These spreadsheet solutions relate to the case Back to School: Real Estate Development of Off-Campus Student Housing, Case #KEL854.

2014 by the Kellogg School of Management at Northwestern University. This case was developed with support from the June 2009 graduates of the Executive MBA Program (EMP-73). This teaching note was prepared by Professor Craig Furfine with research assistance from Eric Nyman 13. Teaching notes are developed solely to help academic faculty teach specific cases. Cases and teaching notes are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail custserv@hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Kellogg Case Publishing.

These spreadsheet solutions relate to the case Back to School: Real Estate Development of Off-Campus Student Housing, Case #KEL854.

2014 by the Kellogg School of Management at Northwestern University. This case was developed with support from the June 2009 graduates of the Executive MBA Program (EMP-73). This teaching note was prepared by Professor Craig Furfine with research assistance from Eric Nyman 13. Teaching notes are developed solely to help academic faculty teach specific cases. Cases and teaching notes are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail custserv@hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Kellogg Case Publishing.

Building square footage 22,950Construction costs / SF $109 DemolitionOther hard construction costsSoft costs 3.25%Total Development Costs (pre-financing)

NOI if in-placeGrowth rate of NOICapEx as a fraction of NOIDSCR of permanent financingPermanent financing interest ratePermanent financing amortization periodConstruction loan rateMonths of construction

Case descriptionCase description

75,000###83,738 Case description

2,735,288

271,183.54Exhibit 163%

20%1.25Case description

4.625%Case description25Case description6%Problem 312Exhibit 14

($)NOI 271,184Divide NOI by minimum DSCR = 1.25 216,947Divide by 12 (monthly debt service) 18,079Supportable mortgage amount 3,211,451Divide by 75% LTV 4,281,934Construction cost 2,735,288Supportable site acquisition cost 1,546,646

Construction loan rate6.00%

Date Beginning Balance Interest Draw Total DebitAug-13 $0.00 $0.00 $75,000.00 $75,000.00 Sep-13 $75,000.00 $375.00 $214,712.50 $215,087.50 Oct-13 $290,087.50 $1,450.44 $214,712.50 $216,162.94 Nov-13 $506,250.44 $2,531.25 $214,712.50 $217,243.75 Dec-13 $723,494.19 $3,617.47 $214,712.50 $218,329.97 Jan-14 $941,824.16 $4,709.12 $214,712.50 $219,421.62 Feb-14 $1,161,245.78 $5,806.23 $214,712.50 $220,518.73 Mar-14 $1,381,764.51 $6,908.82 $214,712.50 $221,621.32 Apr-14 $1,603,385.83 $8,016.93 $214,712.50 $222,729.43

May-14 $1,826,115.26 $9,130.58 $214,712.50 $223,843.08 Jun-14 $2,049,958.34 $10,249.79 $214,712.50 $224,962.29 Jul-14 $2,274,920.63 $11,374.60 $214,712.50 $226,087.10

Aug-14 $2,501,007.73 $12,505.04 $214,712.50 $227,217.54

Total financing charges:$76,675.27

Ending Balance$75,000.00

$290,087.50 $506,250.44 $723,494.19 $941,824.16

$1,161,245.78 $1,381,764.51 $1,603,385.83 $1,826,115.26 $2,049,958.34 $2,274,920.63 $2,501,007.73 $2,728,225.27

Total development costs $2,735,287.88Construction loan interest $76,675.27

NOI at project completion $285,069.63CapEx at project completion $57,013.93Cash flow at completion $228,055.70

Targeted Yield on Cost 5.2%

Supportable site acquisition cost $1,573,723.46

RevenueGross Rental IncomeParking IncomeVacancy Loss 2%Credit Loss 1%

Total Income

Expenses

Real Estate Tax

Operating Expenses

Common Area Electric

Common Area GasCommon Area Cleaning

Security System

Landscaping Maintenance

Landscaping Irrigation

Exterminating

Snow Removal

Garbage Service

HVAC Service ContractGeneral MaintenanceUnit Turnover Cleaning

Insurance

Management Fee 8.0%Total Operating Expenses

Total Expenses

Net Operating Income

Source $ 428,400.00 Exhibit 15 $ 17,550.00 Exhibit 15 $ (8,919.00) Market estimate $ (4,459.50) Market estimate

$ 432,571.50

$ 86,725.25 2011 mill rate * estimated property value

$ 3,500.00 Estimate based on comparable properties

$ 2,000.00 $ 2,600.00 $50 per week

$ 860.00

$ 1,800.00

$ 696.99

$ 600.00 Estimate based on comparable properties

$ 3,000.00

$ 2,400.00

EPA gas usage calculator. 3,000 heated sf, Madison WI census tract, $1.20/therm. Result doubled to account for high circulation in entry and corridors.

$30 per month monitoring, $500 annual maintenanceWeed, mulch, fertilize 6 times per year, $300 per visitIrrigation calculator. Inputs: 1,000 sf shrubs and flowers, water $2.81/gal, sewer $2.33/gal

Plow parking lot and shovel walks. 30 snow days per year, $100 per visit$200 per month per Waste Management estimate

$ 2,100.00 $150 per system annually $ 3,000.00 Developer's estimate $ 7,500.00 $500 per unit annually

$ 10,000.00 Estimate based on comparable properties

$ 34,605.72 $ 74,662.71

$ 161,387.96

$ 271,183.54

Average of quotes from Madison area managers

Occupancy:

RevenueGross Rental IncomeParking IncomeVacancy LossCredit Loss

Total Income

Expenses

Real Estate Tax

Operating ExpensesCommon Area ElectricCommon Area GasCommon Area CleaningSecurity SystemLandscaping MaintenanceLandscaping IrrigationExterminatingSnow RemovalGarbage ServiceHVAC Service ContractGeneral MaintenanceUnit Turnover CleaningInsuranceManagement Fee 8.0%Total Operating Expenses

Total ExpensesExpense ratio

Net Operating Income

CAPEX Reserve 20%

Property Before Tax Cash FlowCash FlowGross Sales Price Exit Cap RateProperty Level Cash Flow

Discount Rate 9%PV (Aug 2014)

Aug 2014 Aug 2015 Aug 2016 Aug 2017 Aug 2018 Aug 2019

Vacancy Loss 2% 2% 2% 2% 2%Credit Loss: 1% 1% 1% 1% 1%

Growth Rate: 3% 3% 3% 3% 3%$450,336 $463,847 $477,762 $492,095 $506,858$18,449 $19,002 $19,572 $20,159 $20,764$9,376 $9,657 $9,947 $10,245 $10,552$4,688 $4,828 $4,973 $5,123 $5,276

$454,722 $468,363 $482,414 $496,887 $511,793

Growth Rate: 3% 3% 3% 3% 3%$91,166 $93,901 $96,718 $99,620 $102,608

Growth Rate: 3% 3% 3% 3% 3%$3,679 $3,790 $3,903 $4,020 $4,141$2,102 $2,165 $2,230 $2,297 $2,366$2,733 $2,815 $2,900 $2,987 $3,076

$904 $931 $959 $988 $1,018$1,892 $1,949 $2,007 $2,068 $2,130

$733 $755 $777 $801 $825$631 $650 $669 $689 $710

$3,154 $3,248 $3,346 $3,446 $3,549$2,523 $2,599 $2,677 $2,757 $2,840$2,208 $2,274 $2,342 $2,412 $2,485$3,154 $3,248 $3,346 $3,446 $3,549$7,884 $8,121 $8,364 $8,615 $8,874

$10,512 $10,827 $11,152 $11,487 $11,831$36,378 $37,469 $38,593 $39,751 $40,943

$78,486 $80,840 $83,266 $85,764 $88,337

$169,652 $174,741 $179,984 $185,383 $190,94537.3% 37.3% 37.3% 37.3% 37.3%

$285,070 $293,622 $302,430 $311,503 $320,848

$57,013.92 $58,724.34 $60,486.07 $62,300.65 $64,169.67

$228,056 $234,897 $241,944 $249,203 $256,6796.50%

-$4,136,109 $228,056 $234,897 $241,944 $249,203 $256,679

$4,136,109

Aug 2020 Aug 2021 Aug 2022 Aug 2023 Aug 2024 Aug 2025

2% 2% 2% 2% 2% 2%1% 1% 1% 1% 1% 1%

3% 3% 3% 3% 3% 3%$522,063 $537,725 $553,857 $570,473 $587,587 $605,215$21,387 $22,029 $22,690 $23,370 $24,071 $24,793$10,869 $11,195 $11,531 $11,877 $12,233 $12,104$5,435 $5,598 $5,765 $5,938 $6,117 $6,300

$527,147 $542,961 $559,250 $576,028 $593,308 $611,604

3% 3% 3% 3% 3% 3%$105,686 $108,857 $112,123 $115,486 $118,951 $122,520

3% 3% 3% 3% 3% 3%$4,265 $4,393 $4,525 $4,661 $4,801 $4,945$2,437 $2,510 $2,586 $2,663 $2,743 $2,825$3,168 $3,264 $3,361 $3,462 $3,566 $3,673$1,048 $1,079 $1,112 $1,145 $1,180 $1,215$2,194 $2,259 $2,327 $2,397 $2,469 $2,543

$849 $875 $901 $928 $956 $985$731 $753 $776 $799 $823 $848

$3,656 $3,766 $3,879 $3,995 $4,115 $4,238$2,925 $3,012 $3,103 $3,196 $3,292 $3,391$2,559 $2,636 $2,715 $2,796 $2,880 $2,967$3,656 $3,766 $3,879 $3,995 $4,115 $4,238$9,140 $9,414 $9,696 $9,987 $10,287 $10,595

$12,186 $12,552 $12,929 $13,316 $13,716 $14,127$42,172 $43,437 $44,740 $46,082 $47,465 $48,889

$90,987 $93,716 $96,528 $99,424 $102,406 $105,478

$196,673 $202,573 $208,650 $214,910 $221,357 $227,99837.3% 37.3% 37.3% 37.3% 37.3% 37.3%

$330,474 $340,388 $350,600 $361,118 $371,951 $383,606

$66,094.76 $68,077.60 $70,119.93 $72,223.53 $74,390.24 $76,721.12

$264,379 $272,310 $280,480 $288,894 $297,561 $306,884$5,901,624

$264,379 $272,310 $280,480 $288,894 $6,199,185

Discount rate for soft costs (risk free expected and promised yield)Discount rate for building

Soft costsDraw scheduleProperty saleNPV of soft costsNPV of draw schedule to the bankNPV of building

NPV of development project*Note, NPV is also the maximum you can pay for the land and still be NPV>=0Construction loan repaymentTotal cash flowIRR

3%9%

1 2 3 4Jan-13 Feb-13 Mar-13 Apr-13

-$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89

-$4,176.45 -$4,166.04 -$4,155.65 -$4,145.29

$921,851.38

-$921,851.38 -$4,186.89 -$4,186.89 -$4,186.89 -$4,186.8923.39%

-$2,640,123.60

5 6 7 8 9May-13 Jun-13 Jul-13 Aug-13 Sep-13

-$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89-$75,000.00 -$214,712.50

-$4,134.95 -$4,124.64 -$4,114.35 -$4,104.09 -$4,093.86-$73,516.74 -$209,941.31

-$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89

10 11 12 13 14Oct-13 Nov-13 Dec-13 Jan-14 Feb-14

-$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89-$214,712.50 -$214,712.50 -$214,712.50 -$214,712.50 -$214,712.50

-$4,083.65 -$4,073.46 -$4,063.30 -$4,053.17 -$4,043.06-$209,417.76 -$208,895.52 -$208,374.59 -$207,854.95 -$207,336.61

-$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89

15 16 17 18 19Mar-14 Apr-14 May-14 Jun-14 Jul-14

-$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89-$214,712.50 -$214,712.50 -$214,712.50 -$214,712.50 -$214,712.50

-$4,032.98 -$4,022.92 -$4,012.89 -$4,002.88 -$3,992.90-$206,819.56 -$206,303.80 -$205,789.33 -$205,276.14 -$204,764.23

-$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89 -$4,186.89

20Aug-14

-$4,186.89-$214,712.50

$4,136,108.86-$3,982.95

-$204,253.59$3,561,974.98

($2,728,225.27)$1,403,696.69

Risk Free Rate 3%Volatility 20%Dividend Yield 5.51%Current Price $ 3,561,974.98 Growth in construction costs 3%Expected Return on Building 9.0%Strike Price $2,640,123.60u 119.11%d 79.84%p 0.4527133616q 0.5975264573

Option value $ 921,851.38

$ 921,851.38 15% 20%0%1%

Growth in construction costs 2%3%4%

Volatility25% 30% 35%

0 1 2 3 $ 3,561,974.98 $ 4,242,604.81 $ 5,053,290.86 $ 6,018,884.55

$ 2,843,903.05 $ 3,387,322.16 $ 4,034,578.97 $ 2,270,589.95 $ 2,704,459.16

$ 1,812,853.19

4 5 6 7 $ 7,168,985.95 $ 8,538,851.20 $ 10,170,473.24 $ 12,113,869.14 $ 4,805,514.99 $ 5,723,763.13 $ 6,817,472.09 $ 8,120,169.32 $ 3,221,233.03 $ 3,836,753.16 $ 4,569,888.21 $ 5,443,112.27 $ 2,159,257.07 $ 2,571,852.56 $ 3,063,287.67 $ 3,648,627.27 $ 1,447,393.30 $ 1,723,964.32 $ 2,053,383.13 $ 2,445,748.00

$ 1,155,607.85 $ 1,376,423.88 $ 1,639,433.91 $ 922,644.52 $ 1,098,945.41

$ 736,645.14

8 9 10 $ 14,428,613.30 $ 17,185,663.76 $ 20,469,537.34 $ 9,671,788.73 $ 11,519,894.92 $ 13,721,141.21 $ 6,483,193.87 $ 7,722,016.49 $ 9,197,556.01 $ 4,345,814.81 $ 5,176,222.45 $ 6,165,306.17 $ 2,913,086.79 $ 3,469,725.67 $ 4,132,728.31 $ 1,952,700.47 $ 2,325,826.67 $ 2,770,250.63 $ 1,308,934.27 $ 1,559,048.24 $ 1,856,954.53 $ 877,404.88 $ 1,045,061.29 $ 1,244,753.85 $ 588,142.08 $ 700,525.53 $ 834,383.46

$ 469,576.31 $ 559,303.96 $ 374,912.65

0 1 2 3 $ 921,851.38 $ 1,523,277.51 $ 2,252,383.74 $ 3,133,950.21

$ 327,327.17 $ 616,140.68 $ 1,149,644.63 $ 106,364.49 $ 208,602.61

$ 27,623.98

STRIKE$2,640,123.60 $2,719,327.31 $2,800,907.13 $2,884,934.34

4 5 6 7 $ 4,197,503.58 $ 5,478,224.36 $ 7,018,027.60 $ 8,866,850.12 $ 1,834,032.62 $ 2,663,136.29 $ 3,665,026.45 $ 4,873,150.30 $ 404,787.71 $ 776,126.32 $ 1,417,442.56 $ 2,196,093.26 $ 57,753.80 $ 119,806.67 $ 246,204.40 $ 500,146.66 $ 4,214.95 $ 9,589.73 $ 21,818.27 $ 49,640.27

$ - $ - $ - $ - $ -

$ -

$2,971,482.37 $3,060,626.84 $3,152,445.65 $3,247,019.02

8 9 10 $ 11,084,183.72 $ 13,740,901.28 $ 16,921,431.99 $ 6,327,359.15 $ 8,075,132.45 $ 10,173,035.86 $ 3,138,764.28 $ 4,277,254.02 $ 5,649,450.66 $ 1,001,385.23 $ 1,731,459.98 $ 2,617,200.82 $ 112,940.07 $ 256,957.89 $ 584,622.96 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

$ - $ - $ -

$3,344,429.59 $3,444,762.47 $3,548,105.35

CopyrightAssumptionsFeasibility (Exhibit 17)Construction loan tableYield on costExhibit 16Pro formaNPVOption assumptionsProperty price treeOption price tree