This is a Real Estate Development course. Please note, the document in the link is already attached. That is the article by "Harding".There is a template attached also.
Directions: This comes from the Organized Home Case. There will be modified construction/cost budgets that differ from the base assignment which will be used in the assessment. You will be assigned a cost/budget. All other issues remain the same. Outcomes are working spreadsheet with return calculations and answering all related questions from the case. The due date is December 6, 2020. Please review the following Project Documents for reference: · The Organized Home Case · Base Fundamental Template - Partial Gift - for Organized Home Other Video Files on how to do the project which may need to be cut and pasted and there is a passcode: 7%03y^AS https://fiu.zoom.us/rec/share/H2kBjXmGJS9QsM4Sb-TehlKTSsiIRWDQkj6NIsjz1bdIBuDPZfPrpEAe7Xij5Mgu.1sWMllyq3dNiwOP4 Instructions: Please upload the project file. 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 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 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 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. 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. 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, 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- 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 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