Shady Trail Case

Daniel Korman
ARCH2550
Prof. Charles

Evaluation of Shady Trail

This paper serves as an evaluation of the Shady Trail property as described in the case “Shady Trail” provided by Harvard Business School. Shady Trail Distribution Center is an industrial property located in the West Dallas area. Lonestar Bank is interested in selling the property for $4 million. Part of the reason Lonestar wants to get rid of the property is to limit their exposure in real estate ventures, especially with the tough market conditions in Asia, Latin America, and North America as described. The recent volatile trend of the real estate markets is a bit too risky for the bank at the moment and they prefer to keep their hands clean. Holt Lunsford runs an in independent
Lunsford likes to focus on warehouse properties, which makes Shady Trail a pretty good fit for him. The building is five years old and in relatively new condition. It boasts high ceilings and special hard floors, which is excellent for loading and stacking. There is lots of office space, efficient lighting, parking room, and insulation for winter and good air circulation for summer. Most interestingly the building is 400 feet deep and 300 feet wide. There are numerous scenarios that can be played out with those measurements, but the solution that makes the most sense is splitting the warehouse for two different tenants/companies (200 feet deep/150 feet wide for each). It is important to mention that five years is relatively young for a warehouse property, meaning the building is in very good shape. Lunsford has stated that he charges a fixed $13,000 fee for management of the property. While this fee is not over the top, it is good that it is mentioned as he is working with friends and wants to avoid any confusion moving forward. Warehouses are simply constructed, require a lot less capital than other types of buildings, and are quite easy to maintain. That being said, after evaluating the case thoroughly, I think Lunsford can do a couple of things differently to improve his situation with the Shady Trail
It is definitely a good idea to have a reserve fee when taking over a property, especially one that you didn’t build yourself, however, I believe Lunsford’s reserve is too high. I would offer a lower structural reserve as the building is relatively new, in good condition, and doesn’t need that much precaution. Instead of a $15,000 reserve, Lunsford should offer a $5,000 reserve. When doing this the Cash Flow before Financing becomes $434,000 (a $10,000 increase from the revised set-up).1 The capitalization rate then changes to 10.35%, which is slightly higher than revised set-up. With this new reserve, the Cash Flow after Taxes doesn’t change (still a 13.2% cash on cash return)2. Even though Lunsford is more concerned about the Cash on Cash return as a private investor, a higher Cash Flow before Financing offers more cushion and comfort. Companies use cash flow financing to fund major operations or purchases. As a relatively new firm, The Holt Companies prefers a higher CFBF because this essentially shows cash flows they expect to receive in the future, and allows the firm to obtain funding early on if necessary. This offers the young company smoother operations and is tempting for other future investors looking