management (9th Edition).
Cengage Learning.
Carnegie Mellon University. (2013). Campus Space, Facilities, and Services.
Carnegie Mellon University. (2019, November 20). Fifth and Clyde Residence Hall - Housing &
Residential Education - Student Affairs - Carnegie Mellon University.
https://www.cmu.edu/housing/about-us/news/2019/fifth-clyde.html
Carnegie Mellon University. (2020, January 2). 2020-2021 Housing Rates.
https://www.cmu.edu/housing/our-communities/rates-and-fees/20-21-housing-rates-
final.pdf
Diaz, V., Brown, J., Connolly, D., Gorski, S., & Turman, S. (2020). Carnegie Mellon University
Revenue Bonds, Series A of 2020. Allegheny County Higher Education Building Authority.
Gerson, B. (2020, March 9). Housing Master Plan Is Building Community, One Neighborhood at
a Time. CMU Community News.
https://www.cmu.edu/piper/news/archives/2020/march/housing-master-plan.html
Homeunion. (2020). Average (and Hidden) Maintenance Costs for a Rental Property –
HomeUnion. https://www.homeunion.com/average-hidden-maintenance-costs-rental-
property/
J.P. Morgan Securities LLC. (2019). Consolidated Statement of Financial Condition and
Supplemental Schedules. www.pwc.com/us
Keating, E. K., & Frumkin, P. (2001). How to Assess Nonprofit Financial Performance.
Stoever Glass. (2020, September 30). Municipal Market Yields.
https://www.stoeverglass.com/marketyields

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Appendix 1 – List of Figures
Figure 1: Fixed Rate Debt
Figure 2: Variable Rate Debt
$32.8
$52.3
$62.2
$49.6
$84.8
Series 2012 A
($32.8 million)
Series 2013
($52.3 million)
Series 2017
($62.2 million)
Series 2019 A
($49.6 million)
Other
($84.8 million)
$120.8
$50.0
$60.1
Series 2008 A
($120.8 million)
Series 2012 B
($50.0 million)
Series 2019 B
($60.1 million)

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Figure 3: Operating Cash Flow vs. Debt Schedule
Figure 4: Base-Case Net Present Value by Year
$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
MillionsofDollars($millions)
Year
Operating Cash Flow Total Debt Service
($100.00)
($80.00)
($60.00)
($40.00)
($20.00)
$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
0 5 10 15 20 25 30 35 40 45 50
MillionsofDollars($millions)
Years

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Appendix 2 – List of Tables
Table 1: Base-Case Discounted Cash Flow Model Years 0 - 25
WACC 1.40%
Year 0 5 10 15 20 25
Unit sales 512 512 512 512 512
Sales price $13,675.77 $14,660.26 $15,715.61 $16,846.94 $18,059.72
Unit costs $3,418.94 $3,665.06 $5,500.47 $5,896.43 $8,126.87
Sales revenues
($ millions)
$7.00 $7.51 $8.05 $8.63 $9.25
Sales costs
($ millions)
$1.75 $1.88 $2.82 $3.02 $4.16
Opportunity cost
($ millions)
$0.69 $0.69 $0.69 $0.69 $0.00
Depreciation % 3.64% 3.64% 3.64% 3.64% 3.64%
Depreciation costs
($ millions)
$3.27 $3.27 $3.27 $3.27 $3.27
FCF
($ millions)
($90.00) $4.56 $4.94 $4.54 $4.91 $5.09
NPV ($90.00) ($68.84) ($47.45) ($29.12) ($10.60) $7.37
Table 2: Base-Case Discounted Cash Flow Model Years 30 - 50
WACC 1.40%
Year 30 35 40 45 50
Unit sales 512 512 512 512 512
Sales price $19,359.79 $20,753.46 $22,247.45 $23,848.99 $25,565.82
Unit costs $8,711.91 $10,376.73 $11,123.73 $11,924.50 $12,782.91
Sales revenues
($ millions)
$9.91 $10.63 $11.39 $12.21 $13.09
Sales costs
($ millions)
$4.46 $5.31 $5.70 $6.11 $6.54
Opportunity cost
($ millions)
$0.00 $0.00 $0.00 $0.00 $0.00
Depreciation % 0.00% 0.00% 0.00% 0.00% 0.00%
Depreciation costs
($ millions)
$0.00 $0.00 $0.00 $0.00 $0.00
FCF
($ millions)
$5.45 $5.31 $5.70 $6.11 $6.54
NPV $25.33 $41.66 $57.99 $74.32 $90.65

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