Bourland Case Study

Question 1: Without performing any numerical analysis, what are the qualitative issues (pros and cons) that Bourland should consider in comparing and evaluating the three financing options being considered?

Following is a list of considerations in comparing the three financing options.

• Forecast the performance of the properties and ascertain if they are worth keeping.

• Identify which financing strategy best fits the corporate strategy of the firm.

• The amount of debt that is required across the two properties.

• The risks associated with each financing strategy.

• Understand if either option helps Glen to retire in Florida.

• The importance of maintaining a long-term relationship with the Bank of Boston.

• Understand that increased capital from securitization is expected to lower barriers to entry for developers or acquirers.

• Understand the extent of asset liability matching for each option.

• In terms of fees, identify the cheapest option for Bourland.

• Understand the inherent interest rate risk in addition to the upfront cost of financing.

• Analyze the counterparty risk for each of the three options.

• Identify the option that minimizes equity injection.

• Understand if there is a need to diversify the sources of capital for the firm.

• Analyze the flexibility loss due to covenants such as debt service coverage ratio requirement.

• Prepayment optionality could be critical if business does better than expected.

• Non-recourse financing limits personal liability in case of default.

• Long maturity of financing gives the flexibility to weather an economic downturn.

• Calculate the switching cost (including opportunity cost) to switch from Bank of Boston.

Using the above parameters, we can assess pros and cons of the three options.

Miniperm

Pros:

• Lowest upfront cost assuming additional 2.2% not paid to cap interest rate at 11%

• Maintain and leverage relationship with Bank of Boston

• Only option without a prepayment penalty.