A young entrepreneur conducts an evaluation of South Park IV, an office/warehouse building, with the possibility of acquiring the same. Despite being presently on a lease, the building would soon be free from these leases. In his analysis, this entrepreneur must delve into the current market conditions and into future returns and value. This case study analysis discusses the basic issues in valuating real estate such as the one at hand.
William J. Poorvu
Harvard Business School (390-181)
April 1990 (Revised December 1995)
Case questions answered:
- Is South Park IV a good property for Laflin to acquire?
- What assumptions has Laflin made in creating his setup for SouthPark IV? What changes, if any, would you make to his setup? What is your projected return for the property?
- What price should Laflin offer for the property? What conditions should be attached to his offer? How might Lonestar try to justify a higher price? What might the property be worth in five years?
- Why are there wide variations in the valuation of real property assets?
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Case answers for South Park IV
1. Is South Park IV a good property for Laflin to acquire?
In order to evaluate if South Park IV is good, I would explore multiple factors:
- Houston economy is slowly recovering and Economic growth is expected to generate fresh demand for space in the near future.
- The major concern is that almost every category of real estate had a tremendous supply of vacant space. Although from 1986-1989, there has been no speculative construction in the area, the average occupancy rate remains at 87%.
- Another concern is the collapse of the Savings & Loan industry in Texas which might further depress prices and rents by flooding the market with deeply discounted properties.
- Overall the building in South Park IV is in excellent condition. The one exception was the roof which needed to be repaired with an estimated expense of $50,000.
- The greatest advantage is that the building is fully leased. The leases were net of common expenses, taxes, and insurance. But all four leases were due to expire next year and Tenants may not be willing to continue at $2.5/sqft.
- Since Lonestar is foreclosing on the property, they are offering attractive financing terms, much lower than the industry. The factor to note would be that no one bid for the property at the foreclosure auction.
Based on the above factors, South Park IV looks good. It may not be high return property but considering…