Shady

1) What are the property specific risks and rewards of the investment?

Risks

• Just-In-Time inventory practice and computerization of management of inventory will lead to lower demand for storage space.

• During economic slowdown, lower occupancy rates reduce rental income and incur additional commission cost needed to find new tenants.

• Due to the financing structure for this property, Lunsford is exposed to financial risk under 2 scenarios. During an economic downturn if tenants renew their leases after 5 years, Lunsford runs the risk of negative leverage due to lower prevailing market rent. If tenants do not renew their leases at the end of 5 years, Lunsford runs the risk of foreclosure by the lender.

• Ease of building industrial buildings reduces barriers of entry into this particular property market and Lunsford faces higher competition as a result.

• Lunsford runs “friendship risk” should the investment turn sour.

Rewards

• Speculative new construction dissipating may signal a start to the recovery phase in the property market cycle. The investment may result in capital appreciation.

• Use of leverage with a positive carrying cost meant returns would be amplified.

• As Lonestar offers a mortgage loan, Lunsford gains by saving on spending time and resources to look for financing in the unstable capital markets.

• The agreement to restore building to original conditions at tenants’ expense meant that Lunsford could cater to different tenant’s needs thus translating to the ability to maintain occupancy rates.

• The purchased property is fully functional and well maintained giving Lunsford the bargaining power to demand for competitive rental rates.

• The location of the property near Dallas Freeway system and Stemmons freeway further extends Lunsford’s bargaining power to demand competitive rental rates.