Olav Haldorsen Shajah Arshad

San Clemente Palace Yevhen Samofal Harvig Boserup

Morten Mehle Aabelvik Liubomyr Romaniv
Introduction
Case information
In January 2018 Immobiliare Manzoni International S.p.A. is considering acquisition of “San Clemente Palace”. The property is located in
a semi-central area of Milan and has mixed use of space (office and rental). However, it needs requalification work due to poor
maintenance status. Anticipated rent is €365,000 until 2019, and then €470,000 per year.

- Asking price: €4.55 million

- Other expenses: stamp duty, brokerage fee, property tax, property management and maintenance
- Divestment planned January 2028

Part I
 Assessing profitability of the investment

Part II
 Analyzing projects economic feasibility and financial sustainability given two different financing options.

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Soundness of Investment Heavily Dependent on Financing
Part 1
We recommend an acquisition of San Clemente Palace since the estimated operating cash flows are sufficient to satisfy our investment
criterions:

NPV = € 344 299  Taking project will enhance current company value.

IRR = 7,9 %  Larger than WACC (7%)

PBP = 9,33 years

Part 2
The two financing options provided by The Bank of Abruzzi severely alters our results from Part 1.
We still recommend the investment, contingent on choosing the first financing option. Only then will the acquisition provide
high enough FCFE to generate sufficient return for shareholders. Our results are very sensitive to changes in cost of equity.
Option 1 Option 2
NPV = € 970 NPV = € - 200 493
IRR = 10% IRR = 9,16%
PBP = 9,32 years PBP = 9,27 years
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Part I - Assessing Investment Profitability

Estimation steps:

1. Total revenue from yearly rent income

2. Operating expenses, while considering inventory changes for cost of goods sold (COGS)

3. Change in working capital

4. Free cash flow from operations (FCFO) and resulting investment valuation criterions (NPV, IRR, PBP)

Operating NPV
Total ∆Working
expenses FCFO IRR
revenue capital
and taxes PBP

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 1) Total Revenues
Revenues 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Rent 365 000 235 000 474 700 479 447 484 241 489 084 493 975 498 914 503 904 508 943 -

• EFP 90 000 - - - - - - - - - -

• REFQI 275 000 - - - - - - - - - -

• ABC - 120 000 121 200 122 412 123 636 124 872 126 121 127 382 128 656 129 943 -

• ENNE - 350 000 353 500 357 035 360 605 364 211 367 854 371 532 375 247 379 000 -

• Discount - (235 000) - - - - - - - - -

Sales - - - - - - - - - - 7 343 315

Comments:
Rent income in 2018 is 365,000, and the rent will be 50% rental discount given in 2019 due to
increased to 470,000 from 2019. However, in 2019 the inconvenience from construction work.
tenant is given 50% discount due to inconvenience from the
ongoing requalification works.
According to the agreement, rent will be 100%
Disinvestment price is calculated using the direct
indexed to the inflation rate. We assume an inflation
capitalization approach, dividing expected rent in 2028 by
rate of 1%, thus yearly rental increase of 1%.
“going out” cap rate of 7 %
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 2) Operating Expenses
Expenses 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

COGS (115 206) (130 206) (130 206) (130 206) (130 206) (130 206) (130 206) (130 206) (130 206) (130 206) (4 013 190)

Brokerage fee - - - - - - - - - - (110 150)

Stamp duty on lease (1 825) (1 175) (2 374) (2 397) (2 421) (2 445) (2 470) (2 495) (2 520) (2 545) -

Property management (3 650) (2 350) (4 747) (4 794) (4 842) (4 891) (4 940) (4 989) (5 039) (5 089) -

Maintenance (41 250) (41 663) (42 079) (42 500) (42 925) (43 354) (43 788) (44 226) (44 668) (45 115) -

Property tax (25 000) (25 000) (25 000) (25 000) (25 000) (25 000) (25 000) (25 000) (25 000) (25 000) -

Comments:
COGS represents the depreciation of our initial investment Property management cost is a percentage of rental
and from 2020 also depreciation of requalification part. income, inflation is therefore indirectly considered
We treat property taxes as expense because it’s a fixed fee
based on the property not our operating income.
Maintenance cost increases with inflation. Number
COGS in 2028 represents the end of year book value in of square meters is constant.
2027 of land, property and requalification investment.

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 3) Working Capital
Current assets 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Land
b-o-y - 960 050 960 050 960 050 960 050 960 050 960 050 960 050 960 050 960 050 960 050
Increase – Investment 960 050 - - - - - - - - - -
Decrease – Divestment - - - - - - - - - - (960 050)
e-o-y 960 050 960 050 960 050 960 050 960 050 960 050 960 050 960 050 960 050 960 050 -
Property
b-o-y - 3 724 994 3 609 788 3 494 582 3 379 376 3 264 170 3 148 964 3 033 758 2 918 552 2 803 346 2 688 140
Increase – Investment 3 840 200 - - - - - - - - - -
Decrease – Depreciation (115 206) (115 206) (115 206) (115 206) (115 206) (115 206) (115 206) (115 206) (115 206) (115 206) -
Decrease – Divestment - - - - - - - - - - (2 688 140)
e-o-y 3 724 994 3 609 788 3 494 582 3 379 376 3 264 170 3 148 964 3 033 758 2 918 552 2 803 346 2 688 140 -
Requalification
b-o-y - - 485 000 470 000 455 000 440 000 425 000 410 000 395 000 380 000 365 000
Increase – Investment - 500 000 - - - - - - - - -
Decrease – Depreciation - (15 000) (15 000) (15 000) (15 000) (15 000) (15 000) (15 000) (15 000) (15 000) -
Decrease – Divestment - - - - - - - - - - (365 000)
e-o-y - 485 000 470 000 455 000 440 000 425 000 410 000 395 000 380 000 365 000 -
Working Capital
b-o-y - 4 685 044 5 054 838 4 924 632 4 794 426 4 664 220 4 534 014 4 403 808 4 273 602 4 143 396 4 013 190
e-o-y 4 685 044 5 054 838 4 924 632 4 794 426 4 664 220 4 534 014 4 403 808 4 273 602 4 143 396 4 013 190 -
Change in WC 4 685 044 369 794 (130 206) (130 206) (130 206) (130 206) (130 206) (130 206) (130 206) (130 206) (4 013 190)

Comments:
Property and requalification part is Requalification part must be capitalized Depreciation on initial investment and
depreciated by 3% annually, land is not. as its recognized as necessary at the requalification starts the occurring year in
We assume sale in start of 2028. time of acquirement. line with instructions on BlackBoard

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 4) Free Cash Flow From Operations
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Operating Income 178 069 34 607 270 294 274 549 278 847 283 187 287 571 291 999 296 471 300 988 3 219 976

Corporate tax (42 737) (8 306) (64 871) (65 892) (66 923) (67 965) (69 017) (70 080) (71 153) (72 237) (772 794)

NOPAT 135 332 26 301 205 424 208 658 211 924 215 222 218 554 221 919 225 318 228 751 2 447 182

(Change in WC) (4 685 044) (369 794) 130 206 130 206 130 206 130 206 130 206 130 206 130 206 130 206 4 013 190

FCFO (4 549 712) (343 493) 335 630 338 864 342 130 345 428 348 760 352 125 355 524 358 957 6 460 372

NPV: € 344 299 IRR: 7,9% PBP: 9,33 years

Comments:
First positive cash flow in 2020 (year 2) due to initial As operating income is positive in all years we don’t
investment and then requalification cost accumulate losses that we can carry forward for tax
deductions.

2018 is considered year 0 and is not discounted. PBP shows that we don’t get back our initial
investment until we liquidate the project
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 Part II - Analyzing Economic Feasibility and Financial Sustainability
Financing Alternatives
We are provided two different financing options by The Bank of Abruzzi to pay for the acquisition and requalification.

Acquisition line – Option 1

Acquisition costs 4 800 250

Loan to Value 50 %
Loan Amount 2 400 125
Interest rate – preamortizing 5,5%
Common terms
Interest rate – regular 5,0%
Arrangement fee 0,75 %
Stamp duty tax 0,25 %
Acquisition line – Option 2 Interest payment Yearly
Capital repayment Yearly
Acquisition costs 4 800 250

Loan to Value 30 %

Loan Amount 1 440 075

Interest rate 5,5%

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Financial structure for San Clemente Palace

Requalification Aquisition option 1 Aquistion option 2

Bank Abruzzi Equity Bank Abruzzi Equity Bank Abruzzi Equity

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 Detailed drawdown comparison (book perspective)
Acquisition Financing Line 1 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
b-o-y balance - 2 400 125 2 400 125 2 250 117 2 100 109 1 950 102 1 800 094 1 650 086 1 500 078 1 350 070 1 200 063
New Debt 2 400 125 - - - - - - - - - -
Debt Repayment - - (150 008) (150 008) (150 008) (150 008) (150 008) (150 008) (150 008) (150 008) (1 200 063)
e-o-y balance 2 400 125 2 400 125 2 250 117 2 100 109 1 950 102 1 800 094 1 650 086 1 500 078 1 350 070 1 200 063 -

Acquisition Financing Line 2 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
b-o-y balance - 1 440 075 1 440 075 1 440 075 1 440 075 1 440 075 1 440 075 1 440 075 1 440 075 1 440 075 1 440 075
New Debt 1 440 075 - - - - - - - - - -
Debt Repayment - - - - - - - - - - (1 440 075)
e-o-y balance 1 440 075 1 440 075 1 440 075 1 440 075 1 440 075 1 440 075 1 440 075 1 440 075 1 440 075 1 440 075 -

Comments:

Option 1 is a mixed. We repay the 50% of the As option 2 is a “bullet”-loan. We repay the full
amount at maturity in 2028 and the other half from amount at maturity in 2028.
2020.

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 Option 1) Debt Service Progression
Acquisition Financing Line 1 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

FCFO (4 669 988) (459 208) 238 269 250 167 262 098 274 061 286 057 295 122 304 221 313 355 6 460 372

Debt repayment - - 210 008 210 008 210 008 210 008 210 008 150 008 150 008 150 008 1 200 063
Interest payments and
issuance costs 158 258 152 257 128 106 116 705 105 305 93 905 82 504 75 004 67 504 60 003 -

DSCR -29,5 -3,0 0,7 0,8 0,8 0,9 1,0 1,3 1,4 1,5 5,4

ICR -29,5 -3,0 1,9 2,1 2,5 2,9 3,5 3,9 4,5 5,2 -

Comments:

DSCR is lower than 120% in 2020-2024. However,

DSCR and ICR are calculated but irrelevant for 2018 given that ICR well exceeds 170% in all years, we
and 2019 as our two investments occur these years assume that the bank will not request any provision
of equity

ICR is positive in all relevant years as we have

maintain a positive cash-flow sufficient to service our 2018 is considered year 0 and is not discounted.
interest cost.

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 Option 1) Free Cash Flow to Equity
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Income
Operating income 19 811 (117 650) 142 189 157 844 173 542 189 283 205 067 216 995 228 968 240 985 3 219 976
Corporate tax (4 755) 28 236 (34 125) (37 883) (41 650) (45 428) (49 216) (52 079) (54 952) (57 836) (772 794)
NOPAT 15 056 (89 414) 108 063 119 961 131 892 143 855 155 851 164 916 174 015 183 149 2 447 182
Cash Flows
(Change in WC) (4 685 044) (369 794) 130 206 130 206 130 206 130 206 130 206 130 206 130 206 130 206 4 013 190
Change in debt 2 400 125 300 000 (210 008) (210 008) (210 008) (210 008) (210 008) (150 008) (150 008) (150 008) (1 200 063)
FCFE (2 269 863) (159 208) 28 261 40 160 52 090 64 053 76 049 145 115 154 214 163 347 5 260 309

NPV: € 970 IRR: 10 % PBP: 9,32 years

Comments:
Due to interest expenses we now have operating
FCFE shows the result of our equity-stake in the
losses in year 2019. We consider that the
project.
corporation is taxed as a whole and therefore we
PBP shows that we don’t get back the equity stake don’t carry it forward for deduction but consider it
until we liquidate the project. immediately.

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 Option 2) Debt Service Progression
Acquisition Financing Line 2 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

FCFO (4 622 561) (419 078) 263 579 269 776 276 007 282 269 288 565 291 930 295 329 298 762 6 460 372

Debt repayment - - 60 000 60 000 60 000 60 000 60 000 - - - 1 440 075

Interest payments and
issuance costs 95 855 99 454 94 804 90 904 87 004 83 104 79 204 79 204 79 204 79 204 -

DSCR -48,2 -4,2 1,7 1,8 1,9 2,0 2,1 3,7 3,7 3,8 4,5

ICR -48,2 -4,2 2,8 3,0 3,2 3,4 3,6 3,7 3,7 3,8 -

Comments:

DSCR is above 140% and ICR exceeds 170% the

DSCR and ICR are calculated but irrelevant for 2018 full period. Therefore, we assume that the bank will
and 2019 as our two investments occur these years not request any provision of equity

ICR is positive in all relevant years as we have

maintain a positive cash-flow sufficient to service our 2018 is considered year 0 and is not discounted.
interest cost.

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 Option 2) Free Cash Flow to Equity
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Income
Operating income 82 214 (64 848) 175 490 183 645 191 843 200 083 208 367 212 795 217 267 221 784 3 219 976
Corporate tax (19 731) 15 563 (42 118) (44 075) (46 042) (48 020) (50 008) (51 071) (52 144) (53 228) (772 794)
NOPAT 62 483 (49 284) 133 373 139 570 145 801 152 063 158 359 161 724 165 123 168 556 2 447 182
Cash Flows
(Change in WC) (4 685 044) (369 794) 130 206 130 206 130 206 130 206 130 206 130 206 130 206 130 206 4 013 190
Change in debt 1 440 075 300 000 (60 000) (60 000) (60 000) (60 000) (60 000) - - - (1 440 075)
FCFE (3 182 486) (119 078) 203 579 209 776 216 007 222 269 228 565 291 930 295 329 298 762 5 020 297

NPV: € - 200 493 IRR: 9,16 % PBP: 9,27 years

Comments:
FCFE shows the result of our equity-stake in the Due to interest expenses we now have operating
project. losses in year 2019. We consider that the
corporation is taxed as a whole and therefore we
PBP shows that we don’t get back the equity stake don’t carry it forward for deduction but consider it
until we liquidate the project. immediately.

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 Conclusion Part II
Debt-Service Coverage-Ratio comparison Interest-Service-Coverage comparison
6.0

5.0

4.0

3.0

2.0

1.0

0.0
2020 2021 2022 2023 2024 2025 2026 2027 2028 2020 2021 2022 2023 2024 2025 2026 2027

Option 1 Option 2 Option 1 Option 2

Comments:

Option 1 appears to be riskier for the financier. No interest payments in 2028

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Conclusion Part II

Aquisition option 1 Aquistion option 2

Option 1 Option 2
NPV = € 970 NPV = € - 200 493
IRR = 10% IRR = 9,16%
PBP = 9,32 years PBP = 9,27 years

Bank Abruzzi Equity Bank Abruzzi Equity

Comments:

Financing option 1 is the only option that will
make the project profitable for the corporation
given the cost of capital. However as we have
DSCR below 1 for the first 3 years its less
attractive for the bank.
As option 1 implies stronger gearing (50%
financing), this leads to higher return on
capital, hence the higher NPV.
There is of course an effect of interest
payments as well.

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Sensitivity Analysis for Cost of Equity

At last we have made an analysis showing how the NPV varies in absolute numbers with
changes to cost of capital. This is relevant if the corporation wants to adjust its demanded
return for risk.

Aquisition Line 1 Aquisition Line 2

Cost of Equity Net Present Cost of Equity Net Present
Value (equity) Value (equity)
11,50% (285 711) 11,50% (524 111)
11,00% (194 738) 11,00% (421 126)
10,50% (99 261) 10,50% (313 339)
10,00% 970 10,00% (200 493)
9,50% 106 213 9,50% (82 319)
9,00% 216 748 9,00% 41 469
8,50% 332 867 8,50% 171 174

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 Olav Haldorsen Shajah Arshad

Scandinavian Property Partners Yevhen Samofal Harvig Boserup

Morten Mehle Aabelvik Liubomyr Romaniv