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February 3, 2014

Asset Valuation

Question 1
The Torre Almirante Office tower was a huge challenge for any construction or real estate giant. Keeping in mind the prevalent real estate scenario at that time, nothing had been built like that before in Brazil (Segel & Pinho, 2004). But Hines had a wide range of construction experience of buildings, approximately more than 700 properties all around the world with some of the most popular buildings and sky scrapers. They had the best architects as well as strong footings in the fields of construction, real estate, leasing, and marketing among others. Another advantage of the construction site was that the Centro had 60% of the office supplies at that time and was easily accessible by means of several high ways and modern subway system (Segel & Pinho, 2004). Rio had a metropolitan population of approximately 11 million people in 2002, which was an amazingly good number from the marketing and demand perspective. It was meant to be the biggest attraction for the multinational tenants who were already compromising on their living standards. The project manager Steve Dolman, who was known as a people’s person, had a vast experience of construction, so he had an edge and confidence for negotiations. Rio is a country famous for its tourist attraction, unique culture, and natural beauty. In 2003, the economy in the country was still struggling, but a sudden downfall of inflation to a single digit by their government was an indication of better energy and technological resources due to a promising economic future (Gomes & Skedsvold, 2007). The problems with the project were either internal or external. The design architects of Hines were experiencing a lot of problems with the project. These barriers included glass window specifications and the material for the gold leaf lobby which was highly expensive; the installation of fire safety standards being not compatible with the outdated building codes as mentioned in the case study; and also the problem in the freight elevator shaft mentioned by the local general contractor. Moreover, there were hindrances from the municipality laws along with several insufficient business documents and pending designs (Segel & Pinho, 2004).
Question 2
An investor plays a significant role in the success and timely completion of a project. One has to believe in the project and the execution of financial goals. As an investor, I need assurance of a project’s completion time, as the rate of return and other factors like future economic situation of the country can then be accessed accordingly (Fan & Wong, 2011). This way, an investment can be analyzed to calculate the yields and the risks simultaneously. An investor should be aware of all the risks to which his investment is going to be exposed to; therefore, a cost benefit analysis can be designed to project the financial returns. As a developer, the biggest concern should be timely payments for the development of the project (Fisher & Goetzmann, 2005). This is because the payments will ensure the timely completion of the project and will further build investor confidence for timelier advance payments. This might be different in Brazil due to the lack of existing municipality operations and business laws to safeguard the investor as well as the developer (Selvanayagam, 2011). The procedures and approval processes are time consuming and costly; as a result, this endangers the completion date of the project.
Question 3
Dolman should have done maximum expenditure that can be managed on the lobby’s ceiling. There should have been a proper distance between slabs in order to do proper air-conditioning and lighting. The lobby is one of the most important aspects as it gives the first impression of the interior and the inner view of the building (Gomes & Skedsvold, 2007). Hines should have gone for the multi-tenanted building, as they have short-term contracts as compared to single tenanted buildings, thus offering more flexibility for the exit strategy. When taking into consideration the expenses for fixing the elevator shaft, Racional should have been the one to bear them, as it was their responsibility, according to the contract, to manage all the expenses for construction and development (Tarasevici, 2000). The misalignment in the shaft should have been fixed rather than engineering and redesigning the whole cabin as well as going through the long and costly procedure of approvals. Since the designing and approval process is Hines’s contractual responsibility, all the costs would have been endured by Hines itself in this case, as opposed to Racional in the former case.
Hines’s decision to go for the REIT financing was the right decision due to a number of reasons. Firstly, the cost of designs and approvals kept on changing because of the unavailability of resources and inadequate business and design documents. In order to cater to the ever changing need of the capital expenditure, funds had to be generated. Other options like pension funds had become saturated by 2003; therefore, they could not be availed. Moreover, the fund raising was divided in a number of offerings and as a result, the risk had been further reduced.

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