Real Estate Finance and Investment

Shady Trail case

Datum: 31-1-2012

Taco van der Hoest 303450
Dave Tettero 291138

Executive Summary
This report provides an analysis and evaluation of the current and prospective profitability of the Shady Trails property. Methods of analysis include trend, horizontal and vertical analysis as well as calculations such as Return on Assets, Return on Equity, Loan-to-Value ratio and the Gross Rent Multiplier. All calculations are found in the appendices.

Original Setup
Using the original assumptions our initial results regarding the desired profitability of the Shady trail are positive: * Net Operating Income (NOI), Cash Flow from Operations (CFO) and Cash Flow after Financing (CFAF) …show more content…
Results of the initial data analysis shows that all financial calculations and ratios are positive. The high ROE and ROA ratios and most importantly the high IRR ratio of 19% leads us to our initial conclusion: we believe that the Shady Trail property is a good investment opportunity for Mr. Lunsford and his investors.

Revision of assumptions:
Base rent
Lunsford calculated Shady Trails base rent income based on the fact that both current tenants are willing to extend their leases at the current market rent. Here he makes two assumptions: one, he will not be able to find new tenants that are willing to pay a price that exceeds the cost of bringing in new tenants and two, the current market rent is still $3.9 per square foot (PSF). We think that he should at least investigate the option of bringing in new tenants and we would definitely change the base rent as the current average base rent PSF for competitive properties is as low as $3.30 PSF (Table D). One note we would like to add is the fact that we disregarded the high average asking rate of $3.91 PSF in the Stemmons sub- market (Exhibit 6) since both the exact price buildup and the comparability of the properties is unknown to us.

Vacancy
The vacancy rate of 5% used in Lunsfords calculation seems too optimistic in our opinion. As the industry average in Dallas equaled 9.6% with a 7.6% vacancy rate for the Stemmons sub-market (Exhibit 6) where Shady Trail was located, we would certainly