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									                  Teaching real estate finance with cases:
                          SUNLIGHT VILLAGE case study
                                                 Giacomo Morri - Paolo Benedetto

            presented at the 18th Annual ERES Conference June 15th - 18th, 2011 Eindhoven


ERES 2011                Giacomo Morri - Paolo Benedetto
 Introduction

 •    Purpose of the work

 •    Industry needs
       – Real estate & Finance
       – Computer skills
       – Team working


 •    From theory to practice
       – Learning by doing
       – Problem solving skills
       – Presentation skills




ERES 2011                    Giacomo Morri - Paolo Benedetto   2
 Use of Sunlight Village case study

 •    Different RE finance courses
       – Master of Science
       – Master in Real Estate (post experience)
       – Executive courses for practitioners


 •    Presentation tool only
       – Class presentation
       – Spreadsheet creation by the teacher


 •    Exercise & Examination tool
       –    Initial presentation by the teacher
       –    Spreadsheet creation by students
       –    Final class presentation & discussion by students
       –    Valuation by the teacher
       –    Delivery of spreadsheet & PPT solution files for self-assessment



ERES 2011                       Giacomo Morri - Paolo Benedetto                3
            Example of a case study
               SUNLIGHT VILLAGE




ERES 2011      Giacomo Morri - Paolo Benedetto   4
 The role of the story

 •    The topic:
       – Land development, financing & acquisition
 •    Players involved:
       – Mary Watson  attorney, land owner & seller
       – Julie Holmes  MD real estate development company & buyer




 “Mary Watson, a well reputed attorney in a top legal firm, and Julie Holmes, managing director of an
     international real estate development company, have been friends since they were children.
     They attended the same schools and they have been playing volleyball in the same team for
     many years. Later on, even if they went to different universities, respectively studying law and
     finance, they have always kept in touch and now, that they are older, their daughters are best
     friends at primary school.”




ERES 2011                         Giacomo Morri - Paolo Benedetto                                       5
 The object

 •    10,000sqm plot of land
 •    The bid  €5 million




              Seller: Land
 “A few years ago, Mary’s family purchased a 10,000sqm plot of land for €2 million that has recently
      obtained a building permit for 5,000sqm for residential from the municipality. The family
      accountant has suggested selling the property for not less than €5 million, but Mary doesn’t trust
      him too much and she has therefore proposed the deal to Julie, knowing that they might find an
      agreement which can satisfy both of them.”



ERES 2011                         Giacomo Morri - Paolo Benedetto                                      6
 Input data – development

 •    Direct construction costs          €1,100/sqm
 •    Land drainage                      €400,000
 •    Urban land development costs       12% of direct building costs
 •    Other costs as % of the direct building costs:
       – designing costs        3%
       – project management     2%
       – contingency            5%


 •    Development Timing         3 years from 2011
 •    Sales €3,500/sqm           3 years from 2012 (preliminary contract)

              RESIDENTIAL sqm 5000        2011        2012     2013   2014   2015
              Land acquisition            50%         50%       0%     0%      0%
              Land drainage               100%         0%       0%     0%      0%
              Urban development costs     100%         0%       0%     0%      0%
              Building %                  20%         40%      40%     0%      0%
              Preliminary contract %       0%         20%      25%    35%     20%
              Sale (notary's deed) %       0%          0%       0%    60%     40%
ERES 2011                    Giacomo Morri - Paolo Benedetto                        7
 Input data – development

 Additional operating costs
 •Annual development management fee: 5% of the GAV  WARNING
 •Marketing fees to enhance the sales: €30,000/year
 •General administrative costs: €5,000/year (from 2011)
 •Selling brokerage fees: 2% on the sale price (to be paid at the notary’s deed)


                                               WARNING
              Annual development management fee: 5% of the GAV as % of the GAV is
               calculated as the sum of all direct and indirect construction costs from the
                     beginning of the project until the end of the construction phase

            The model has to be set up in order to consider both production and sale
                                              phases




ERES 2011                        Giacomo Morri - Paolo Benedetto                              8
 Input data – funding issues

 •    Expected equity return      15%
 •    Corporate tax rate          35%
 •    No constant cap capital structure, but structured finance approach:
       – purchase of the land without recurring to bank debt
       – capital expenditures financed with debt
       – no VAT financing

 •    Construction facility financing
       – loan to cost on CAPEX: 80%
       – interest rate: 5%
       – upfront fee: 0.60% over the total amount
       – Bullet financing with repayment accordingly to the notary’s deed sales (release
         price 1.00)

 •    VAT rate
       – 10% on sales and on capex
       – 20% on all services

ERES 2011                     Giacomo Morri - Paolo Benedetto                              9
 Problem solving – investment decisions

 Two questions arise

 •Would you buy the land @ €5,000,000?
       – Just yes or no… and why?



 •Offering €3,000,000 fixed payment at the beginning, what is the maximum
 amount of extra return (in %) above a 10% hurdle rate (levered IRR) that can
 be granted to the seller as deferral payment at the end of the project?
       – Calculating earn-out without any previous explanation:
           Knowledge of financial models
           Use of IRR


             but no previous theory about earn-out scheme construction




ERES 2011                     Giacomo Morri - Paolo Benedetto                   10
            Use of the case study
             SUNLIGHT VILLAGE




ERES 2011     Giacomo Morri - Paolo Benedetto   11
 Use of SUNLIGHT VILLAGE case study

 •    Task: Investment valuation, financing & negotiation
 •    Object: Residential development scheme
 •    Main issues:
       – Investment spreadsheet model for DCF investment Analysis
       – Project financing approach (equity side)



 •    Students’ task
       – Case Study Requested Output Take decisions!
            Yes or no
            Earn out
       – Complete land development report using DCF (formula working spreadsheet)
       – Power point presentation
       – Class presentation




ERES 2011                   Giacomo Morri - Paolo Benedetto                         12
 Use of SUNLIGHT VILLAGE case study

 •    Team working
       – Group composition
       – Working hours decision (When? Where? How?...)
 •    Data selection
       – What is really useful?
       – What is sensitive for the final decision?
 •    Application of finance to real estate
       – Accounting (P&L - Balance sheet)
       – Cash flow models (investment, financing, covenants etc.)
       – Investment criteria (IRR, NPV, PBP etc.)
 •    Practical skills
       – Use of spreadsheet
       – Power point presentation
       – Class presentation & Communication




ERES 2011                      Giacomo Morri - Paolo Benedetto      13
 Use of spreadsheet

 •    Not only finance, but also practical skills with daily tool
       – more and more companies require people already able to create and properly
         manage DCF models & presentations


 •    Some major tips to use spreadsheet for case solution
       –    Colors
       –    Cell (data or formula)
       –    Data input & calculation sheet
       –    Output data sheets (for presentation and print)
       –    Data analysis tools: Sensitivity & Goal seek


 •    Tips related to Power Point presentation
       – Executive summary
       – Use of attachments
       – Public speech presentation and complete document



ERES 2011                       Giacomo Morri - Paolo Benedetto                       14
 Use of spreadsheet – colors & cells
 •    Yellow cells with blue writing  input data (numbers to be plugged in)
 •    White cells with black writing  calculation (formulas) or output data




ERES 2011                   Giacomo Morri - Paolo Benedetto                    15
 Use of spreadsheet – data input & calculation
 •    Data input and calculation formulas all in the same sheet to facilitate
      computations and links




ERES 2011                    Giacomo Morri - Paolo Benedetto                    16
 Use of spreadsheet – output data sheets
 •    Output data separate from input and calculation sheet
        If input data changes, output tables and graphs are always ready to be copy-
       pasted in presentations and reports


                                                      2011      2012       2013        2014         2015
            WIP
            Inventory residential
            Initial inventory          27,452,440       0     3,918,150 8,143,600 10,993,350 4,397,340
            New production             10,993,350   3,918,150 4,225,450 2,849,750      0          0
            Sales                      10,993,350       0         0          0     6,596,010 4,397,340
            Final inventory            27,452,440   3,918,150 8,143,600 10,993,350 4,397,340      0
                           Variation                3,918,150 4,225,450 2,849,750 -6,596,010 -4,397,340

            Trading Debt
            Initial Trading Debt       3,718,750       0          0       875,000     1,968,750    875,000
            New Trading Debt           4,375,000       0       875,000   1,093,750    1,531,250    875,000
            Collected Trading Debt     4,375,000       0          0          0        2,625,000   1,750,000
            Final Trading Debt         3,718,750       0       875,000   1,968,750     875,000        0
                           Variation                   0       875,000   1,093,750   -1,093,750   -875,000




ERES 2011                              Giacomo Morri - Paolo Benedetto                                        17
 Use of spreadsheet – data analysis tools
 •    Tables (1 or 2 entries)
       – Sensitivity analysis
                                                                     Apartment sale price (€/sqm)
                                           21.9%            3,000     3,200    3,500       3,700     4,000

                   Building cost (€/sqm)
                                            950             17.6%     21.5%    27.0%       30.6%     35.7%
                                           1,000            15.9%     19.8%    25.3%       28.9%     33.9%
                                           1,050            14.1%     18.1%    23.6%       27.2%     32.2%
                                           1,100            12.4%     16.3%    21.9%       25.5%     30.6%
                                           1,150            10.6%     14.6%    20.3%       23.8%     28.9%
                                           1,200            8.9%      12.9%    18.6%       22.2%     27.3%
                                           1,250            7.3%      11.3%    17.0%       20.6%     25.7%
 •    Graphs
                                                                      Levered cash flows
                                                      €6
                                              € MM




                                                      €5
                                                      €4
                                                      €3
                                                      €2
                                                      €1
                                                      €0
                                                     -€ 1     2011      2012     2013      2014     2015
                                                     -€ 2
                                                     -€ 3
                                                     -€ 4

ERES 2011                                               Giacomo Morri - Paolo Benedetto                      18
            Solving a case study
             SUNLIGHT VILLAGE
                   example




ERES 2011     Giacomo Morri - Paolo Benedetto   19
 Solution: main steps

 •    Analysis of the problem
 •    Data preparation
       – Building, operating and company costs
       – Work in progress: investment
 •    Accounting
       – Profit & loss statement – without debt
       – Unlevered cash flow statement
       – VAT flows
 •    Bank Financing
       – Profit & loss statement – with debt
       – Levered cash flow statement & Investment criteria
 •    Balance sheet
 •    Sensitivity analysis
 •    Deferral payment



ERES 2011                     Giacomo Morri - Paolo Benedetto   20
 Solution – building, operating & company costs
                                                         2011     2012       2013      2014       2015
       Building res. sqm                       5,000    1,000     2,000     2,000        0         0
       Building res. €                      5,500,000 1,100,000 2,200,000 2,200,000      0         0
       Preliminary contract sqm                5,000       0      1,000     1,250      1,750     1,000
       Preliminary contract €               17,500,000     0    3,500,000 4,375,000 6,125,000 3,500,000




                                                                                                           DATA PREPARATION
       Sale (notary's deed) sqm                5,000       0        0         0        3,000     2,000
       Sale (notary's deed) €               17,500,000     0        0         0     10,500,000 7,000,000
       Land for residential                 3,000,000 1,500,000 1,500,000     0          0         0
       Land drainage for residential         400,000   400,000      0         0          0         0
                                                           2011      2012      2013       2014    2015
            Operating costs residential
            Cost of Production
            Land res.                          3,000,000 1,500,000 1,500,000     0         0        0
            Land drainage res.                  400,000   400,000      0         0         0        0
            Residential Building               5,500,000 1,100,000 2,200,000 2,200,000     0        0
            Urban land development              660,000   660,000      0         0         0        0
            Designing                           165,000    33,000   66,000     66,000      0        0
            Construction mngt                   165,000    33,000   66,000     66,000      0        0
            Project mngt                        110,000    22,000   44,000     44,000      0        0
            Contingency                         275,000    55,000   110,000 110,000        0        0
            Development mngt                    718,350   115,150 239,450 363,750          0        0
                                    Total     10,993,350 3,918,150 4,225,450 2,849,750     0        0
            Other costs (not in WIP)
            General marketing expenses         150,000    30,000    30,000     30,000     30,000 30,000
            General administrative cost         25,000     5,000     5,000      5,000     5,000   5,000
            Broker fee (at deed)               350,000       0         0          0      210,000 140,000
                                    Total                 35,000    35,000     35,000    245,000 175,000
ERES 2011                                    Giacomo Morri - Paolo Benedetto                                          21
 Solution – work in progress: investment



                                                 2011      2012       2013        2014         2015




                                                                                                         DATA PREPARATION
       WIP
       Inventory residential
       Initial inventory          27,452,440       0     3,918,150 8,143,600 10,993,350 4,397,340
       New production             10,993,350   3,918,150 4,225,450 2,849,750      0          0
       Sales                      10,993,350       0         0          0     6,596,010 4,397,340
       Final inventory            27,452,440   3,918,150 8,143,600 10,993,350 4,397,340      0
                      Variation                3,918,150 4,225,450 2,849,750 -6,596,010 -4,397,340

       Trading Debt
       Initial Trading Debt       3,718,750       0          0       875,000     1,968,750    875,000
       New Trading Debt           4,375,000       0       875,000   1,093,750    1,531,250    875,000
       Collected Trading Debt     4,375,000       0          0          0        2,625,000   1,750,000
       Final Trading Debt         3,718,750       0       875,000   1,968,750     875,000        0
                      Variation                   0       875,000   1,093,750   -1,093,750   -875,000




ERES 2011                               Giacomo Morri - Paolo Benedetto                                             22
 Solution – P&L statement (without debt)


                                                        2011      2012      2013       2014      2015
    P&L STATEMENT
    Residential Sales                     17,500,000     0         0         0     10,500,000 7,000,000
    WIP Variation Res.                    10,993,350 3,918,150 4,225,450 2,849,750      0         0
     Total Revenues (production value)    28,493,350 3,918,150 4,225,450 2,849,750 10,500,000 7,000,000




                                                                                                           Accounting
    Cost of Production res.               10,993,350 3,918,150 4,225,450 2,849,750     0         0
    Cost of Good sold res.                10,993,350     0         0         0     6,596,010 4,397,340
    Company costs (not in WIP)             525,000    35,000    35,000    35,000    245,000   175,000
    Total Costs (cost of production)      22,511,700 3,953,150 4,260,450 2,884,750 6,841,010 4,572,340

    EBITDA                                 5,981,650   -35,000   -35,000   -35,000   3,658,990 2,427,660
    Amortization                               0
    Profit before tax                      5,981,650   -35,000   -35,000   -35,000   3,658,990 2,427,660
    Tax                                    2,093,578   -12,250   -12,250   -12,250   1,280,647 849,681
    Net Profit                             3,888,073   -22,750   -22,750   -22,750   2,378,344 1,577,979




ERES 2011                                Giacomo Morri - Paolo Benedetto                                          23
 Solution – unlevered cash flow statement




                                                  2011       2012      2013       2014      2015
    CASH FLOW STATEMENT
    Net Profit                       3,888,073   -22,750    -22,750    -22,750 2,378,344 1,577,979




                                                                                                      Accounting
    Amortization                         0          0          0          0         0         0
    Inventory variation                  0     -3,918,150 -4,225,450 -2,849,750 6,596,010 4,397,340
    Receivable variation                 0          0       875,000 1,093,750 -1,093,750 -875,000
    Investments                          0
    Divestments                          0
    Real Estate Cash Flow            3,888,073 -3,940,900 -3,373,200 -1,778,750 7,880,604 5,100,319

    Unlevered IRR           14.36%




ERES 2011                            Giacomo Morri - Paolo Benedetto                                         24
 Solution – cash in & cash out
                                                        2011       2012       2013       2014      2015
      Cash Out
      Land res.                           3,000,000   1,500,000 1,500,000      0        0         0
      Land drainage res.                   400,000     400,000      0          0        0         0
      Residential Building                5,500,000   1,100,000 2,200,000 2,200,000     0         0
      Urban land development               660,000     660,000      0          0        0         0
      Designing                            165,000      33,000    66,000    66,000      0         0
      Construction mngt                    165,000      33,000    66,000    66,000      0         0
      Project mngt                         110,000      22,000    44,000    44,000      0         0
      Contingency                          275,000      55,000   110,000   110,000      0         0
      Development mngt                     718,350     115,150   239,450   363,750      0         0




                                                                                                             CHECK
      General marketing expenses           150,000      30,000    30,000    30,000   30,000    30,000
      General administrative cost           25,000      5,000     5,000     5,000     5,000     5,000
      Broker fee (at deed)                 350,000         0        0          0     210,000 140,000
      Tax                                 2,093,578    -12,250   -12,250   -12,250 1,280,647 849,681
                                Total    13,611,928   3,940,900 4,248,200 2,872,500 1,525,647 1,024,681

      Cash In
      Preliminary contract (bookings)     4,375,000       0       875,000   1,093,750 1,531,250 875,000
      Final sale (notary's deed)         13,125,000       0          0          0     7,875,000 5,250,000
                                 Total   17,500,000       0       875,000   1,093,750 9,406,250 6,125,000

      Real Estate Cash Flow              3,888,073    -3,940,900 -3,373,200 -1,778,750 7,880,604 5,100,319




ERES 2011                                Giacomo Morri - Paolo Benedetto                                        25
 Solution – VAT

                                                         2011       2012       2013       2014        2015
  VAT
  VAT on res. sale (debt)          10%                     0          0         0        1,050,000 700,000
  VAT paid on capex (credit)       10%                  221,500    231,000   231,000          0        0
  VAT paid on services (credit)    20%                  47,630     90,090    114,950       49,000   35,000
  VAT balance                                           269,130    321,090   345,950    -1,001,000 -665,000




                                                                                                                Accounting
  Initial VAT credit                                       0       269,130   590,220      936,170       0
  VAT balance                                           269,130    321,090   345,950    -1,001,000   -665,000
  Intermediate VAT credit                               269,130    590,220   936,170      -64,830    -665,000
  VAT to be paid                                           0          0         0         -64,830    -665,000
  VAT Payment o Refund                                     0          0         0         -64,830    -665,000
  Final VAT credit                                      269,130    590,220   936,170         0          0

  VAT balance                               729,830    -269,130   -321,090   -345,950   1,001,000    665,000
  VAT Payment o Refund                      -729,830       0          0          0       -64,830     -665,000
  VAT Flows                                     0      -269,130   -321,090   -345,950    936,170        0

  Real Estate Cash Flow (inc. VAT)                     -4,210,030 -3,694,290 -2,124,700 8,816,774 5,100,319
  IRR                              13.45%




ERES 2011                              Giacomo Morri - Paolo Benedetto                                                 26
 Solution – capex financing



                                                 2011      2012       2013     2014      2015
       Financing
       Capex financing
       LTC                 80%




                                                                                                   FINANCING
       Kd                 5.00%
       Total debt       6,394,680
       Upfront fee        0.60%       38,368    38,368
       Financing tax      0.00%          0         0         0         0         0         0
       Initial debt                 14,068,296     0     1,278,936 3,836,808 6,394,680 2,557,872
       New debt                     6,394,680 1,278,936 2,557,872 2,557,872      0         0
       Debt reimboursed             6,394,680      0         0         0     3,836,808 2,557,872
       Final debt                   14,068,296 1,278,936 3,836,808 6,394,680 2,557,872     0
       Financial burden              703,415    31,973    127,894 255,787 223,814        63,947




ERES 2011                           Giacomo Morri - Paolo Benedetto                                      27
 Solution – P&L statement (with debt)


                                                            2011        2012        2013        2014         2015
    P&L STATEMENT
    Residential Sales                        17,500,000        0           0           0      10,500,000   7,000,000
    WIP Variation Res.                       10,993,350   3,918,150   4,225,450   2,849,750        0            0
     Total Revenues (production value)       28,493,350   3,918,150   4,225,450   2,849,750   10,500,000   7,000,000




                                                                                                                       FINANCING
    Cost of Production res.                  10,993,350   3,918,150   4,225,450   2,849,750        0            0
    Cost of Good sold res.                   10,993,350        0           0           0       6,596,010   4,397,340
    Company costs (not in WIP)                 525,000      35,000      35,000      35,000      245,000     175,000
         Total Costs (cost of production)    22,511,700   3,953,150   4,260,450   2,884,750    6,841,010   4,572,340
    EBITDA                                    5,981,650     -35,000     -35,000     -35,000    3,658,990   2,427,660
    Amortization                                  0            0           0           0           0            0
    EBIT                                      5,981,650     -35,000     -35,000     -35,000    3,658,990   2,427,660
    Financial burden                           741,783      70,341     127,894     255,787      223,814      63,947
    EBT                                       5,239,867    -105,341    -162,894    -290,787    3,435,176   2,363,713
    Taxes                                     1,833,953     -36,870     -57,013    -101,776    1,202,312    827,300
    Net Income                                3,405,914     -68,472    -105,881    -189,012    2,232,865   1,536,414




ERES 2011                                   Giacomo Morri - Paolo Benedetto                                                  28
 Solution – levered cash flow statement


                                                  2011         2012       2013       2014       2015
  CASH FLOW STATEMENT
  Net Income                       3,405,914      -68,472     -105,881   -189,012 2,232,865 1,536,414
  Amortization                          0            0            0          0          0        0
  Inventory variation                   0       -3,918,150   -4,225,450 -2,849,750 6,596,010 4,397,340




                                                                                                          FINANCING
  Receivable variation                  0            0         875,000   1,093,750 -1,093,750 -875,000
  VAT credit variation                  0        -269,130     -321,090   -345,950   936,170      0
  Investments                           0
  Divestments                           0
  New debt                         6,394,680     1,278,936 2,557,872    2,557,872      0          0
  Debt reimboursement              -6,394,680        0          0           0     -3,836,808 -2,557,872
  FCFE (levered)                   3,405,914    -2,976,816 -1,219,549    266,910 4,834,487 2,500,882
  Equity IN                                     -2,976,816 -1,219,549       0          0          0
  Equity OUT                                         0          0       266,910 4,834,487 2,500,882
  IRR                     21.94%
  NPV                    773,170




ERES 2011                          Giacomo Morri - Paolo Benedetto                                              29
 Solution – cash in & cash out
                                                       2011       2012        2013       2014      2015
     Cash Out
     Land res.                           3,000,000   1,500,000 1,500,000      0            0         0
     Land drainage res.                   400,000     400,000       0         0            0         0
     Residential Building                5,500,000   1,100,000 2,200,000 2,200,000         0         0
     Urban land development               660,000     660,000       0         0            0         0
     Designing                            165,000      33,000    66,000    66,000          0         0
     Construction mngt                    165,000      33,000    66,000    66,000          0         0
     Project mngt                         110,000      22,000    44,000    44,000          0         0
     Contingency                          275,000      55,000   110,000   110,000          0         0
     Development mngt                     718,350     115,150   239,450   363,750          0         0




                                                                                                             CHECK
     General marketing expenses           150,000      30,000    30,000    30,000       30,000    30,000
     General administrative cost           25,000      5,000     5,000      5,000        5,000     5,000
     Broker fee (at deed)                 350,000         0         0         0         210,000   140,000
     VAT Flows                            936,170     269,130   321,090   345,950          0         0
     Financial burden                     741,783      70,341   127,894   255,787       223,814   63,947
     Debt reimboursement                 6,394,680        0         0         0        3,836,808 2,557,872
     Taxes                               1,833,953    -36,870   -57,013   -101,776     1,202,312 827,300
     Total                              21,424,936   4,255,752 4,652,421 3,384,712     5,507,933 3,624,118

     Cash In
     Preliminary contract (bookings)     4,375,000       0      875,000 1,093,750 1,531,250 875,000
     Final sale (notary's deed)         13,125,000       0         0         0      7,875,000 5,250,000
     New debt                            6,394,680   1,278,936 2,557,872 2,557,872      0         0
                                Total   24,830,850   1,278,936 3,432,872 3,651,622 10,342,420 6,125,000

     FCFE (levered)                     3,405,914    -2,976,816 -1,219,549   266,910   4,834,487 2,500,882

ERES 2011                                Giacomo Morri - Paolo Benedetto                                        30
 Solution – balance sheet


                                                  2011        2012        2013        2014        2015
            BALANCE SHEET
            Assets
            Inventory residential               3,918,150   8,143,600 10,993,350 4,397,340          0




                                                                                                            BALANCE SHEET
            VAT Credit                           269,130     590,220   936,170       0              0
            Liquidity                               0           0      266,910 5,101,397        7,602,278
                            Total Assets        4,187,280   8,733,820 12,196,430 9,498,737      7,602,278

            Liabilities
            Trading debt                            0        875,000    1,968,750    875,000       0
            Financial debt for VAT                  0           0           0           0          0
            Financial debt for capex            1,278,936   3,836,808   6,394,680   2,557,872      0

            Net income (past periods)               0      -68,472   -174,353       -363,364 1,869,500
            Net income (current period)          -68,472  -105,881   -189,012       2,232,865 1,536,414
            Injected Equity                     2,976,816 4,196,365 4,196,365       4,196,365 4,196,365
            Equity                              2,908,344 4,022,012 3,833,000       6,065,865 7,602,278
                         Total Liabilities      4,187,280 8,733,820 12,196,430      9,498,737 7,602,278




ERES 2011                                    Giacomo Morri - Paolo Benedetto                                         31
 Solution – sensitivity analysis
                                                                      Apartment sale price (€/sqm)
                                                  21.9%     3,000      3,200    3,500       3,700      4,000




                                                                                                                  SENSITIVITY ANALYSIS
                        Building cost (€/sqm)
                                                   950      17.6%      21.5%    27.0%       30.6%      35.7%
                                                  1,000     15.9%      19.8%    25.3%       28.9%      33.9%
                                                  1,050     14.1%      18.1%    23.6%       27.2%      32.2%
                                                  1,100     12.4%      16.3%    21.9%       25.5%      30.6%
                                                  1,150     10.6%      14.6%    20.3%       23.8%      28.9%
                                                  1,200     8.9%       12.9%    18.6%       22.2%      27.3%
                                                  1,250     7.3%       11.3%    17.0%       20.6%      25.7%


                                                                       Apartment sale price (€/sqm)
                                                773,170     3,000      3,200    3,500       3,700       4,000
            Building cost (€/sqm)




                                                  950      272,768    690,809 1,317,869 1,735,909     2,362,970
                                                 1,000      91,142    509,242 1,136,303 1,554,343     2,181,403
                                                 1,050     -93,789    327,676 954,736 1,372,776       1,999,837
                                                 1,100    -278,721    144,260 773,170 1,191,210       1,818,270
                                                 1,150    -463,652    -40,672 591,603 1,009,644       1,636,704
                                                 1,200    -648,583   -225,603 408,867 828,077         1,455,138
                                                 1,250    -833,514   -410,534 223,936 646,511         1,273,571


ERES 2011                                                     Giacomo Morri - Paolo Benedetto                                   32
 Solution – deferral payment

 Offering €3,000,000 fixed payment at the beginning, what is the maximum
    amount of extra return (in %) above a 10% hurdle rate (levered IRR)




                                                                                          DEFERRAL PAYMENT
    that can be granted to the seller at the end of the project?

                                       2011       2012       2013      2014      2015
  Target IRR               10.0%    -2,976,816 -1,219,549 266,910 4,834,487 2,500,882
  Capitalized flows                 -4,358,356 -1,623,220 322,961 5,317,935 2,500,882
  Sum of capitalized flows          -4,358,356 -5,981,576 -5,658,614 -340,679 2,160,202
  Deferred land payment 62.6%                                                 1,352,287
  Effective FCFE           15.0%    -2,976,816 -1,219,549 266,910 4,834,487 1,148,595



   The maximum amount that can be granted to the seller at the end of the
                project is €1,352,287, i.e. 62% extra return




ERES 2011                          Giacomo Morri - Paolo Benedetto                                   33
                                                        "In theory, there is no difference
                                                          between theory and practice.
                                                            But, in practice, there is."

                                                        Johannes Lambertus Adriana van de
                                                                   Snepscheut
                                                            (computer scientist and educator)



Contacting Author
Giacomo Morri, PhD
SDA Professor & Director Master in Real Estate
Accounting, Control, Corporate Finance &
Real Estate Department
SDA Bocconi School of Management
Milan – Italy
giacomo.morri@sdabocconi.it

www.propertyfinance.it
www.sdabocconi.it/mre                                     Giacomo Morri        Paolo Benedetto

ERES 2011                          Giacomo Morri - Paolo Benedetto                               34

								
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