Reference no: EM132183451

The Issue/Problem

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.

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 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.

Attachment:- Organized Home.zip