Organized home questions.docx
Organized home questions
(1) With an initial loan commitment of $1,225,000 and using the initial terms outlined in the case, what is ARP's expected return if the property is held for six years? Eleven years? Assume that ARP and its investors are in the 31% marginal tax bracket at the federal level and the 6% bracket at the state level. Assume a 28% capital gains tax rate and standard depreciation schedules. Similar projects in the Atlanta market have sold at cap rates of between 8.5% and 11%.
(2) What are the pros and cons of the transaction excluding the new cost uncertainty?
(3) Does the enhanced design required by The Organized Home add value to the real estate? Does it add value to the company's brand? If The Organized Home moved out of the building, would the design increase/decrease leasing opportunities?
(4) Do you think the development process, primarily the building design process, is different for major national retailers such as Walgreen's, CVS, or Revco?
(5) Review TOH's financial statements. What is the company's financial condition? What will be the financial impact of the company's growth plans?
(6) What is your impression of the value placed upon limited out-parcel availability at North Point Mall? Is the location really as good as Adams thinks?
(7) Has Adams missed any options during his thought process?
(8) Assess the risks of each of the options defined by Adams as well as any options you believe to be superior.
(9) Assess the probability of the options defined by Adams as well as any new options. Which outcome do you believe is most likely. Which mitigates the greatest amount of risk?
(10) With the new debt and equity structures that might result from the potential options, quantify ARP's return using a discounted cash-flow model similar to that required in Question 1. Use the same basic cap rate and tax assumptions. List and defend any additional assumptions.
(11) Develop and summarize an action plan for Adams. What should he do and what should his negotiating strategy be? This should be in the form of an executive summary
OrganizedHome file.pdf
81
Challenges, Risks and Returns
in Single-Tenant Retail Development
William G. Hardin, III S. Alan Aycock
Focus
The purpose of the case is to illustrate the uncertainties involved in real estate
development and investment without requiring detailed knowledge of tax
regulations, financing techniques, zoning, or other regulatory constraints. The case
allows for discussion of direct real estate investment at various levels of complexity
depending upon the ability and knowledge of the students. At the foundation
level, students must incorporate valuation theories with discounted cash-flow
models to generate an expected return on investment. The students are then
required to make adjustments to their basic assumptions and models due to the
potential change in deal structure. At the next skill level, students must assess the
.
Organized home questions.docxOrganized home questions(1) W.docx
1. Organized home questions.docx
Organized home questions
(1) With an initial loan commitment of $1,225,000 and using the
initial terms outlined in the case, what is ARP's expected return
if the property is held for six years? Eleven years? Assume that
ARP and its investors are in the 31% marginal tax bracket at the
federal level and the 6% bracket at the state level. Assume a
28% capital gains tax rate and standard depreciation schedules.
Similar projects in the Atlanta market have sold at cap rates of
between 8.5% and 11%.
(2) What are the pros and cons of the transaction excluding the
new cost uncertainty?
(3) Does the enhanced design required by The Organized Home
add value to the real estate? Does it add value to the company's
brand? If The Organized Home moved out of the building,
would the design increase/decrease leasing opportunities?
(4) Do you think the development process, primarily the
building design process, is different for major national retailers
such as Walgreen's, CVS, or Revco?
(5) Review TOH's financial statements. What is the company's
financial condition? What will be the financial impact of the
company's growth plans?
(6) What is your impression of the value placed upon limited
out-parcel availability at North Point Mall? Is the location
really as good as Adams thinks?
(7) Has Adams missed any options during his thought process?
(8) Assess the risks of each of the options defined by Adams as
well as any options you believe to be superior.
(9) Assess the probability of the options defined by Adams as
well as any new options. Which outcome do you believe is most
likely. Which mitigates the greatest amount of risk?
(10) With the new debt and equity structures that might result
2. from the potential options, quantify ARP's return using a
discounted cash-flow model similar to that required in Question
1. Use the same basic cap rate and tax assumptions. List and
defend any additional assumptions.
(11) Develop and summarize an action plan for Adams. What
should he do and what should his negotiating strategy be? This
should be in the form of an executive summary
OrganizedHome file.pdf
81
Challenges, Risks and Returns
in Single-Tenant Retail Development
William G. Hardin, III S. Alan Aycock
Focus
The purpose of the case is to illustrate the uncertainties
involved in real estate
development and investment without requiring detailed
knowledge of tax
regulations, financing techniques, zoning, or other regulatory
constraints. The case
allows for discussion of direct real estate investment at various
levels of complexity
depending upon the ability and knowledge of the students. At
the foundation
level, students must incorporate valuation theories with
discounted cash-flow
models to generate an expected return on investment. The
students are then
required to make adjustments to their basic assumptions and
models due to the
potential change in deal structure. At the next skill level,
3. students must assess the
risks and potential returns in single-tenant retail development
including funding
requirements and return expectations. Deal structure, non-
recourse lending,
property cash flow, and risk mitigation can also be discussed.
At the final level, the
need for negotiation skills, an investment strategy, and an
understanding of the
development cycle are manifested.
Setting
Atlanta Retail Properties (ARP), a developer of small retail
centers and retail
build-to-suit projects is in the final stages of the development of
a 16,000 square
foot build-to-suit for The Organized Home (TOH), a local chain
specializing in
containers and home/office storage systems. Unfortunately,
TOH management
has requested design changes in the proposed building that will
substantially
increase the cost of the project. Because the entire project was
based upon initial
cost estimates, the amount of equity capital, equity return
estimates, the loan
commitment, and other projections are affected by the potential
increase in
construction costs. Don Adams, President of ARP is
determining and assessing his
options in light of the new construction cost estimates.
Exhibits
Exhibits include TOH's present and historical Income
Statements and Balance
Sheets, a table of competing retail centers with rental rates, and
4. the project's
construction budget.
Availability
The case and teaching notes are available for cost plus shipping
charges at
the American Real Estate Society Case Center, Graduate
Program in Land
Development, Texas A&M University, College Station, Texas,
77843-3137. (E-
mail: [email protected])
William G. Hardin, III, is Assistant Professor of Finance, in the
Department of Finance and Economics,
Mississippi State University, Starkville, Mississippi. S. Alan
Aycock is a Doctoral Candidate in the Department of
Real Estate, College of Business Administration, at Georgia
State University, Atlanta, Georgia.
Journal of Real Estate Practice and Education Volume 1 Number
1 1998
mailto:[email protected]
82
Hardin and Aycock Case Study: Single-Tenant Retail
Development
Teaching Notes
Teaching notes are available and stress various objectives from
the actual
calculation of investment returns to potential discussion topics
on the develop-
ment process, construction lending, lease negotiations, the value
5. of design, and
differences in build-to-suit projects for national versus local
retail chains. The
actual negotiated deal structure is presented along with a
summary of subsequent
property performance.
PRELUDE
Don Adams, President of Atlanta Retail Properties (ARP) was
ready for a break.
He had been working on the The Organized Home (TOH)
project for the last few
months and hoped to move from the planning stage to the actual
development
stage of the project by August 1, 1996. After several rounds of
negotiation, he had
received a commitment letter for a construction loan with an
option to convert to
a permanent mortgage from Alabama Life earlier in the day and
only needed to
reconfirm the cost components of the deal before heading out
for a long weekend
at his vacation house on Lake Lanier. Don was less confident
than normal in his
own cost estimates because the TOH management team had
requested that the
architect make a couple of changes to the building's design.
Since this store was to
be the chain's signature store, management wanted to improve
the design of the
building's entrance and change the texture of the building's
exterior. Don didn't
believe the changes would be too costly, but wanted to enjoy
the long Fourth of
July weekend by eliminating any doubt.
6. However, before Adams could get David James of Metropolitan
Contractors on
the line, his phone rang. As luck would have it, it was David,
"Don, I don't think
you're going to like the new cost numbers. I think we are
looking at about
$250,000 in additional costs to build in the design features the
client wants. The
atrium design they want is an additional $120,000 and the split-
block design they
have selected will cost at least $80,000 over the original
construction estimate.
When you add these costs to a couple of the other smaller
changes they want, like
more office space than originally projected, we are easily
$250,000 over our
original $1,750,000 development cost estimate. Needless to say,
that's a lot of
money on a 16,000-square foot building. I'll fax the details over
when I get the
final numbers on all the changes."
Adams was frustrated by the news, but decided to think about
his options over the
weekend. He had a good working relationship with the
management team at TOH
and had already discussed his required investment returns. Still,
Adams' primary
concern was how to fund the additional costs, given the
limitations created by the
loan commitment he had just received and his investors'
required investment
returns. Too much time and too much creativity had already
gone into the deal to
have it unravel.
7. Journal of Real Estate Practice and Education
83
Case Study: Single-Tenant Retail Development Hardin and
Aycock
THE DEVELOPMENT GROUP
Atlanta Retail Properties (ARP) is a family-controlled real
estate management,
leasing and development firm. Since none of the present family
members take an
active interest in the day-to-day operations of the firm, this
responsibility is placed
on Don Adams, 47, the company's president who has been with
the firm for seven
years. Adams was hired by the firm after the firm's founder and
family patriarch
died unexpectedly in 1989. Adams oversees the company's
operations and is
actively involved in new development, property management
and the brokerage of
large commercial projects. Most of the firm's activity is in retail
property. The
company and family partnerships control approximately
seventy-five retail pro-
perties with most being less than 10,000 square feet in size.
Although the family
has developed larger neighborhood centers, its niche is in
providing build-to-suit
space for local and regional retail chains.
The company's board of directors, composed of Adams and four
family members,
8. must approve investments made by affiliated entities or
partnerships. The board is
relatively conservative, but is willing to take some risk if
properly compensated.
The board attempts to mitigate the inherent risk of dealing with
local and regional
tenants via diversification of its tenant base, the use of
relatively large amounts of
equity capital on a specific transaction basis, and by the
selection of development
sites in areas with above-average population growth and
potential for retail
development.
Because the firm and family-controlled partnerships have
acquired a substantial
real estate portfolio over the last forty years, the firm and the
partnerships it
controls have little debt, excellent cash flow, and a substantial
line of credit
available for development activities. The line of credit,
provided by a regional
bank, allows the firm to make equity investments in new
projects and is repaid
from existing operating cash flows. Most new development
deals are structured as
separate limited partnerships with ARP as the general partner.
The new deals are
financed via equity contributions generated from existing family
partnerships and
transaction-specific debt.
In the last eighteen months, Adams has completed three build-
to-suit projects on
behalf of the firm and family interests. He has also been looking
for new build-to-
9. suit opportunities with companies requiring multiple locations.
Because ARP is a
small firm, with only four salaried employees, the opportunity
to do multiple-site
deals is efficient.
THE TENANT
The Organized Home (TOH) was founded in Atlanta in late
1993 by a group of
three recent Vanderbilt University graduates. Ed Brown is the
company's CEO.
The company was initially capitalized with $250,000 in equity
and a $250,000 line
of credit that was sufficient for the company's first 8,000 square
foot location
which opened in 1994 in the affluent Buckhead neighborhood in
Atlanta. The
store specializes in selling all types of containers, including
household and office
Volume 1 Number 1 1998
84
Hardin and Aycock Case Study: Single-Tenant Retail
Development
storage systems. On a stand-alone basis, the first store was
marginally profitable by
fiscal year-end 1995 (see Exhibit 1) as the group looked for
additional locations
for expansion. Unlike its primary competition, The Container
Store which
concentrates on one store per metropolitan area, TOH plans to
10. have multiple
locations within any given metropolitan area. After Atlanta, the
group plans stores
in Charlotte, Nashville and Jacksonville.
During the final half of 1995, TOH management was successful
in raising
additional financial commitments to implement its growth
strategy. Using Ed
Brown's connections within the retail industry, an additional
$2,000,000 in capital
was raised by January 1996. A venture capital group composed
of ex-retail
industry executives provided $1,000,000 in equity capital and
guaranteed a
$1,000,000 line of credit. The executives were looking for retail
opportunities and
felt that TOH might be a "category killer" in the home storage
and container
retail submarket. The venture capital group added substantial
credibility to the
company and provided the young TOH management team with
needed
experience. The additional capital would support the two or
three additional
stores the company planned to open in 1996. The capital
infusion, however, does
not mitigate the fact that the company was not profitable on a
GAAP basis in
fiscal 1995 and continues to have a negative operating cash
flow due to its
expansion activities.
Although the management team at TOH had planned to only
open stand-alone
buildings, the next site the company selected was in a retail
11. strip center adjacent to
Perimeter Mall in North Atlanta. Negotiations for the store site
started in mid-
1995 with the store opening in April 1996. Concurrent with the
selection of the
Perimeter Mall site, the company was also looking for a site
adjacent to the new
North Point Mall in Alpharetta, Georgia to build its prototypical
store and
maintain a strong presence in the fast growing, affluent North
Atlanta suburban
market.
THE NORTH POINT MALL MARKET
North Point Mall is the newest enclosed mall in metropolitan
Atlanta. Developed
by Homart, the mall is anchored by Rich's, Dillard's, J. C.
Penney, Lord & Taylor,
and Sears. In early 1996, Parisian's, a well-regarded Alabama-
based department
store, committed to build a store at the center. The land adjacent
to the mall is
controlled by Cousins Properties, an Atlanta-based real estate
investment trust.
Development around the mall has included single-tenant build-
to-suits, power
centers, hotels, and class A office. The North Point Mall area is
accessible via GA
400, a major highway, and several major surface streets. Most
real estate
professionals see the GA 400 corridor as the major real estate
market in the city
for the next ten years.
Because the North Point market is so new there is little
available data on
12. comparable retail space. However, as noted, there is limited
land adjacent to the
mall, the premium location in the North Point retail market.
Consequently, rental
Journal of Real Estate Practice and Education
85
Case Study: Single-Tenant Retail Development Hardin and
Aycock
Exhibit 1
The Organized Home Income Statement and Balance Sheet
Revenue
Cost of Goods Sold
Gross Profit
Selling Expense Corporate
Selling Expense Store 1
G&A Expense Corporate
G&A Expense Store 1
Org. Expenses Store 2
Depreciation
Total Operating Expenses
Operating Profit (Loss)
Interest Expense
Net Profit before Tax (Loss)
Taxes
Net Profit after Tax
Assets
Cash
Accounts Receivable
13. Inventory
Prepaids
Total Current Assets
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Total Assets
Liabilities and Shareholders Equity
Accounts Payable
Accruals
Bank Line of Credit
Total Current Liabilities
Shareholders' Equity
Convertible Preferred Stock
Common Stock
Paid-in Capital
Retained Earnings
Total Shareholders' Equity
Total Liabilities & Equity
Income Statement
1994
1,204,000
758,521
445,480
37,821
34,825
111,450
371,750
18. 1,000,000
100,000
150,000
(164,373)
935,627
1,445,162
•through June YTD
Volume 1 Number 1 1998
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Hardin and Aycock Case Study: Single-Tenant Retail
Development
Exhibit 2
North Point Mall Market—Comparable Rents
Size Yr Occupancy Rental
Center Anchors (sq. ft) Built (%) Rate
North Point Market Circuit City, Target,
Marshall's, PetsMart 485,000 1994 98 $19 p.s.f. NNN
Mansell Crossing Toys R' Us, T.J. Maxx,
Service Merchandise 440,011 1993 98 $18 p.s.f. NNN
Haynes Bridge Village Publix 101,000 1994 100 $16 p.s.f. NNN
19. Haynes Market Kroger 130,515 1988 99 $15 p.s.f. NNN
Alpharetta Crossing Winn-Dixie,
Eckerd Drugs 95,500 1989 99 $15 p.s.f. NNN
rates should be in the range evidenced by existing retail rental
rates. As shown in
Exhibit 2, the minimum rental rate from existing competition is
$15.00 per square
foot. Because North Point Market and Mansell Crossing are
located within a mile
of the mall, they are the most noteworthy. The two power
centers are 98% leased
and have quoted rental rates of $4.00 to $5.00 above the
proposed lease rate for
TOH.
T H E TRANSACTION
Initial Exposure
Don Adams was introduced to Ed Brown in February 1996 by
Ron Curtis, a
broker with contacts at Homart Corporation and Cousins
Properties. Because
Homart Corporation developed North Point Mall on land
acquired from Cousins,
most of the land adjacent to the mall is owned by Cousins
Properties. Prior to
talking with Adams, Curtis, on behalf of TOH, had approached
Cousins
Properties about a build-to-suit on one of the out-parcels
Cousins planned to
develop, but Cousins was not interested due to the relatively
small transaction
size, the weak financial capacity of the prospective tenant, and
20. a strategy based
upon ground-leasing most of the out-parcels adjacent to the
mall. Homart,
however, would sell one of its three out-parcels to a developer
willing to work with
TOH, but would not sell to speculators and would retain, via
deed restrictions,
final "reasonable" approval of out-parcel usage . Two additional
developers Curtis
contacted prior to the introduction of Adams and Brown were
not interested in a
deal with TOH due to the transaction size and the company's
weak financial
condition.
Adams and Brown hit it off immediately. Adams had been a
TOH customer since
1994 and was always impressed with the service he received.
Additionally, ARP
Journal of Real Estate Practice and Education
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Case Study: Single-Tenant Retail Development Hardin and
Aycock
had wanted to make an investment in the North Point area, but
had not been able
to put a workable deal together due to the limited amount of
land not controlled
by Cousins and restrictions on out-parcel usage dictated by
Homart Corporation.
Even though Adams had not received financial statements on
TOH, he knew the
21. company had limited financial capacity. However, because he
was aware of the
venture capital infusion, he decided to place a 1.550-acre out-
parcel under
contract for $14 per square foot. A standard purchase agreement
with an
expiration date of August 30, 1996 was executed between ARP
and Homart
Corporation. Earnest money of $10,000 was required. If ARP
canceled the
contract prior to May 15, 1996, the earnest money would be
refunded. At the time,
Adams had not made up his mind with regard to the feasibility
of the transaction,
but wanted to give himself a chance to evaluate the potential
deal and get
investment approval.
General Return Requirements
After reviewing the financial statements from TOH, Adams felt
that a transaction
was doable provided Brown was willing to pay rent that would
generate an
unleveraged initial yield on cost of 13%. Because the venture
capital participants
did not want to guarantee the lease, Adams needed to get a
return premium to
justify ARP's risk in the deal. With debt accounting for 65% to
70% of the total
capital required for the transaction, a rental rate generating a
13% yield on cost
would generate the 17% to 23% equity returns ARP generally
earned from its
retail development activities.
During the ARP Board of Director's monthly meeting, the deal
22. was approved as
long as the cost structure was reasonable and financing on a
non-recourse basis
was attainable for at least 65% of total costs. One of the board
members outlined
the group's general position with the following, "Once again, we
have enough
spreadsheets and scenarios to sink the Titanic, but the real
question is can we rent
the space either to one tenant or maybe two for an average
rental rate of $14.00 a
square foot if TOH tanks? With the building's location adjacent
to the newest mall
in Atlanta, limited competition, and top demographics, if we
can't get about
$14.00 a foot we need a new man running the shop." The ARP
board also was
interested in starting a new development project in order to
consummate a 1031
Tax Deferred Exchange to defer taxes on another project under
contract for sale.
Subsequent to approval from the ARP board and after additional
discussions with
Ed Brown, Adams felt confident that TOH could work with the
basic return
structure ARP required. It, however, took about three weeks for
TOH to generate
a letter of understanding. The company finally agreed to the
13% net yield on
cost, but wanted to have some input into the building's actual
design. Brown was
willing to execute a lease with an estimated construction budget
provided by
Adams so long as there were provisions in the lease that the
tenant must approve
23. the design prior to construction. Since Adams had included such
a provision in
many past transactions, a lease was executed between an ARP-
controlled limited
partnership and TOH.
Volume 1 Number 1 1998
88
Hardin and Aycock Case Study: Single-Tenant Retail
Development
In addition to the provision requested by Brown, Adams
retained the right to
terminate the lease prior to starting construction if financing is
unattainable. At an
estimated rental rate of about $14.00 per square foot, the base
rental rate is
comparable to what TOH has been paying for in-line space. The
lease has an
initial term of ten years with a 15% rental rate increase after
five years. TOH has
two five-year renewal options with rent adjusted for each period
based upon the
cumulative change in the CPI Index during each prior five-year
period with a
minimum 15% increase in rent. The lease is a triple net lease,
meaning that the
tenant pays all building operating costs.
The Project Cost
Having built numerous single-tenant buildings, Adams was
initially confident that
24. his core cost estimates were accurate. Since the site was already
graded and there
were no potential site problems nor utility access problems the
cost estimates were
straightforward. The construction budget (see Exhibit 3) as
estimated by Adams
and incorporated into the lease dated April 26, 1996 had a total
cost of $1,750,000.
The major cost items were the price of the land and the building
shell. The budget
was for a functional retail building with split-block siding and
windows along the
front and back of the building to give the building exposure to
both North Point
Mall and an adjacent major access road. The only uncertainty in
the budget
estimates were the costs created by TOH's design requirements.
The Loan Commitment
Working with the local mortgage broker that placed many of
ARP's permanent
loans, Adams applied for a construction/permanent loan from
Alabama Life.
Alabama Life in partnership with an Alabama-based S&L had
developed a single,
tri-party closing construction/permanent loan product. The S&L
handles the
construction portion of the transaction inclusive of construction
draws and
inspections with Alabama Life paying off the construction loan
after the issuance
of a certificate of occupancy.
The basic loan terms Alabama Life offered to Adams included a
six-month
construction period priced at the Prime Rate plus 2% with a
25. 1.0% fee followed by
a ten-year permanent mortgage at a rate of 9% with a 1.0% fee.
Loan repayment
is monthly based upon a twenty-year amortization schedule. The
mortgage broker
is compensated with an additional 1% fee. The loan amount is
$1,225,000 and is
non-recourse. The loan commitment contains the normal
contingencies with
respect to appraisal, permits, plans and specs review, etc.
Having negotiated the terms of the commitment, Adams knows
that Alabama
Life's primary risk mitigation requirement is the loan-to-cost
ratio as opposed to
the loan-to-value ratio or debt coverage ratio. Since the tenant
is not creditworthy
and ARP applied for a non-recourse loan, Alabama wants ARP
and its affiliates
to have real money at risk. During negotiations, Alabama Life
indicated that with
a tenant as weak as TOH, the property's cash flows and value
were uncertain.
Journal of Real Estate Practice and Education
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Case Study: Single-Tenant Retail Development Hardin and
Aycock
Exhibit 3
Development Cost Breakdown for The Organized Home
at North Point Mall
26. Cost Items
Land Purchase Costs
Construction Costs
Site Preparation (Paving & Landscape)
Tenant Finish Allowance
Architect's Fees
Engineering Fees
Sewer/Water Taps
Hazard Insurance Premiums
Performance Bond Premium
Real Estate Taxes
Intangible Tax
Title Insurance Premium
Attorney's Fees/Recording Fees
Permanent Lender's Fee
Loan Commitment Brokerage Fee
Appraisal Fee
Real Estate Commissions
27. Surveyor's/Soils Test Fees
Inspecting Agent's Fees
Overhead/Organizational Expense
Developer's Fee
Contingency Reserve
Loan Interest
Total
Amt
($)
945,000
558,000
40,000
45,000
12,500
8,000
5,000
2,500
2,375
6,200
31. 125,000
80,000
Revised Total Cost & Equity 2,000,000 1,225,000 775,000
Volume 1 Number 1 1998
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Hardin and Aycock Case Study: Single-Tenant Retail
Development
Alabama Life wanted to make sure that ARP has an economic
reason to support
potential negative cash flow during any time period the building
might be vacant
due to the loss of its single tenant. Although the terms require
30% cash in the
transaction, Adams believes the commitment to be fair given the
project's tenant
profile and the negative responses he had been given when
describing the
transaction to other lenders and mortgage brokers.
THE PRESENT SITUATION AND POSSIBLE
ALTERNATIVES
After taking a break for the Fourth of July, Adams is ready to
outline a strategy
and develop options to deal with the increased cost estimates
required to keep the
TOH project on track. The options Adams feels he has range
from killing the deal
to funding the entire additional costs with equity. Specifically,
32. Adams wants to
know how a few basic choices would affect his investors'
returns and to get a feel
for the risks involved with each potential option. Before his
meeting with Brown
later in the week, Adams wants to determine his funding choice
and negotiating
strategy. Specifically, he plans to quantify the risk and return of
the following
options:
Kill the deal. Because of the provisions in the initial lease and
concerns with
financing under the new cost scenario, Adams has the right to
cancel the
lease. The purchase contract would then be allowed to expire.
Eliminate the changes requested in the building design. Adams,
after talking
with James over the weekend, is not convinced that the changes
add much,
if any, value to the building. Also, since, Brown and TOH
agreed to the
initial construction budget, Brown could possibly be convinced
that the
changes do not represent a good business decision.
Renegotiate the loan amount with Alabama Life based upon the
new
construction budget. The loan amount would be higher, but the
maximum
70% loan-to-cost ratio would be retained. Only minimal
additional equity
capital would be required.
Fund the difference with equity and raise the rental rate. This
33. option could
entail using the same 13% yield on cost or could require an
additional
return premium. It could also require personal guarantees of the
TOH lease
by the new venture capital partners.
Combine additional equity with a cash contribution from TOH
to cover the
difference.
Try to convince The Organized Home to pay the difference.
Since the design
changes may add value only to the company, maybe the
company should pay
for these "image"-related costs.
Journal of Real Estate Practice and Education
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Case Study: Single-Tenant Retail Development Hardin and
Aycock
Questions
(1) With an initial loan commitment of $1,225,000 and using the
initial terms
outlined in the case, what is ARP's expected return if the
property is held for
six years? Eleven years? Assume that ARP and its investors are
in the 31%
marginal tax bracket at the federal level and the 6% bracket at
the state
level. Assume a 28% capital gains tax rate and standard
34. depreciation
schedules. Similar projects in the Atlanta market have sold at
cap rates of
between 8.5% and 11%.
(2) What are the pros and cons of the transaction excluding the
new cost
uncertainty?
(3) Does the enhanced design required by The Organized Home
add value to
the real estate? Does it add value to the company's brand? If
The Organized
Home moved out of the building, would the design
increase/decrease leasing
opportunities?
(4) Do you think the development process, primarily the
building design process,
is different for major national retailers such as Walgreen's,
CVS, or Revco?
(5) Review TOH's financial statements. What is the company's
financial
condition? What will be the financial impact of the company's
growth plans?
(6) What is your impression of the value placed upon limited
out-parcel
availability at North Point Mall? Is the location really as good
as Adams
thinks?
(7) Has Adams missed any options during his thought process?
(8) Assess the risks of each of the options defined by Adams as
35. well as any
options you believe to be superior.
(9) Assess the probability of the options defined by Adams as
well as any new
options. Which outcome do you believe is most likely.7 Which
mitigates the
greatest amount of risk?
(10) With the new debt and equity structures that might result
from the potential
options, quantify ARP's return using a discounted cash-flow
model similar to
that required in Question 1. Use the same basic cap rate and tax
assumptions. List and defend any additional assumptions.
(11) Develop and summarize an action plan for Adams. What
should he do and
what should his negotiating strategy be? This should be in the
form of an
executive summary.
Volume 1 Number 1 1998
Name: _________________________________
Date: _______
Aftershock:
Beyond the Civil War
Directions: Answer these questions as you watch the video.
After the video, go back and fill in any information you can add
to each answer. Boldface/underlined terms are key terms to
study. Be sure to have a good understanding of these terms.
36. Use the textbook to add information if needed. This is worth 10
points extra credit on lowest grade
1. What were some white landowners attempting to achieve
through their violence against African-Americans?
2. Who are the Radical Republicans and what do they hope to
achieve?
3. What is the Freedman’s Bureau? What did it do? Why was
the Freedman’s Bureau unsuccessful?
4. Why do many historians consider former President Andrew
Johnson to be a white supremacist? He was against slavery;
why was he AGAINST equal rights for African-Americans?
5. How did many Confederates regain government power in the
Southern states?
6. What are “Black Codes?”
· What were their immediate effects?
· What is their legacy?
7. What were the two competing theories of what to do about
Reconstruction?
· Johnson’s Plan:
· Radicals in Congress:
8. What is the “selfish” reason Louisiana Republicans wanted to
give African-Americans the right to vote? Why did black Union
soldiers feel they deserved the right to vote?
9. Describe what happened at the Mechanics Hall in New
37. Orleans in 1866. What part did President Johnson play in it?
10. What are the Reconstruction Acts? What do they represent
to Southerners?
11. How did the Ku Klux Klan begin? Why did it start? Why
didn’t local officials stop the Klan when it became violent?