Anderson Street Case Analysis

Sarah Harrs

Anderson Street Case Analysis

This case leaves Leonard with a dichotomous decision to purchase a multifamily property on Anderson Street.  The difficulty of his decision is enhanced by his expended personal investment (i.e. time and tenacity) into researching the property and securing funding. His optimism to acquire the property on Anderson Street is decreased by his naiveté and lack of property development experience.         

Without creating a complex BOE model or a ProForma, I believe the property on Anderson Street is worth approximately $250K. I believe the Banker, Mrs. Harris was accurate in her calculations when she divided NOI ($30,800) by the CAP Rate of 11.6%. Her calculation valued the property at approximately $265K. Due to the unfinished structure of the building and my conservative assumption that the CAP rate will increase before the 20 year loan is paid, I believe the CAP rate will shift 2% out of congruency with probable increase in rental income. I estimated this shift as I believe the area will grow in popularity but the market will also respond and eventually exceed the current cap rate.

While most real estate transactions carry significant fiscal risks, perhaps the most prominent risks throughout the case are Leonard’s lack of project management experience and his novice project estimates that significantly under value the carrying costs of the property within the first year. These two major risks ignite the other, as Leonard’s estimate would be more realistic if he had prior exposure to project management. Many real estate professionals know that most development projects struggle to complete on time. Therefore, seasoned developers allot extra time in their project plans for unexpected issues. Leonard decreased an already “optimistic” completion date by two months and assumed he would occupy all apartments within that time frame. As Leonard has little experience and little fiscal flexibility, these are two detrimental risks that could render serious consequences.

To appropriately evaluate this investment, I would need to know more about Leonard’s goals and expectations from this investment. It is difficult to assess this investment in a technical manner if Leonard does not have a goal IRR or timeframe for his returns. In the case, his investment motives are very general. I believe that he will need to make specific goals in order to appropriately evaluate and meet the expectations from this property. I would also research rent increases and trends in the area. Benchmarking rent to comparable properties and realistic market increases would allow Leonard to more accurately determine his future cash flows from the property.