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Steeley Associates Versus Concord Falls 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 Stecley Associates restored it. For almost a decade, Stecley has leased it to the university for academic office space. The 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 Stecley and hinted that if Stecley 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 necessanily mean that it could win a lawsuit against the town to force the town to grant a permit. The principals at Steeley Associates held a series of meetings to review their alternatives. They decided that they had three 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 options, if Steeley sells the house and property, it thinks it can get $900,000. 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 case Steeley will see a return of $1.3 million (over a 10-year planning horizon); if no growth (or erosion) occurs, it will make only $200,000. If Stecley requests a permit for the apartments, a host of good and bad outcomes are possible. The immediate good outcome is approval of its permit, which it estimates will result in a retum of $3 million. However, Stecley 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. CASE PROBLEM 623 Steeley can sell the property at that point. However, the rejection of the permit will undoubtedly decrease the value to potential buyers, and Stecley estimates that it will get only $700,000. Alternatively, it can construct the office building and face the same potential outcomes it did earlier, namely, a 30% chance of no town growth and a $200,000 return or a 70% chance of growth with a return of $1.3 million. A third option is to sue the town. On the surface, Stecley'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 $300,000, and it feels it has only a 40% chance of winning. However, if Stecley does win, it estimates that the award will be approximately $1 million, and it will also get its $3 million return for building the apartments. Steeley also estimates that there is a 10% chance that the suit coluld 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 $200,000 in legal fees. If Siecley loses the suit, it will then be foced with the same options of selling the property or constructing an office building. However, if the suit is camied this far into the future, it feeks that the selling price it can ack will be somewhat dependent on the town's growh prospects at that time, which it feek it can estimate at only 5050. If the town is in a growth mode that far in the future, Stecley thinks that $900,000 is a conservative estimate of the potential sale price, whereas if the town is not growing, it thinks $500,000 is a more likely estimate. Finally, if Stecley constructs the office building, it feck that the chance of town growth is 50%, in which cave the return will be only $1.2 million. If no growth occurs, it conservatively ectimates only a $100,000 return. A. Perform adecision tree analysis of Steeley Associates's decision situation, using expected value, and indicate the appropriate decision with these criteria. B. Indicate the decision you would make and explain your reasons