FINC 371 Project

Executive Summary: A Montessori school offers a unique learning experience and appealing to families with young children. In this growing affluent area 27 miles north of Houston, it will surely be a very profitable real estate investment. Real Estate in The Woodlands is and has been on a trend of growth and prosperity. The financial analysis of this investment has proven that it is a sound investment. The report that follows will prove this point to you. Company profile: Montessori education emphasizes “independence, freedom within limits, and respect for a child’s psychological development” started by Italian doctor and education Maria Montessori. Each of the instructors is trained at a special facility known as Montessori Accreditation Council for Teacher Education. It breaks free of traditional practices of education creating a unique learning experience for each student. Additionally, it has a corporate gaurantee from La Petite Academy, Inc. a Deleware Corp. Market Analysis: The Woodlands area is affluent suburban area targeting families. Although the location of the daycare facility is in an older part of the area, the cost reflects its age. In addition, the location is extremely central and easily accessible from neighboring towns because of it’s proximity to I-45. However, the target market is a well off family with young children and the immediately surrounding area is consistent with the target market. Additionally, the area is growing making a growing need for daycares. Average income within a mile radious is over $106, 000. Typically, the values of Montessori schools focus on hands on learning and uphold a well respected reputation. We will have four instructors paid $14,500/year and one director paid $20,000/year. We anticipate to have approximately thirty students. The purchase price is $1,363,529. One example of a sales comp was in Tomball, TX where another daycare facility sold for between $1,000,000-1,500,000 and had 13,708 available square feet. -Pictures/information about comparable properties -rental rates, occupancy, amenities, rent abatements (free rent for 1 month? Inventory/vacancy rate for property type -Supply/Demand Competition -SWOT Analysis-Property’s Strengths, Weaknesses, Opportunities, and Threats Property Description: The property is 5,964 square feet and goes for $228.63 per square foot. Signage is limited in this area due to restrictions by The Woodlands Association in attempts to maintain a certain asthetic in the area. It is accessible from a driveway from Many Pines Road and is not visible from the road because of a barrier of trees. Financial Analysis This section will tell reveal to you the financial details and analysis of Montessori Unlimited. This will allow you to make the most educated decision as to whether the investment is ideal for you. First off I would like to state and explain some of the assumptions and values that were used in the calculations. The going in cap rate was listed on the property as 8.5%. As for expenses, comparable daycares were looked at to get a good estimate of the operating expenses we expect to be incurred. To find the growth rate of potential growth income, we looked at a national forecast of similar retail environments. We did the same to come up with the growth rate for operating expenses. We also researched local property taxes to come up with a solid figure, the property tax came out to be around $27,000. This is a large amount, but is made up for by Texas’ policy of not having income tax. Thus, in the calculations to find after-tax cash flow, we used sales tax instead of income tax. The sales tax in The Woodlands is around 9.8% of the sale of products or services. The last assumption we made by looking at historical trends was to come up with a terminal cap rate, which we estimated to be just slightly lower than the going in cap rate at 8.2%. Upon doing research, we felt safe with a loan to value of 75%. Looking at the history of banking with small businesses in the area, we assumed the loan would come at a 7.5% interest rate. The first calculation that will give insight into the profitability of this investment is the unleveraged NPV, which is the net present value if there was no debt financing involved. The table above is used to find the unleveraged NPV. This is found by having an initial investment of $1,363,529, and using the NOI for each year as a cash flow. Also, in year 10 we add in the selling value of the property which is calculated by dividing year 11’s NOI by the terminal cap rate. This number is $2,352,850.85. It is also important to note that we used a required of return of 6.47%, which is the average cost of capital for educational services. The NPV= $931,68206 We use the same numbers and process for the unleveraged IRR IRR=14.03% The leveraged NPV and IRR take into account debt financing. In this case, the initial investment is the amount of equity you have to invest. In this case, the LTV was .75 so the investor must invest .25 the purchase price in equity. This value is 340882.25. The after tax cash flows are the yearly cash flows used for this calculation. The year 10 cash flow gets the selling price minus the carrying value on the loan added to it. This value is $1,664,289.74. The leveraged NPV is $810,915.41 The leveraged IRR is 21.81 If you have the capital to be able to buy the property out-right, then that is the most profitable choice as it results in the higher NPV. But, by leveraging you don’t take on as much risk and you have a higher IRR. A vital factor that is playing into these values being so positive is the low cost of capital in the industry which results in a low required rate of return. My advice pertaining to this property is that it is a good investment. It is in a blossoming part of Texas where real estate is growing very fast. In fact, investing in this property for the land alone would not be the worst idea. The Woodlands is quickly becoming a luxury destination and has residents with high average incomes. This is good for any business in the retail sector. To conclude, the Montessori Unlimited daycare is a profitable investment and is worth looking into.