Shady Trail Case Study

Shady Trails

Holt Lunsford became one of the best leasing agents in Dallas. Thanks to his hard work, long hours, and genuine charm, he was able to become a guru in the local Dallas real estate market. He was able to conduct thorough analysis and research in order to come up with a sizable purchase agreement with Lonestar Bank in order to buy the Shady Trail facility. He was able to quantify that there was a great opportunity in front of him and he was able to include his friends and partners to make an executive decision to buy the property. He did, however, have to make a few assumptions in order to make sure he was making the right move.

The major change in Lunsford’s assumptions that we made was his assumption that the rental rate for the property should be $3.25 per square foot. We ended up taking the 6 building comparisons and calculated the weighted average of the rents in each building. The weighted average ended up being $3.20, which is $0.05 lower than Lunsford’s calculation.

The calculation of the $3.20 rental rate is below:

This 5 cent change in the rental rate makes a significant different to the cash flow after taxes. Below is a comparison of the original set up (with cash flows from operations at $424,000 – given the $3.25 rental rate) and the new set up (with cash flows from operations at $344,000 – given the updated $3.20 rental rate).

The only piece of information that was changed in each setup was the cash flow from operations (based on the different rental rates). It is evident that this one change drastically effects the cash flow after taxes.

Although the Shady Trail facility looks like a great investment opportunity, many of Holt Lunsford’s figures and decisions to purchase are based on assumptions. If he were to use assumptions like these to make the best-educated decision on whether or not to purchase the property, then he should use a more conservative approach. If using the more conservative rental rate of $3.20 per...