Submitted by: Submitted by wsks
Views: 245
Words: 280
Pages: 2
Category: Business and Industry
Date Submitted: 03/23/2012 09:30 AM
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.