Millegan Creek Apartments- Financial Analysis

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The Millegan Creek Apartment case is an example of a commercial loan. The parties involved in the commercial loan are JP Multifamily Inc. and Fleet Bank. Real Estate group at Fleet Bank want to find out whether or not to accept JPI’s proposed $15,715,000 loan for a 390-unit apartment project in Austin, Texas. The details about the each party, market and financial analysis of the project is outlined below.

The Development Expertise
JPI Multifamily Inc.(JPI) was founded in 1989 by John Carpenter and Frank Miller, who had worked together at Southland Financial. JPI, a first class developer, was known as a “merchant builder” meaning that they developed properties with the intention of selling rather than owning them. JPI had begun seriously investigate in Austin market in 1991. They purchased their first site in early 1992, which was a “trophy property”, 210-unit project, located in the Southwest part of Austin. The second property JPI purchased in Austin was located in the North Central Area which was a 342-unit project. And, finally the third apartment development in the Austin for JPI would be a 390 unit the Millegan Creek Apartments project. The investment Strategy

JPI tried to achieve at least a 150 basis point spread between the initial yield and the current market capitalization rates. JPI was seeking development opportunities which provide a going-in cap rate (or cash on cash return) of at least 10% on the total project cost. They had developed approximately 2800 apartment units and 1,640 apartments. This record was in line their investment strategy of targeting a “holding period for development projects of two to three years. In 1994, they had eight properties with 2,700 units under construction, four of which were under agreement to be sold upon completion.

Fleet Bank is being considered as a lender of the project. The Austin Market is a new market for Fleet Bank. Fleet wants to diversify its loan portfolio out of Northeast. Tom Hayden’s (a vice president in Commercial Real Estate at Fleet Bank) assignment was to seek financial opportunities in real estate in the State of Texas. Based on Tom’s research, JPI was an active developer who had survived the Texas real estate crash built a large number of apartments.

The Description of the Product: Jefferson at Millegan Creek Apartment would be a typical JPI luxury apartment complex. The apartment would target renters with high discretionary incomes who could probably afford a single-family home, but made a lifestyle choice to live in rental apartments. Site amenities included two swimming pools, a clubhouse, fitness center with sauna and steam rooms, and the laundry facilities. Standard features in each apartment included nine-foot ceilings, a security system, crown molding and upgrade white on white appliances. Location: The Millegan Creek site was located in Williamson County, adjacent to the city of limits of Austin and approximately 11 miles northwest of the central business district. The site was an irregular, rectangular shape consisting of about 21.5 acres, with 904 feet of frontage along McNeil Road. Near Highways: Parmer Lane had recently been expanded from a two lane to a six-lane road and provided excellent north-south access. McNeil Road brought about 15,000 cars in an east west direction past the site each day and had recently been upgraded from a two lane to a five-lane road. In addition, McNeil Road was being extended three miles to connect to Wells Branch Parkway. Construction financing:The loan was being reviewed by Fleet Bank because the volume of deals JPI doing, their existing lenders (NationsBank, Guaranty Federal Savings Bank (in Dallas), BankOne, General Electric Credit Corporation had reached the limit of the exposure they wanted with any borrower. Construction problem:The site was level with no significant subsurface...
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