Directions:
This comes from the Organized Home Case. There will be modified construction/cost budgets that differ from the base assignment which will be used in the assessment. You will be assigned a cost
udget. All other issues remain the same. Outcomes are working spreadsheet with return calculations and answering all related questions from the case. The due date is December 6, 2020.
Please review the following Project Documents for reference:
· The Organized Home Case
· Base Fundamental Template - Partial Gift - for Organized Home
Other Video Files on how to do the project which may need to be cut and pasted and there is a passcode: 7%03y^AS
https:
fiu.zoom.us
ec/share/H2kBjXmGJS9QsM4Sb-TehlKTSsiIRWDQkj6NIsjz1bdIBuDPZfPrpEAe7Xij5Mgu.1sWMllyq3dNiwOP4
Instructions:
Please upload the project file.
81
Challenges, Risks and Returns
in Single-Tenant Retail Development
William G. Hardin, III S. Alan Aycock
Focus
The purpose of the case is to illustrate the uncertainties involved in real estate
development and investment without requiring detailed knowledge of tax
egulations, financing techniques, zoning, or other regulatory constraints. The case
allows for discussion of direct real estate investment at various levels of complexity
depending upon the ability and knowledge of the students. At the foundation
level, students must incorporate valuation theories with discounted cash-flow
models to generate an expected return on investment. The students are then
equired to make adjustments to their basic assumptions and models due to the
potential change in deal structure. At the next skill level, students must assess the
isks and potential returns in single-tenant retail development including funding
equirements and return expectations. Deal structure, non-recourse lending,
property cash flow, and risk mitigation can also be discussed. At the final level, the
need for negotiation skills, an investment strategy, and an understanding of the
development cycle are manifested.
Setting
Atlanta Retail Properties (ARP), a developer of small retail centers and retail
uild-to-suit projects is in the final stages of the development of a 16,000 square
foot build-to-suit for The Organized Home (TOH), a local chain specializing in
containers and home/office storage systems. Unfortunately, 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.
Exhibits
Exhibits include TOH's present and historical Income Statements and Balance
Sheets, a table of competing retail centers with rental rates, and the project's
construction budget.
Availability
The case and teaching notes are available for cost plus shipping charges at
the American Real Estate Society Case Center, Graduate Program in Land
Development, Texas A&M University, College Station, Texas, XXXXXXXXXXE-
mail: XXXXXXXXXX)
William G. Hardin, III, is Assistant Professor of Finance, in the Department of Finance and Economics,
Mississippi State University, Starkville, Mississippi. S. Alan Aycock is a Doctoral Candidate in the Department of
Real Estate, College of Business Administration, at Georgia State University, Atlanta, Georgia.
Journal of Real Estate Practice and Education Volume 1 Number 1 1998
mailto: XXXXXXXXXX
82
Hardin and Aycock Case Study: Single-Tenant Retail Development
Teaching Notes
Teaching notes are available and stress various objectives from the actual
calculation of investment returns to potential discussion topics on the develop-
ment process, construction lending, lease negotiations, the value of design, and
differences in build-to-suit projects for national versus local retail chains. The
actual negotiated deal structure is presented along with a summary of subsequent
property performance.
PRELUDE
Don Adams, President of Atlanta Retail Properties (ARP) was ready for a
eak.
He had been working on the The Organized Home (TOH) project for the last few
months and hoped to move from the planning stage to the actual development
stage of the project by August 1, 1996. After several rounds of negotiation, he had
eceived a commitment letter for a construction loan with an option to convert to
a permanent mortgage from Alabama Life earlier in the day and only needed to
econfirm the cost components of the deal before heading out for a long weekend
at his vacation house on Lake Lanier. Don was less confident than normal in his
own cost estimates because the TOH management team had requested that the
architect make a couple of changes to the building's design. Since this store was to
e the chain's signature store, management wanted to improve the design of the
uilding's entrance and change the texture of the building's exterior. Don didn't
elieve the changes would be too costly, but wanted to enjoy the long Fourth of
July weekend by eliminating any doubt.
However, before Adams could get David James of Metropolitan Contractors on
the line, his phone rang. As luck would have it, it was David, "Don, I don't think
you're going to like the new cost numbers. I think we are looking at about
$250,000 in additional costs to build in the design features the client wants. The
atrium design they want is an additional $120,000 and the split-block design they
have selected will cost at least $80,000 over the original construction estimate.
When you add these costs to a couple of the other smaller changes they want, like
more office space than originally projected, we are easily $250,000 over our
original $1,750,000 development cost estimate. Needless to say, that's a lot of
money on a 16,000-square foot building. I'll fax the details over when I get the
final numbers on all the changes."
Adams was frustrated by the news, but decided to think about his options over the
weekend. He had a good working relationship with the management team at TOH
and had already discussed his required investment returns. Still, Adams' primary
concern was how to fund the additional costs, given the limitations created by the
loan commitment he had just received and his investors' required investment
eturns. Too much time and too much creativity had already gone into the deal to
have it unravel.
Journal of Real Estate Practice and Education
83
Case Study: Single-Tenant Retail Development Hardin and Aycock
THE DEVELOPMENT GROUP
Atlanta Retail Properties (ARP) is a family-controlled real estate management,
leasing and development firm. Since none of the present family members take an
active interest in the day-to-day operations of the firm, this responsibility is placed
on Don Adams, 47, the company's president who has been with the firm for seven
years. Adams was hired by the firm after the firm's founder and family patriarch
died unexpectedly in 1989. Adams oversees the company's operations and is
actively involved in new development, property management and the
okerage of
large commercial projects. Most of the firm's activity is in retail property. The
company and family partnerships control approximately seventy-five retail pro-
perties with most being less than 10,000 square feet in size. Although the family
has developed larger neighborhood centers, its niche is in providing build-to-suit
space for local and regional retail chains.
The company's board of directors, composed of Adams and four family members,
must approve investments made by affiliated entities or partnerships. The board is
elatively conservative, but is willing to take some risk if properly compensated.
The board attempts to mitigate the inherent risk of dealing with local and regional
tenants via diversification of its tenant base, the use of relatively large amounts of
equity capital on a specific transaction basis, and by the selection of development
sites in areas with above-average population growth and potential for retail
development.
Because the firm and family-controlled partnerships have acquired a substantial
eal estate portfolio over the last forty years, the firm and the partnerships it
controls have little debt, excellent cash flow, and a substantial line of credit
available for development activities. The line of credit, provided by a regional
ank, allows the firm to make equity investments in new projects and is repaid
from existing operating cash flows. Most new development deals are structured as
separate limited partnerships with ARP as the general partner. The new deals are
financed via equity contributions generated from existing family partnerships and
transaction-specific debt.
In the last eighteen months, Adams has completed three build-to-suit projects on
ehalf of the firm and family interests. He has also been looking for new build-to-
suit opportunities with companies requiring multiple locations. Because ARP is a
small firm, with only four salaried employees, the opportunity to do multiple-site
deals is efficient.
THE TENANT
The Organized Home (TOH) was founded in Atlanta in late 1993 by a group of
three recent Vande
ilt University graduates. Ed Brown is the company's CEO.
The company was initially capitalized with $250,000 in equity and a $250,000 line
of credit that was sufficient for the company's first 8,000 square foot location
which opened in 1994 in the affluent Buckhead neighborhood in Atlanta. The
store specializes in selling all types of containers, including household and office
Volume 1 Number 1 1998
84
Hardin and Aycock Case Study: Single-Tenant Retail Development
storage systems. On a stand-alone basis, the first store was marginally profitable by
fiscal year-end 1995 (see Exhibit 1) as the group looked for additional locations
for expansion. Unlike its primary competition, The Container Store which
concentrates on one store per metropolitan area, TOH plans to have multiple
locations within any given metropolitan area. After Atlanta, the group plans stores
in Charlotte, Nashville and Jacksonville.
During the final half of 1995, TOH management was successful in raising
additional financial commitments to implement its growth strategy. Using Ed
Brown's connections within the retail industry, an additional $2,000,000 in capital
was raised by January 1996. A venture capital group composed of ex-retail
industry executives provided $1,000,000 in equity capital and guaranteed a
$1,000,000 line of credit. The executives were looking for retail opportunities and
felt that TOH might be a "category killer" in the home storage and container
etail submarket. The venture capital group added substantial credibility to the
company and provided the young TOH management team with needed
experience. The additional capital would support