South Park Essays

629 Words May 17th, 2011 3 Pages
1. Is this a good property for Laflin to acquire?

NPV
From Exhibit 4 the NPV is about $1.5 million. There initial investment is $400,000. Without included debt payments this appears attractive. However, the NPV should include the debt payments for a useful NPV. This reduces the NPV significantly. The investors double their money and the investment appears viable.

Comps
At a price of $18.80 per square foot ($1,500,000/80,000 square feet), the deal seems in line with recent sales in the area as seen in Exhibit 5.

Cash Flow
According to his financial model, the investment generates positive cash flow, excluding the initial investment, over the life of investment. This indicates further capital will not need to be raised for
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This could be accomplished through a sensitivity analysis
* He should show his cash flow netted with the mortgage payment as this reflects the true cash flow of the investment

Changes to the rent roll and vacancy rate as well as the addition of debt cost in the mode yield an npv of $553k. When the initial investment of $400k is taken into consideration this yields a total npv of $153k. This is a positive NPV and therefore the investment is not a losing proposition. However this should be compared to other investments.

3. What price should Laflin offer? What conditions should be attached to his offer? How might Lonestar try to justify a higher price? What might Southpark IV be worth in five years?

Laflin should offer a price less than the $1,500,000. With existing market conditions it does not offer a great enough return. Using my recalculated numbers, a $1,000,000 asking price would offer $600k of NPV. A $1.5 million asking price leaves only $100k.

Lonestar could justify a higher price by indicating the glut of new supply in the Houston market. Vacancy rates are falling and there appears to be no additions of new supply, therefore occupancy rates should raise and rents as well.

According to the calculation of Laflin in year five, NOI is $216,784. At a 10% cap rate the property is worth $2,167,840. My adjusted calculation yields a valuation…

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