Shady Trial Harvard Case Solution & Analysis

Problem Statement:

Lansford is looking to invest in the warehouse property in Dallas, and he is working on the valuation of the property and any volatility which can have effect on the investment.


Shady Trial is a warehouse located at a place which is advantageous for the investors, though the market in Dallas is volatile, and Lans ford might not get the rent which will make it acceptable for investors who are his friends, to invest in the warehouse property. Due to the just in time inventory system the vacancy rate can also go high and the money paid for Shady trial may be higher than first expected.


The main objective of Lunsford is make some personal wealth for himself through investing in a property in Dallas where real estate market is sputtering and the capital markets are in disarray for which Lunsford has raised $1.2 million through his friends. Lunsford want to invest in warehouse properties because of their small size, their historical performance, and Lunsford own experience which is relevant to the warehouses.

Lunsford has the offer to invest in Shady trial, which is a business center built in 1994. Shady trial is built on the area of 120000 SF and it is divisible with 25000 SF minimum and has a height of 24 ft. The location has many advantages as it has ESFR sprinkler system, both sides of the building has doors for uploading and unloading, and has the ability to park 60 cars. There are 24 truck doors which are useful in the uploading and unloading. The location of warehouse is also very beneficial for the users as it has easy access to the Dallas freeway system with the visibility on the stemmons freeway.  Shady trial has numerous truck-high loading docks which can accommodate even the large trailers which are being used currently. 5% of the building is allocated to the office space, the building is possessed with all the modern days equipment to reduce the costs, and also has a extra thick floor which is stronger than usual surfacing. However the building was not served by any railroad, which can be a disadvantage for some. Another concern for Lunsford is the limited aprons on all sides of the building and single curb cuts due to which the space for the truck turnaround is limited, though the size of Shady trial is not very big and the problems might not arise because of only two to three tenants will occupy the warehouse at most.

The financial structure to support the investment is critical with 11 of Lunsford friends and Lunsford himself has arranged 1.2 million and rest of the investment is needed to be raised through the loan, though Loncaster itself has offered the loan to Lansford. According to the deal with the Loncaster if Lunsford go ahead, Loncaster will give loan of 2800000 which will be paid in next 10 years, though there is no penalty on the early payment of the loan, so if Lansford decides to sell the warehouse after 5 years without extending the lease for further five years, it can repay the full principal payment left at the end of 5th year. Lansford would have to pay interest of 6% to the Loncaster Bank. If Lunsford decides to reject the offer of Loncaster, it would have to seek the fund from somewhere else, which may take time, while most institutional investment might not invest in such a small property.

The rental rate per SF for in the analysis is 3.25 and the percentage of vacancy is 5%.

The financial analysis shows that the investment if the rent rate is 3.95 will give a ROA of 13%, which is acceptable to the investors, but if the ROA goes down by 12.5% it won’t be acceptable for the investors. The rate that is used in calculating the income won’t be 3.95 due to the market condition at the moment. Vacancy rate cannot be 100% due to a lot of companies have shifted towards the Just in time inventory system, if the vacancy rate violates a bit, the ROA will be seriously affected making the investment a no go for investors.

As shown in the exhibit if the vacancy rate is 95% and the rent rate is 3.25 the ROA of the company will be lower than 7% in the first year, which will go to a maximum of 7.14 which isn’t acceptable for the investors.........................

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