943-945 Warren Road

Abstract

This case, intended for MBA and executive education audiences, investigates whether an LLC should invest in a real estate deal. The materials provide a straightforward opportunity for applying discounted-cash-flow methods from the perspective of equity investors in the LLC. The investors know the terms of interest and principal payments on planned debt financing and have made forecasts of rental rates, occupancy, depreciation, future sale price, various expenses, and other items related to the property. The case can be used as an introduction to estimation and analysis of cash flows to the suppliers of equity. The setting provides opportunities for discussion of tax issues and risks. Excerpt UVA-F-1638 May 11, 2011 943–945 Warren Road Mike Grant, Tom Hoffman, and Andy Krouse had created a limited liability company (LLC) for the purpose of owning real estate. They had considerable experience in real estate; their most recent deal involved purchasing a small apartment complex and converting it to condominiums. With that $ 5 million investment ($ 3 million to purchase the complex and$ 2 million for the conversion), they earned a 20% annual rate of return on their money over a three-year period. The LLC now owned 10 commercial properties throughout central Virginia. Grant, Hoffman, and Krouse were considering buying a small retail complex (approximately 14,000 square feet) located at 943–945 Warren Road in Charlottesville, Virginia. The estimated purchase price was $ 2.5 million, and they anticipated spending an additional $ 300,000 on renovations immediately after the purchase. The total investment would be approximately $ 2.8 million. They had a commitment from a local bank for a $ 2.175 million25-year mortgage at an interest rate of 7.25%, which they thought was attractive given current lending markets. Exhibit 1 shows the annual breakdown of mortgage payments by interest and principal over the life of the loan. They needed to decide quickly whether to pursue the deal. 943–945 Warren Road . . .