Essay on Shady Trail Case Study

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Executive Summary After analyzing the numbers and the market and property factors involved with Shady Trail, it is my opinion that this property is a reasonable one to invest in. It meets the criteria we had previously set forth in choosing an investment property as both the IRR and the current cash flows are in excess of the minimum we mandated. These numbers require that the assumptions we use in market rent, cap rate in 2003, vacancy rate, and our plans to sell the investment after 5 years all hold. If one of these assumptions doesn’t hold and the 5-year projection is below expectations, it can still be remedied by holding the asset for a longer time period. Assumptions/Issues The principal issue in the completed analysis is the…show more content…
Financial Analysis Using the tables (shown below and in Exhibit 1) to calculate cash flow before financing and net proceeds from sale, a DCF method was used to arrive at a NPV of $216,789 and IRR of 13.3% for a 5-year holding period at assumed vacancy of 5% (Exhibit 1). As mentioned earlier, this IRR exceeds the 12.5% initially set out, and therefore seems like a feasible project. Using a higher vacancy rate of 7%, however, lowers the IRR to a point that is no longer feasible. If holding all else same, a vacancy of 7% on the building yields a NPV of $122,420 and an IRR of 11.47% (please see table below and Exhibit 2). This IRR does not meet the minimum required and therefore the assumption of vacancy rates staying at 5% is paramount to our analysis. This aspect of the analysis is considerably risky as an assumed vacancy rate does not necessarily yield a guaranteed rate. If vacancy happens to rise, then the valuation of the property is far different than what was originally envisioned.
Base Rent (12,000 SQ FT at $3.25) 390,000
Add: Expense Reimbursement 118,000
Gross Income =508,000
Subtract: Vacancy (5%) 25,400
Adjusted Gross Income =482,600
Subtract: General Expenses 27,000 R/E Taxes 66,000 Insurance 12,000 Management Fee 13,000 Structural Reserve 15,000
CF From Operations
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