Reference no: EM133312324

Sleeey Associates Vs. Concord Falls

Steeley Associates, Inc., a property development firm, purchased an old house near the town square in Concord Falls, where State University is located. The old house was built in the mid-1800s, and Steeley Associates restored it. For almost a decade, Steeley has leased it to the universitv for academic office space. he house is located on a wide lawn and has become a town landmark.

However, in 2008, the lease with the university expired, and Steeley Associates decided to build high-density student apartments on the site. using all the open space. The community was outraged and objected to the town council. The legal counsel for the town spoke with a representative from Steeley and hinted that if Steeley requested a permit, the town would probably reject it. Steeley had reviewed the town building code and felt confident that its plan was within the guidelines, but that did not necessarily mean that it could win a lawsuit against the town to force it to grant a permit.

The principals at Steeley Associates held a series of meetings to review their alternatives. They decided that they had three (3) options: They could request the permit, they could sell the property, or they could request a permit for a low-density office building, which the town had indicated it would not fight. Regarding the last two (2) options, if Steeley sells the house and property, it thinks it can get P900,000. If it builds a new office building, its return will depend on town business growth in the future. It feels that there is a 70% chance of future growth, in which Steeley will see a return of P1.3 million (over a 10-year planning horizon); if no growth (or erosion' occurs, it will make only P200,000.

If Steeley requests a permit for the apartments, a host of good and bad outcomes are possible.

The immediate good outcome is an approval of its permit. which it estimates will result in a returr of P3 million. However, Steeley gives that result only a 10% chance that it will occur. Alternatively, Steeley thinks there is a 90% chance that the town will reject its application, which will result in another set of decisions.

Steeley can sell the property at that point. However, the rejection of the permit will undoubtedly decrease the value to potential buyers, and Steeley estimates that it will get only P700,000.

Alternatively, it can construct the office building and face the same potential outcomes it did earlier, namely. a 30% chance of no town arowth and a P200.000 return or a 70% chance of growth with a return of P1.3 million.

A third option is to sue the town. On the surface, Steeley's case looks good, but the town building code is vague, and a sympathetic judge could throw out its suit. Whether or not it wins, Steeley estimates its possible legal fees to be P300,000, and it feels it has only a 40% chance of winning However, if Steeley does win, it estimates that the award will be approximately P1 million, and it will also get its P3 million return for building the apartments. Steeley also estimates a 10% chance that the suit could linger on in the courts for such a long time that any future return would be negated during its planning horizon, and it would incur an additional P200,000 in legal fees If Steeley loses the suit, it will then be faced with the same options of selling the property or constructing an office building. However, if the case is carried this far into the future, it feels that the selling price it can ask will be somewhat dependent on the town's growth prospects at that time, which it feels it can estimate at only 50-50. If the town is in a growth mode that far in the future, Steeley thinks that P900,000 is a conservative estimate of the potential sale price, whereas if the town is not growing, it thinks P500,000 is a more likely estimate. Finally, if Steeley constructs the office building, it feels that the chance of town growth is 50%, in which case the return will be only P1.2 million. If no growth occurs, it conservatively estimates only a P100,000 return.

1. Indicate the applicable decision criteria in this case and explain your reasons.

2. Which option should Steeley Associates, Inc. choose? Justify