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 custserv@hbsp.harvard.edu. No part of this
publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any
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permission of Kellogg Case Publishing.

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
herwisewithout 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