Finance Portfolio Management: Ravensclaw Arms Case Study Analysis

This document presents a detailed analysis of the Ravensclaw Arms case study from a finance portfolio management perspective. It includes analyses for the development team, focusing on cash flow positivity and the impact of increased competition, and calculates debt service coverage ratios. For the Executive Director, it assesses whether developer fees will be repaid within 15 years. Finally, for the investor, it performs a cap rate analysis to project the property's value at Year 15 and compares it to outstanding debt, determining if the investment meets the hurdle. The analysis uses provided financial data and assumptions to evaluate the viability and profitability of the Ravensclaw Arms project. Desklib provides access to this and similar solved assignments.

Running Head: Finance Portfolio Management
Finance Portfolio Management
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Finance Portfolio Management
Contents
Case Study: Ravensclaw Arms..........................................................................................................3
Analysis for development team.....................................................................................................3
Does the property stay cash flow positive throughout the compliance period?..........................3
What might change in the property’s financial performance if there is a sudden jump in
competition for eligible tenants?................................................................................................4
Analysis for Executive Director.....................................................................................................5
Will this fee be entirely repaid by the end of 15 years?.............................................................5
Analysis for Investor.....................................................................................................................6
Do the cap rate analysis to determine whether property value will exceed outstanding debt at
end of Year 15...........................................................................................................................6
References:....................................................................................................................................7
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Finance Portfolio Management
Case Study: Ravensclaw Arms.
1) Analysis for development team:
(A) Does the property stay cash flow positive throughout the compliance period,
given this set of assumptions? Whether the property is being financed with the
right amount of debt?
Debt service coverage ratio for the year (calculated after subtracting replacement
reserves) = Cash flow from operations after reserves for the year/Total debt service
for the year, where total debt service for the year = 12 * Monthly fixed mortgage
payment (Formigle, 2016).
Period Debt Service Coverage Ratio
Year 1 1.199
Year 2 1.196
Year 3 1.192
Year 4 1.186
Year 5 1.180
Year 6 1.173
Year 7 1.164
Year 8 1.155
Year 9 1.144
Year 10 1.132
Year 11 1.119
Year 12 1.105
Year 13 1.089
Year 14 1.072
Year 15 1.053
As the debt service coverage ratio is more than 1 for this 15-year compliance period
so the property stays cash flow positive throughout the period.
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Finance Portfolio Management
The property remains cash flow positive even after servicing annual debt throughout
the compliance period. Therefore, the property is financed with the right amount of
debt.
(B) What might change in the property’s financial performance if there is a sudden
jump in competition for eligible tenants? How can you translate those changes
into a financial sensitivity analysis?
If there is sudden jump in competition for eligible tenants then it will negatively affect
this property's financial performance as it will decrease gross potential income
because of reduced rental due to the competition and decrease in gross effective
income due to increase in vacancy rate.
There can be various scenarios depending upon the impact of the competition like:
High Impact, Low Impact and No Impact with different rent trend rates and vacancy
rates. Assuming the impact of competition will be from year 5 to year 15, the
following table shows the assumptions for the rate change for that period.
High Impact Low Impact No Impact
Rents trend rate -2% 1% 2%
Vacancy rate 10% 7% 5%
What do you learn about the property’s financing when you tweak some of these
assumptions?
As shown in the excel sheet, in low impact scenario cash flow after reserves will
remain positive throughout the period. But the debt service coverage ratio will be less
than 1 from year 6 onwards. So after the debt/mortgage payments the property will
not remain cash flow positive from that year. In high impact scenario cash flow after
reserves will turn negative from year 10 onwards and the debt service coverage ratio
will be less than 1 from year 5 onwards. So after the debt/mortgage payments the
property will not remain cash flow positive from that year.
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Finance Portfolio Management
2) Analysis for Executive Director:
Based on the assumptions presented here, will this fee be entirely repaid by the end
of 15 years?
As shown in the excel sheet, total deferred developer fees paid by the end of 15 years
period is $4,35,366. So, the fees will not be entirely repaid by the end of 15 years as
$5,25,000 - $4,35,366 = $89,634 will remain outstanding.
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Finance Portfolio Management
3) Analysis for Investor:
Do the cap rate analysis to determine the property’s projected value at Year 15.
Will Ravensclaw Arms meet the hurdle: will the property value exceed the $4.876K
of then – outstanding debt?
Capitalization rate for year 15 (Carter, 2019) = Net operating Income
(NOI) for the year / Market value of the property at that time.
6%
Year 15 NOI, subtracting all operating expenses, but not subtracting
replacement reserve contributions. (Using data from long-term operating
proforma for 15-year compliance period)
$3,28,454
Market value of the property at end of 15 year period = Net operating
Income (NOI) for the year 15 / Capitalization rate for year 15.
$54,74,235
Given, estimated total debt at year 15, including the first mortgage and
all soft debt.
$48,76,920
(Property value at year 15) – (outstanding debt at year 15) $5,97,315
According to the cap rate analysis the property value of $54,74,235 is $5,97,315 greater
than the outstanding debt value of $48,76,920.
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Finance Portfolio Management
References:
Carter, G. (2019). Understanding and Calculating Cap Rate For Rental Properties. Listen
Money Matters. Available 25 March 2019 from:
https://www.listenmoneymatters.com/cap-rate-rental-properties/
Formigle, I. (2016). Assessing Real Estate Investment Risk Using Debt Service Coverage
Ratios. Crowd Street. Available 25 March 2019 from:
https://www.crowdstreet.com/risk-debt-service-coverage-ratios/
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