Economic Recession and Land

Beacon Lakes Case Analysis

Armando Codina is the chairman and CEO of Armando Codina Group of Company, which is one of the most active developers in Florida. However, Armando Codina is facing a challenging decision whether to abandon the Beacon Lakes development project worth $220 million or go ahead with the project. However, Codina has already spent $2 million to obtain the necessary approval to develop the 6.6 million square foot warehouse project Despite the approval, Codina is facing various obstacles making him considering whether to go ahead with the project or abandon the project. Codina feels that an unsuccessful project such as the Beacon project can affect his untainted career. Among the problems facing Codina is the uncertainty regarding the getting an approval for the project and expansion to the UDB (Urban Development Boundary) towards the west that is currently zoned to prohibit further development. (Segel, Barlick, & Gonzalec, 2008). Moreover, the negative press coverage regarding the project investment at Beacon Lakes is given Codina a consideration whether not to go ahead with the project. For example, the latest news of The SFBJ (South Florida Business Journal) shows that the press is against the project. The current weekly business news of the SFBJ reveals that the author is biased about the project because there are many illegal contaminations and dumping at the site. (Segel, Barlick, & Gonzalec, 2008).

Similar to the negative press coverage, the local government agencies are also placing obstacles to the approval of the project. Thus, Codina needs to obtain a wide variety of approval, reviews, and permits from more than 20 different local, state and federal government departments and agencies. Additionally, Codina is considering that the approval will affect the market conditions of the project looking at the recession and downward markets that have been affecting the US commercial real market sector since the last 12 months.

After estimating the project costs, Codina believes that the project cost is substantial. Apart from the environmental mitigation, operating costs are also pushing project costs high The unexpected demand by the local authorities can also push the cost liabilities high. Moreover, the developmental costs such as land acquisition, construction, infrastructure and other developmental costs are significantly high. Additionally, the stock market decline coupled with the economic recession compound the problem of a decline in market demand for the properties. For example, the supply of industrial properties outpaces the demand. In 2001, developers delivered more than three million square feet of new industrial warehouse space in Miami. However, the demand was unable to match the supply with 12.5% vacant rate of properties. Moreover the average asking lease price for the warehouse properties fell to $16.50 per square feet. (Segel, Robert, & Jose, 2008).

The major barrier to the project was the GU rezoning that is designated to the Beacon Lakes. Codina would need to ensure that amendment of county master plan is carried out. The press is not helping the matter. In the last few weeks, SFBJ is written series of articles that are against the project. A report even emphasizes that an involvement of Armando Codina in the local politics will assist him securing the approval for the project. Typically, SFBJ published a series of the misleading campaign with the goal of derailing the project. Moreover, some group of environmentalists is also opposing the project believing that the project may lead to the environmental degradation.

2. Hypothesis

Armando Codina Group is to ahead with the project amidst of the barriers because the benefits of the project in the long run are more than costs.

3.Analysis to Support the Hypothesis

Several indications in the case support that Codina should go ahead with the project despite the barriers. The cost-benefit analysis of the project reveals that the benefits of the project are more than the costs. A being revealed in Appendix 1, the expected operating income that will be realized from the 20 acres of land developed will be $1.86 Million in 2003 and will increase to $2.36 Million in 2013.

Although, the economic recession that the United States is experiencing will be temporary, the economic situation will pick up within few years making the project to command high income. Moreover, Codina is not going to finance the project from the company revenue, some banks have decided to sponsor the project by providing loans for the company. Although, the project developmental costs are approximate $141 Million, however, the Group expects to raise fund from the local banks. Moreover, the Codina expects to buy the land for the project for $95,00 per acre. However, not all land will be used for the project, the company intends to sell the remaining 174 acres of the usable land for $363,726 per acre. Based on the estimation, Codina will reap the benefits of $46.75 Million benefits by selling the rest of the land as being revealed in Table 1.

Table 1

Cost of Land acre

Remaining Acres

Costs

$95 000,00

$16 530 000,00

Total Sales

$363 726,00

$63 288 324,00

Revenues

$46 758 324,00

Apart from the benefits that the company will reap from the selling the remaining land, Codina will also be able to raise $65 million from CDD (Community Development District) bond to finance the project. The company will also be able to secure local, state and federal governments bonds to finance the infrastructures such as canals, roads and other infrastructures. Codina will be eligible for the tax-exempt financing arrangement that will assist the company to enjoy the reduced costs from the project because of the implicit subsidy that will assist in reducing the project costs.

More importantly, Codina Group stands to enjoy 100% from the CDD bonds. The financing will serve as important benefits for the company because banks rarely provide the project development loans because they have run into a problem by financing the similar projects in the past. However, Codina Group can still raise approximately $65 Million to cover the eligible infrastructures, and the company will be able to repay the loans from the benefits derived from selling the remaining land not used for the project development.

More importantly, Codina hopes to derive tax benefits from the brownfield development. Similar to other states in the United States, Florida also encourages the developers to implement the rehabilitation of the contaminated properties. Thus, the Codina believes that the incentives from the state government will assist him to enjoy the tax benefits. After the project completion, Codina expects that the project will generate approximately 9,600 full-time jobs as well as generate $10 million tax revenue for the state government.

Moreover, the company will enjoy the VCTC (Voluntary Clean-Up Tax Credit) that will be up to 35% of the cleanup costs, which will be up to $250,000 yearly. The Group will also be able to enjoy $2,500 tax refund for the eligible job created. Since Codina will generate up to 9,600 full-time jobs from the project, the company will generate $24 Million tax credit from the total jobs created from the project as being revealed in Table 2.