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    Holt Lunsford Commercial is analyzing options for their client Staton Tees' whose headquarters lease is expiring. The options are renewing the lease at their current Welch Center location, purchasing Welch Center, or building a new facility. Renewing the lease would cost $3.5 million over 10 years. Purchasing Welch Center for $4 million could yield a 6.6% return. Building a new facility 20 miles away could generate the highest return of 15.2% but would require the largest initial investment of $1.1 million. Based on the financial analysis, building a new facility is recommended to provide the best return on investment for Staton Tees'.

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    Running Head: Finance

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    Carlos Alphonce
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    Holt Lunsford Commercial is analyzing options for their client Staton Tees' whose headquarters lease is expiring. The options are renewing the lease at their current Welch Center location, purchasing Welch Center, or building a new facility. Renewing the lease would cost $3.5 million over 10 years. Purchasing Welch Center for $4 million could yield a 6.6% return. Building a new facility 20 miles away could generate the highest return of 15.2% but would require the largest initial investment of $1.1 million. Based on the financial analysis, building a new facility is recommended to provide the best return on investment for Staton Tees'.

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    Holt Lunsford Commercial is analyzing options for their client Staton Tees' whose headquarters lease is expiring. The options are renewing the lease at their current Welch Center location, purchasing Welch Center, or building a new facility. Renewing the lease would cost $3.5 million over 10 years. Purchasing Welch Center for $4 million could yield a 6.6% return. Building a new facility 20 miles away could generate the highest return of 15.2% but would require the largest initial investment of $1.1 million. Based on the financial analysis, building a new facility is recommended to provide the best return on investment for Staton Tees'.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    94 views7 pages

    Running Head: Finance

    Uploaded by

    Carlos Alphonce
    Holt Lunsford Commercial is analyzing options for their client Staton Tees' whose headquarters lease is expiring. The options are renewing the lease at their current Welch Center location, purchasing Welch Center, or building a new facility. Renewing the lease would cost $3.5 million over 10 years. Purchasing Welch Center for $4 million could yield a 6.6% return. Building a new facility 20 miles away could generate the highest return of 15.2% but would require the largest initial investment of $1.1 million. Based on the financial analysis, building a new facility is recommended to provide the best return on investment for Staton Tees'.

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    Staton Tees' is facing lease expiration at their current headquarters location, Welch Center, and is exploring their options which include renewing their lease, purchasing Welch Center, or building a new facility. Holt Lunsford Commercial was tasked with analyzing the financial viability and recommending the best option.

    Staton Tees' has three main options - renewing their lease at Welch Center, purchasing Welch Center outright, or purchasing land and building a new facility.

    Renewing the lease would cost $3.5NNN per square foot increasing 3% every three years for a total of $3566798 over 10 years in lease payments plus operating costs of $1.5 per square foot increasing 3% annually for a total of $4845925. Purchasing Welch Center would cost an initial $1093041 with financing and have cash flows presented over 10 years.

    RUNNING HEAD: FINANCE

    HOLT LUNSFORD COMMERCIAL

    NAME

    INSTITUTION
    FINANCE

    Holt Lunsford Commercial deals in wide variety of real estate services such as tenant

    representation, construction management, acquisition services and property management. Staton

    Tees’ is an outstanding client of the Lunsford, facing the problem of lease expiration on its

    headquarter facilities (Segel, 2014). Despite the current location being more comfortable for

    Staton Tees’, he has purposed Lunsford to explore all available options. This means, he will have

    to determine the practical; and financial viability of each option and ultimately recommend on

    the better option. The objective of this analysis is to assess the disadvantages and advantages of

    the available scenarios and determine the best scenario for all cases (Segel et a., 2016).

    Welch Center is the main location where the headquarters for Staton Tee’s is found

    within an area of 102718 square foot warehouse. The entire building is occupied by Staton Tees’

    and its corporate offices has been dedicated with a total of 15000 square feet. With the prime

    location for Welch Center at the Dallas North Tollway and near 1-635, higher accessibility is

    guaranteed for customers belonging to Staton Tees’. This location makes it convenient for the

    owner and founder to access his business more easily (Segel et a., 2016). Amenities are many in

    the nearby location which has subsequently increased its rates due to higher demand. Staton

    Tees’ should make strategic real estate decision, since the expiration for the lease on Welch

    Center is about to be realized. This means all available options should be explored. Some of the

    options that should be fully exploited include purchasing Welch Center outright, extension of the

    lease at Welch Center or land purchasing and building to suit.

    Welch Center Leasing

    The lease belonging to Staton Tees’ shall be renewed and the operation shall continue as

    usual. The amount of rent charged is expected to begin at $3.5NNN per square foot increasing

    after every three years at the rate of 3%. A total of $3566798 lease value shall be realized in the
    FINANCE

    next ten years. The operating costs shall start at $1.5 per square feet in the first year and will

    increase by 3% for every subsequent year. A total of $4845925 shall be used on the period of

    lease. The net present value (NPV) of $4045452 shall be expected including the operating costs.

    Welch Center purchase

    Welch Center has its current owner willing to sell the warehouse at $4048300. A five

    year interest rate loan can be secured with 75% leverage and with interest only loan of 4.5%.

    Debt principal of $3036225 shall have accumulated at the end of five years, which will be

    refinanced at ending period of five years to settle the principal of interest-only loan. An

    amortized loan at the rate of 4.5% shall be obtained by Staton Tees’ for the five years remaining.

    Staton Tees’ will be required to pay 2% closing costs and 25% equity. Therefore, a total initial

    costs of $1093041 shall be spent by Staton (Segel et a., 2016).. The opportunity cost of capital

    for Staton Tees’ was assumed to be 20% of the initial equity required. In the fifth year, the roof

    will be required to be replaced at a cost of $410872 at the expense of Staton Tees’. In the tenth

    year, it is assumed that Staton Tees’ will sell the building. At the rate of $4.37NNN per square

    foot for the lease, $448878 was determined to be the net operating income. The building shall

    attract a price of $5985035 at the rate of 7.5% exit cap rate. Therefore, the total proceeds shall be

    $5865334 from the closing costs. The total yield from the proforma cash flow in a period of ten

    years is $2822494 with NPV of $3123957. This will result to a 6.6% return on investment.

    Built-to-suit Option

    The new building found 20 miles north of Welch Center is expected to be larger than the

    Welch Center building which will include two story office that was desired by Staton Tees’.

    Land cost shall be $787500 and the building shall be constructed with a total cost of $3677300
    FINANCE

    which will incorporate the 4% fees of the developer. Exactly a 4.5% interest rate shall apply that

    will attract a debt principle of $3348600. The loan will be amortized for the remaining five years

    at 4.5% interest rate. Closing costs will be $6470109 and the sale of the building shall be

    $6602152 at a 7.5% exit cap rate. The total cash flow of $2662734 and NPV of $3045849

    resulting to 15.22% return on investment (Segel et a., 2016).

    Recommendation

    The purchase option provides a healthy return by only reinvesting the equity to its

    business following a projected sale of the facility. This is achieved yet it does not provide 20%

    return on investment by Staton Tees’. Attaining a 20% return on investment can be difficult due

    to the conservative nature of the market in the property industry. A number of factors favored

    selection of built to suit option including greater total cash flow, net present value and higher rate

    of return. Staton Tees’ has the option of building the site according to specifications that will

    help emphasize and optimize its brand. The option has an inexpensive debt that will assist to him

    survive on the unusual conditions of the market.


    FINANCE

    CASH FLOW PURCHSE FOR WELCH CENTER

    Equity Operating Financing OCC Sale Total


    Year 0 $ (1,012,075.00) $ (80,966.00) $ (1,093,041.00)
    Year 1 $ (118,125.70) $ (136,630.13) $ (202,415.00) $ (457,170.83)
    Year 2 $ (121,669.47) $ (136,630.13) $ (202,415.00) $ (460,714.60)
    Year 3 $ (125,319.56) $ (136,630.13) $ (202,415.00) $ (464,364.68)
    Year 4 $ (129,079.14) $ (136,630.13) $ (202,415.00) $ (468,124.27)
    Year 5 $ (543,823.52) $ (136,630.13) $ (202,415.00) $ (882,868.64)
    Year 6 $ (136,940.06) $ (679,252.81) $ (202,415.00) $ (1,018,607.87)
    Year 7 $ (141,048.26) $ (679,252.81) $ (202,415.00) $ (1,022,716.08)
    Year 8 $ (145,279.71) $ (679,252.81) $ (202,415.00) $ (1,026,947.52)
    Year 9 $ (149,638.10) $ (679,252.81) $ (202,415.00) $ (1,031,305.92)
    Year 10 $ (273,827.96) $ (679,252.81) $ (202,415.00) $ 5,985,035.47 $ 5,103,367.65

    Total Cash Flows $ (2,822,493.75)

    NPV $ (3,123,956.53)

    PURCHASE ROI FOR WELCH CENTER

    ROI w/ 5 year loan


    NOI after 10 years $ 448,878
    Exit Cap 7.50%
    Sale Value $ 5,985,035.47
    Closing Costs $ 119,700.71
    Net Profit $ 5,865,334.76
    Total Cash Outlay $ 5,502,361.69
    Return on Investment 6.60%
    FINANCE

    CASH FLOW FOR BUILT TO SUIT

    Equity Operating Financing OCC Sale Total


    Year 0 -$ 1,116,200.00 -$ 1,116,200.00
    Year 1 -$ 126,500.00 -$ 150,687.00 -$ 223,240.00 -$ 500,427.00
    Year 2 -$ 130,295.00 -$ 150,687.00 -$ 223,240.00 -$ 504,222.00
    Year 3 -$ 134,203.85 -$ 150,687.00 -$ 223,240.00 -$ 508,130.85
    Year 4 -$ 138,229.97 -$ 150,687.00 -$ 223,240.00 -$ 512,156.97
    Year 5 -$ 142,376.86 -$ 150,687.00 -$ 223,240.00 -$ 516,303.86
    Year 6 -$ 146,648.17 -$ 749,136.17 -$ 223,240.00 -$ 1,119,024.34
    Year 7 -$ 151,047.62 -$ 749,136.17 -$ 223,240.00 -$ 1,123,423.79
    Year 8 -$ 155,579.04 -$ 749,136.17 -$ 223,240.00 -$ 1,127,955.21
    Year 9 -$ 160,246.42 -$ 749,136.17 -$ 223,240.00 -$ 1,132,622.59
    Year 10 -$ 297,096.85 -$ 749,136.17 -$ 223,240.00 $ 6,470,109.26 $ 5,497,733.09

    Total Cash Flows -$ 2,662,733.52

    NPV $ (3,045,848.99)

    ROI BUILD-TO-SUIT

    ROI w/ 5 year loan


    NOI after 10 years $ 495,161
    Exit Cap 7.50%
    Sale Value $ 6,602,152.31
    Closing Costs $ 132,043.05
    Net Profit $ 6,470,109.26
    Total Cash Outlay $ 5,615,315.85
    Return on Investment 15.22%
    FINANCE

    Reference

    Segel, A. I., Meghji, N., & Garcia-Cuellar, R. (2016). Patrimonio Hoy: A

    Groundbreaking Corporate Program to Alleviate Mexico's Housing Crisis. Business solutions for

    the global poor, 155-172.

    Segel, A. I., & Vogel Jr, J. H. (2007). Holt Lunsford Commercial.

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