Shady Trail Ver2

MGP 276 Real Estate Finance and DevelopmentCase 2 – Shady Trail

Hardik Mehta, James Shaltes, Srini Srinivasan

Thursday, December 5, 2013

Scenario 1 (as in the case but w/o taxes) Scenario 2 (as in the case but w/o taxes)Item Value Comments Item

Cost based Valuation $3,735,000 From Exhibit 3 Cost based ValuationInvestment $1,200,000 InvestmentTotal Sq Ft 120,000 Total Sq Ft

Rent/SF $3.90 Rent/SF

Annual Rent Growth 3% Annual Rent Growth

Cap Rate 9% Cap Rate

Vacancy 5% Vacancy

Sales Commission 5% Sales Commission

Shady Trail Setup ($000s) Shady Trail Setup ($000s)Base Rent $468 $118K =$105K + $13K (Management Fee) Base RentExpense Reimbursement $118 Expense Reimbursement

Gross Income $586 Gross IncomeVacancy 5% $29 Vacancy 7.6%

Adjusted Gross Income $557 Adjusted Gross Income

General Expenses $27 General ExpensesReal Estate Taxes $66 Real Estate TaxesInsurance $12 InsuranceManagement Fee $13 Management FeeStructural Reserve $15 Structural Reserve

Cash Flow from Operations $424 Cash Flow from OperationsTenant Improvements $0 Tenant ImprovementsLeasing Commissions $0 Leasing Commissions

Cash Flow Before Financing $424 Cash Flow Before Financing

Cash Flow from Operations $424 Cash Flow from OperationsInterest $167 30 year @ 6%

InterestPrincipal $34 Principal

Cash Flow After Financing $223 Cash Flow After Financing

Pre-Tax Cash-on-Cash return before transaction costs 18.58% Pre-Tax Cash-on-Cash return before transaction costs

Assumption: Extend the lease of current tenants for 5 years @ 3.90/Sq. Ft.

Net Sales Price Calculation Net Sales Price Calculation2004 Cash Flow @ 3% Growth ($ '000s) $492 $424*(1.03)^5 2004 Cash Flow @ 2% Growth ($ '000s)Sale Price ($'000s) $5,461 Sale Price ($'000s)

Net Sales Price After Commission $5,193 Net Sales Price After CommissionLess: Mortgage at the end of 2003 $2,606 Less: Mortgage at the end of 2003

Cash Before Taxes from Sale $2,587 Cash Before Taxes from Sale

Pre-tax return on $1.2M Investment $2,587 116% Pre-tax return on $1.2M Investment

Equity $1,200,000 25% 0.3 7.50%Debt $2,800,000 6% 0.7 4.20%Total $4,000,000 11.7%

Based on These assumptions we do not recommend that Mr. Lunsford buy the Shady Trail Property




Scenario 2 (as in the case but w/o taxes) Scenario 3 (Valuating the purchase price to get the same return as Scenario # 1)Item Value Comments Item

Cost based Valuation $3,735,000 From Exhibit 3 Cost based ValuationInvestment $1,200,000 InvestmentTotal Sq Ft 120,000 Total Sq Ft

Rent/SF $3.25 Based on Table D Rent/SF

Annual Rent Growth 2% Annual Rent Growth

Cap Rate 11.7% Cap Rate

Vacancy 7.6% Vacancy

Sales Commission 5% Sales Commission

Shady Trail Setup ($000s) Shady Trail Setup ($000s)Base Rent $390 Base RentExpense Reimbursement $118 Expense Reimbursement

Gross Income $508 Gross IncomeVacancy 7.6% $39 Vacancy 7.6%

Adjusted Gross Income $469 Adjusted Gross Income

General Expenses $27 General ExpensesReal Estate Taxes $66 Real Estate TaxesInsurance $12 InsuranceManagement Fee $13 Management FeeStructural Reserve $15 Structural Reserve

Cash Flow from Operations $336 Cash Flow from OperationsTenant Improvements $0 Tenant ImprovementsLeasing Commissions $0 Leasing Commissions

Cash Flow Before Financing $336 Cash Flow Before Financing

Cash Flow from Operations $336 Cash Flow from OperationsInterest $167 30 year @ 6%

InterestPrincipal $34 Principal

Cash Flow After Financing $135 Cash Flow After Financing

Pre-Tax Cash-on-Cash return before transaction costs 11.28% Pre-Tax Cash-on-Cash return before transaction costs

Based on Exhibit 6. Average Growth Rate of Mfg, Retail, Wholesale,

Transportation & utility and Distribution employment is 1.26%

Based on $4M valuation Now. See Page 5

Page 12. Dallas Warehouse Space by Submarket, fall 1998. Stemmons County

$118K =$105K + $13K (Management Fee)


Net Sales Price Calculation Net Sales Price Calculation2004 Cash Flow @ 2% Growth ($ '000s) $371 $424*(1.02)^5 2004 Cash Flow @ 2% Growth ($ '000s)Sale Price ($'000s) $3,174 Sale Price ($'000s)

Net Sales Price After Commission $3,021 Net Sales Price After CommissionLess: Mortgage at the end of 2003 $2,606 Less: Mortgage at the end of 2003

Cash Before Taxes from Sale $415 Cash Before Taxes from Sale

Pre-tax return on $1.2M Investment $415 35% Required Pre-tax return on $1.2M Investment

Based on These assumptions we do not recommend that Mr. Lunsford buy the Shady Trail Property

Yearly Mortgage of $113K for a 30 year 6% Fixed Rate Mortgage = $0.95M ~ $1M. We recommend that Mr. Lunsford make pay up to $2.2M for the Shady Trail Property




Scenario 3 (Valuating the purchase price to get the same return as Scenario # 1)Item Value Comments

Cost based Valuation $3,735,000 From Exhibit 3Investment $1,200,000 Total Sq Ft 120,000

Rent/SF $3.25 Based on Table D

Annual Rent Growth 2%

Cap Rate 11.7% Based on $4M valuation Now. See Page 5

Vacancy 7.6%

Sales Commission 5%

Shady Trail Setup ($000s)Base Rent $390 $118K =$105K + $13K (Management Fee)Expense Reimbursement $118

Gross Income $508Vacancy 7.6% $39

Adjusted Gross Income $469

General Expenses $27Real Estate Taxes $66Insurance $12

$13Structural Reserve $15

Cash Flow from Operations $336Tenant Improvements $0Leasing Commissions $0

Cash Flow Before Financing $336

Cash Flow from Operations $336Interest

$11330 year @ 6%

PrincipalCash Flow After Financing $223

Pre-Tax Cash-on-Cash return before transaction costs 18.58%

Based on Exhibit 6. Average Growth Rate of Mfg, Retail, Wholesale, Transportation & utility

and Distribution employment is 1.26%

Page 12. Dallas Warehouse Space by Submarket, fall 1998. Stemmons County


Net Sales Price Calculation2004 Cash Flow @ 2% Growth ($ '000s) $371 $424*(1.02)^5Sale Price ($'000s) $3,174

Net Sales Price After Commission $3,021Less: Mortgage at the end of 2003 $1,296

Cash Before Taxes from Sale $1,725

Required Pre-tax return on $1.2M Investment $1,725 43.72%

Yearly Mortgage of $113K for a 30 year 6% Fixed Rate Mortgage = $0.95M ~ $1M. We recommend that Mr. Lunsford make pay up to $2.2M for the Shady Trail Property

Holding Year 1 2 3 41998 1999 2000 2001 2002

Total Sq Ft 120000 120000 120000 120000 120000Rent/SF $ 3.90 $ 3.90 $ 3.90 $ 3.90 $ 3.90 Base Rent $ 468,000 $ 468,000 $ 468,000 $ 468,000 $ 468,000

Expense Reimbursement $ 118,000 $ 118,000 $ 118,780 $ 119,576 $ 120,387 Gross Income $ 586,000 $ 586,000 $ 586,780 $ 587,576 $ 588,387 Vacancy rate 8% 8% 8% 8%

Vacancy $ - $ 44,536 $ 44,595 $ 44,656 $ 44,717 Adjusted Gross Income $ 586,000 $ 541,464 $ 542,185 $ 542,920 $ 543,670

General Expenses $ 27,000 $ 27,000 $ 27,540 $ 28,091 $ 28,653 Real Estate Taxes $ 66,000 $ 66,000 $ 66,000 $ 66,000 $ 66,000 Insurance $ 12,000 $ 12,000 $ 12,240 $ 12,485 $ 12,734 Management Fee $ - $ 13,000 $ 13,000 $ 13,000 $ 13,000

Structural Reserve $ - $ 15,000 $ 15,000 $ 15,000 $ 15,000 Cash Flow from Operations $ 481,000 $ 408,464 $ 408,405 $ 408,344 $ 408,283 Tenant Improvements $ - $ - $ - $ - $ -

Leasing Commissions $ - $ - $ - $ - $ - Cash Flow Before Financing $ 481,000 $ 408,464 $ 408,405 $ 408,344 $ 408,283 Interest $ 167,064 $ 164,943 $ 162,692 $ 160,301 Principal $ 34,384 $ 36,505 $ 38,765 $ 41,147 Cash Flow After Financing $ 207,016 $ 206,957 $ 206,887 $ 206,835 Discount rate 113% 127% 142% 160%DCF $ 184,014.22 $ 163,521.36 $ 145,303.53 $ 129,125.81

Sum of DCFCap Rate2004 Cash FlowSale Price ($'000s)Net Sales Price After Commission

Less: Mortgage at the end of 2003

Tenant ImprovementsLeasing CommissionsCash Before Taxes from Sale

Scenario 1 Scenario 2 Scenario 3 Scenario 45 6 6 6 6

2003 2004 2004 2004 2004120000 120000 120000 120000 120000

$ 3.90 $ 3.25 $ 3.59 $ 3.77 $ 3.25 $ 468,000 $ 390,000 $ 430,592 $ 452,117 $ 390,000

$ 121,215 $ 122,059 $ 122,059 $ 122,059 $ 122,059 $ 589,215 $ 512,059 $ 552,651 $ 574,176 $ 512,059

8% 8% 8% 8% 8%

$ 44,780 $ 38,916 $ 42,001 $ 43,637 $ 38,916 $ 544,435 $ 473,143 $ 510,649 $ 530,539 $ 473,143

$ 29,226 $ 29,810 $ 29,810 $ 29,810 $ 29,810 $ 66,000 $ 66,000 $ 66,000 $ 66,000 $ 66,000 $ 12,989 $ 13,249 $ 13,249 $ 13,249 $ 13,249 $ 13,000 $ 13,000 $ 13,000 $ 13,000 $ 13,000

$ 15,000 $ 15,000 $ 15,000 $ 15,000 $ 15,000 $ 408,220 $ 336,084 $ 373,590 $ 393,480 $ 336,084 $ -

$ - $ 408,220 $ 157,764 $ 43,684 $ 206,772

180% 203% 203% 203% 203% $ 114,743.59

$ 736,708.51 9.00% 9.00% 9.00% 11.70%

$ 308,333 $ 342,743 $ 360,990 $ 300,880 $ 3,425,928 $ 3,808,258 $ 4,011,004 $ 2,571,628 $ 3,254,631 $ 3,617,845 $ 3,810,454 $ 2,443,047

$ 2,606,000 $ 2,606,000 $ 2,606,000 $ 2,606,000

$ 648,631 $ 1,011,845 $ 1,204,454 $ (162,953)

DCF from Sale $ 359,944.28 $ 561,501.89 $ 668,386.39 $ (90,427.51)

Discounted in $ 1,096,652.79 $ 1,298,210.40 $ 1,405,094.90 $ 646,281.00 Less initial $ (1,200,000) $ (1,200,000) $ (1,200,000) $ (1,200,000)Total DCF $ (103,347.21) $ 98,210.40 $ 205,094.90 $ (553,719.00)

Pre-tax IRR -8.61% 8.18% 17.09% -46.14%

Scenario 5 Scenario 66 6

2004 2004120000 120000

$ 3.59 $ 3.77 $ 430,592 $ 452,117

$ 122,059 $ 122,059 $ 552,651 $ 574,176

8% 8%

$ 42,001 $ 43,637 $ 510,649 $ 530,539

$ 29,810 $ 29,810 $ 66,000 $ 66,000 $ 13,249 $ 13,249 $ 13,000 $ 13,000

$ 15,000 $ 15,000 $ 373,590 $ 393,480

203% 203%

11.70% 11.70% $ 334,458 $ 352,265 $ 2,858,619 $ 3,010,808 $ 2,715,688 $ 2,860,268

$ 2,606,000 $ 2,606,000

$ 109,688 $ 254,268

$ 60,869.09 $ 141,100.55

$ 797,577.60 $ 877,809.06 $ (1,200,000) $ (1,200,000) $ (402,422.40) $ (322,190.94)

-33.54% -26.85%

Documents

Shady Trail Ver2