South Park IV Case Solution & Answer

South Park IV Case Solution  

Description of Property, Location, Condition, and Usage

George Laflin raised $450,000 million in order to invest in 80,000 square feet commercial and industrial building located in 100 acre South Park Industrial Center Houston, Texas.The building was constructed in the year 1980, which includes 185 foot bay depths and a clear ceiling of 22 foot.The asking-price for this property is $1.5 million.

It is expected that 15% of the building area consists-an office with external concretepanelwalls; therefore the building is in an excellent condition. There is only one exception in the building that is its roof, which is not in a good condition and it needs-some sort of maintenance. It is expected that the maintenance cost will be no more than $50,000.

There are several uses of building like in order to access through rail there is loading dock present in front of the building with the parking facility of 80 cars.Due to its multiple uses, it generated operating cash flow of $200,000 in the year 1989however,these estimates are according to the sales book of present owner.

Market condition

In early 1980’s there was a downturn in oil prices, which affected the global economy and the US economy as well. It affected the real estate industry as well and there was no significant increase in the industrial space of Houston from the year1986 to 1989, which is the desired location of Laflin.

Before the downturn in the oil prices, Houston was the 9th largest industrial market in the US. It is expected that after this collapse, there was no significant increase in real estate industry in the whole US real estate industry, therefore Houston is still among the largest industrial markets in the US and there is a significant potential in real estate industry.

This collapse in oil prices also affects the saving and loan-industry,which results in further decrease in rentals amount and restricts the industrial property holders to more discounted prices.Therefore,the profitability ratio in this sector decreases significantly.

It is expected that oil prices will be stabilized within a year or two as they have increased from $14 dollar per barrel to $16 per barrel.Therefore,it could re-stabilize the real estate industry, which will increase the Industrial Occupancy ratio and employment-ratio which decreased significantly from the year 1980 to 1989.

Justification of Current Market Value with respect to Appraiser’s Valuation

The building is fully leased at $2 per square feet and it is expected that the building is leased by four tenants with different sizes. However,all leases will expire in the month of June of the year 1990. The current market value of the building is $1.2 million and the value of the land is$300,000 therefore the overall market value of the desired building is $1.5 million. In order to appraise the value of the property, the appraiser uses three methods.

Each method like cost, income and market data justifies the current value of the property. The most-appropriate valuations are through net present value and market value of a similar building like market value of a building whose lea-sable area is 82159 square feet with 8% office and 22 feet ceiling height is 1233200 dollar. As the square feet area and ceiling height of the South Park are-same as of above mentioned building and it is comparatively new building as it was builtin 1980, therefore the overall market value of the South Park is realistic according to the valuation of the  appraiser.

Financial Analysis

According to appraiser’s valuation the asked price of this property is reasonable with respect to cost, income and market valuation. However,in order to evaluate whether the investment is worthwhile or not for Laflin, the discounted cash flow model is used. Due to the recent collapse in real estate industry and decrease in profitability because of decrease in rentals, Lonestar offered Laflin a secured loan of worth $1.2 million at a low interest rate and at easy terms as compared to current market interest rate and other related terms. It is expected that Laflin will get mortgage loan on this property at an interest rate of 8% with 10 years period and 30 years amortization period. Therefore,calculations are performed for 10 years with interest rate of 8% on current debt facility…………….

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