From Exhibit 4 the NPV is about $1.5 million. There initial investment is $400,000. Without included debt payments this appears attractive. However, the NPV should include the debt payments for a useful NPV. This reduces the NPV significantly. The investors double their money and the investment appears viable.
At a price of $18.80 per square foot ($1,500,000/80,000 square feet), the deal seems in line with recent sales in the area as seen in Exhibit 5.
According to his financial model, the investment generates positive cash flow, excluding the initial investment, over the life of investment. This indicates further capital will not need to be raised for future expenses.
The reproduction cost of $2,037,762 is greater than the purchase price. This number is useful in indicating that it would be cheaper to purchase this property than to build a brand new facility.
2. What assumptions has Laflin made in creating his setup for Southpark IV? What changes, if any, would you make? What is your projected return for Southpark IV?
* Income and expenses will grow at 3%
* He uses a 14% discount rate to calculate his NPV
* Exit cap rate of 10%
* The price associated with the sale will be 5% of the gross sales price * The $50,000 roof repair estimate is accurate
* The tenants would honor their statement that they would extend their leases * 4% management fee
* 5% vacancy
* The property will be sold in the 10th year
* Rehabilitation expenses of $15,000
* He uses rental rates from the previous rental rates that were somewhat higher
* I would increase the vacancy rate to be more conservative in his estimates and to be more in line with vacancy rate shown on the Houston rental data as well as the occupancy data for the competitor rentals. I would raise to 10%. * He should change his rental...