South Park IV Harvard Case Solution & Analysis

South Park IV Case Solution

South Park IV

Description of Property, Location, Condition, and Usage

George Laflin raised $450,000 million in order to invest in 80,000 square feet commercial and industrial building located in 100 acre South Park Industrial Center Houston, Texas.The building was constructed in the year 1980, which includes 185 foot bay depths and a clear ceiling of 22 foot.The asking price for this property is $1.5 million.
It is expected that 15% of the building area consists of an office with external concrete panel walls; therefore the building is in an excellent condition. There is only one exception in the building that is its roof, which is not in a good condition and it needs some maintenance. It is expected that the maintenance cost will be no more than $50,000.
There are several uses of building like in order to access through rail, there is a loading dock present in front of the building with the parking facility of 80 cars.Due to its multiple uses, it generated operating cash flow of $200,000 in the year 1989 however,these estimates are according to the sales book of present owner.

Market condition

In early 1980’s there was a downturn in oil prices, which affected the global economy and the US economy as well. It affected the real estate industry as well and there was no significant increase in the industrial space of Houston from the year 1986 to 1989, which is the desired location of Laflin.
Before the downturn in the oil prices, Houston was the 9th largest industrial market in the US. It is expected that after this collapse, there was no significant increase in real estate industry in the whole US real estate industry, therefore Houston is still among the largest industrial markets in the US and there is a significant potential in real estate industry.
This collapse in oil prices also affects the saving and loan industry,which results in further decrease in rentals amount and restricts the industrial property holders to more discounted prices.Therefore,the profitability ratio in this sector decreases significantly.
It is expected that oil prices will be stabilized within a year or two as they have increased from $14 dollar per barrel to $16 per barrel.Therefore,it could re-stabilize the real estate industry, which will increase the Industrial Occupancy ratio and employment ratio, which decreased significantly from the year 1980 to 1989.
Justification of Current Market Value with respect to Appraiser’s Valuation
The building is fully leased at $2 per square feet and it is expected that the building is leased by four tenants with different sizes. However,all leases will expire in the month of June of the year 1990. The current market value of the building is $1.2 million and the value of the land is$300,000 therefore the overall market value of the desired building is $1.5 million. In order to appraise the value of the property, the appraiser uses three methods..............

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