Shady Trail Harvard Case Solution & Analysis

Shady Trail  Case Solution

Problem Statement:

            The core problem of the case is the evaluation risk and return related to the property, which is considered for the investment by Lunsford. Many secondary issues also need to be considered which are related to the valuation, performance, and disadvantages about the project.


            Lunsford is the property manager, and currently aims to acquire warehouse property, which is facing some difficulties but has good future prospects. Lunsford is concerned regarding the performance of the investment property as he is responsible for the investment of outside investors. He intends to increase the portfolio of real estate by diversification, which means by purchasing properties in different areas of the country in order to reduce the risk.

 The property managers have different objectives when they are making investment in particular property, however the core objective is to provide a better investment return for the investor. On the other hand, the investors are always looking for those investment avenues, which generate reasonable returns in lower capital.

At the same time many risks are being facedby Lunsford as well as the investor. The main risk facedby both stakeholders is the Credit risk that means the property is financed by the mortgages so the firm has to generate reasonable cash flows to repay the principal loan as well as interest. Moreover, in case the fund does not generate the acceptable return, then the fund might default on its commitments. In addition to this, the firm also faces difficulties from the inflation and interest rates as the higher rate negatively affects the real estate market of the country.

The property has many genetic advantages for the firm, which mainly include the property holding high truck loading, energy efficiency, and lower heating costs. These factors will incur less cost for the firm which in turn will increase the margin on the annual income. Apart from advantages, the property has disadvantage as well, as many major corporation are adopting the just in time method for selling goods, due to which the demand for warehousing has reduced and will continue to decrease as the companies require lower inventory levels to reduce the holding cost.

Lunsford and his investor group have another benefit associated with this property, as the two tenants intend to renew the lease agreement for five years so that the proportional income of the property will be sustained for the next five years. Moreover, Lunsford does not need to pay any upfront cost for the new tenant like improvement expenses.

Lonester intends to sell the shady trail in order to reduce the risk in the real estate. Moreover, it is expecting that the economic slowdown will negatively affect the pricing of real estate in the future. Since Lunsford and investor group are facing future risk in case when the expectation of Lonester happens, therefore Lunsford can demand lower selling value for the property as it has higher future risk. Although the mortgage financing provided by the Lonester is based on market rates however,the extended amortization period would assist the firm to pay in more installments which will result in less burden on the annual income. Thus, the financing provided to the firm is attractive for the investor group due to its extended amortization period..................

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