-Write from an ethical point of view
-Written as a memo to the EVP of finance.
You are asked to build a financial model for a mixed use development project in Washington, DC. However, the managing partner has left some decisions open. You are to determine how they should be dealt with in the model. Among those issues:
The project has a multifamily housing component. Should the project accept Section 8 vouchers for low income tenants? (Note that in order to obtain the necessary land for the project, some existing low income housing will have to be razed.) Section 8 vouchers provide a stable source of revenues, but may drive away more affluent families and high end retail tenants.
The project’s cash flows during construction will be tight. Any unexpected expenditure will impact the delivery date and potentially risk the project’s viability. Do you use equity (which has little impact on cash flows, but requires the developers to give away part of the company) or debt (which requires principal and interest payments, but allows the developers to retain 100% of the companys stock) to finance the project?
A verbal commitment to provide financing has been secured from the investment arm of a wealthy family (the Pepsee family). The two sisters who make investment decisions for the family are very polarizing in D.C. They are known for their charitable and political contributions to groups that want to keep DC’s representatives from having a vote in Congress. The “Pepsee Sisters” have offered to provide either debt or equity at below market rates to finance the project. Do you rely on the Pepsee Sisters for your financing? Or do you look elsewhere, even though that will put the project timeline back substantially and cost more? Do you inform the DC government of the involvement of the Pepsee Sisters?
The financial model provides an estimate of future financial performance. But it also reflects choices made in the project. How should these issues be addressed or noted in the financial model – if at all? You are to write a memo to the EVP of finance at your firm, explaining your recommendations for all three bullet points. The memo should not exceed 500 words.