PL 4312 CLASS 1 Development Feasibility Analysis

real estate finance II
Class 1: Introduction to Real Estate Development Finance: Project

Feasibility
OBJECTIVES OF THIS CLASS
•  Financial Feasibility of Development Projects:

•  Highest & Best Use
•  Back-of-the Envelope
•  SFFA: Front Door
•  SFFA: Back Door
Copyright ©: Richard Peiser & David Hamilton Professional Real Estate Development 3rd Ed;, Geltner/ Miller/Clayton/Eichholtz Real
Estate Finance 2007;Brueggeman/Fisher, Real Estate Finance & Investments 2011, modified by Dr P Derrington 2015
9/11/16 2
Property Development Industry
CAPITAL
Resources
(investment)
FINANCIAL Development New
ANALYSIS Activity Built
Space
PHYSICAL
Resources
(construc9on)
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Estate Finance 2007;Brueggeman/Fisher, Real Estate Finance & Investments 2011, modified by Dr P Derrington 2015 6
SPACE MARKET
LOCAL
ADDS SUPPLY DEMAND &
NEW (Landlords) (Tenants) NATIONAL
ECONOMY
RENTS
&
OCCUPANCY FORECAST
FUTURE
DEVELOPMENT
INDUSTRY
ASSET MARKET
IF IS SUPPLY
YES DEVELPT CASH
(Owners
PROFITABLE FLOW
Selling)
?
CAPITAL
PROPERTY MKT MKTS
CONSTRUNCTION MARKET REQ’D
D EMAND
COST VALUE CAP
INCLUDING (Investors
RATE
Buying)
LAND
= Causal flows.
= Information gathering & use.
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GO Decision
¤  SITE
¤  DRIVING FACTORS for FEASIBILITY”

1.  Market analysis
2.  Regulatory constraints
3.  Financial conditions
4.  Context/community constraints
¤  STRATEGIC RESOLUTION:
¤  Financial <+>Design
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GO Decision
¤  PRELIMINARY SCHEME <+> CONSTRUCTION COST
Ø  CONSTRUCTION DOCUMENTATION
¤  LINE UP FINANCING:
¤  Equity
¤  Permanent Loan
¤  Construction Loan
Ø  GO DECISION
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GO DECISION:
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Graaskamp also coined the concept that most
development projects can be characterized as either:
1.  A site looking for a use, or
2.  A use looking for a site.
1. Site Looking for a Use:
• è Developer tries to determine & build the “HBU”, or
• è Public entity seeks developer to build a use determined
through a political process (presumably also “HBU”).
2. Use Looking for a Site:

• è Developer has a particular specialization, or
• è Developer is working for a specific user.
9
1. SITE LOOKING FOR A USE
•  VALUATION OF LAND FOR DEVELOPMENT

•  Highest & Best Use Decision
10
Estate Finance 2007;Brueggeman/Fisher, Real Estate Finance & Investments 2011, modified by Dr P Derrington 2015 9/11/16
Land Values
¤  What determines land values?
1.  Usual market pricing: comparables, clearing price.
2.  Potential of land as component of total value of
developed site.
¤  Called RESIDUAL LAND VALUE

¤  Equals:
¤  TOTAL DEVELOPED PROPERTY VALUATION
¤  Less COST OF CONSTRUCTING IMPROVEMENTS
¤  I.E. NET VALUE of developing the site
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Example
Office Development
¤  Total Property Valuation:

¤  NOI = $500,000
¤  Cap Rate = 10%
¤  Capitalized Value = $5M
¤  Construction Cost: $4M
¤  Residual Land Value:

TOTAL Valuation – Construction Cost
= $1M
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VARIATIONS in Residual Land Value
¤  By definition, Residual Land Value (RLV) is dependent

upon:
1.  Net Operating Income of developed property.
2.  Construction Cost of development.
3.  Cap Rate applied for Capitalized Valuation
¤  IF THESE VARIABLES CHANGE:

¤  Higher NOI => Higher RLV
¤  Lower Construction Cost => Higher RLV
¤  Lower Cap Rate => Higher RLV
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HIGHEST & BEST USE
•  Alternative uses compared for DEVELOPMENT of a site:

•  If site has various complying alternative uses.
•  If developer has capability for various uses.
14
Highest & Best Use (H&BU)
¤  Maximizing Residual Land Value requires:
¤  Comparing alternatives for NOI, Cap Rate & Construction
Cost.
¤  This OPTIMIZATION is the Highest & Best Use analysis.
¤  For a given SITE consider:

1.  Different allowable property types developed to maximum
area.
2.  Cap Rates for respective property types at this location.
3.  Most economical construction budget for respective
property types at this location.
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Example: H&BU Analysis Summary
Highest and Best Use Analysis
Data Input Box:

Office Retail Apartment Warehouse
NOI yr 1 $500,000 $600,000 $405,000 $400,000
Return or r 13.00% 13.00% 12.00% 10.00%
Growth or g 3.00% 5.00% 3.00% 2.00%
Building Costs 4,000,000 6,750,000 3,000,000 4,000,000
HIGHEST and BEST USE ANALYSIS:

Implied Property Implied Land
Use Year 1 NOI Cap Rate Value (NOI/Cap rate Building Costs Value
Office $500,000 10.00% 5,000,000 4,000,000 1,000,000
Retail 600,000 8.00% 7,500,000 6,750,000 750,000
Apartment 405,000 9.00% 4,500,000 3,000,000 1,500,000
Warehouse 400,000 8.00% 5,000,000 4,000,000 1,000,000
Textbook reference; Brueggeman Chapter 10

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2. USE LOOKING FOR A SITE
•  Back-of-the-envelope
•  SFFA “Front Door”
•  SFFA “Back Door”
17
USE LOOKING FOR A SITE
Is a specific development feasible?
¤  FIRST: Back of the Envelope Analysis
¤  Quick technique to evaluate the further expenditure of time and
capital
¤  LATER: Feasibility Analysis PROFORMA

¤  Detailed Discounted Cash Flow Projections
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“Back-of-the-Envelope” EXAMPLE
¤  You are driving around and locate a one acre site- you think
about an office building
¤  You know the site is zone commercial
¤  (before financing)
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Back-of-the-Envelope Facts
1.  You call the listing broker, and are told the site is
listed for $50.00 per sq. ft
2.  You know the FAR allows for a 50,000 sq. ft building
3.  You know that construction costs for an office
typically are $120.00 per sq. ft
4.  Your hurdle cap rate is 8%
5.  You know that total operating expenses, including
RE taxes, are $16.00 per sq. ft
6.  Market rents in the area are $32.00 per sq. ft
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“Back-of-the-Envelope” Example
¤  STEP 1. Determine the total cost of acquiring the site and

constructing the building:
¤  Land acquisition
¤  43,560 sq. feet x $50 sq. ft = $2,178,000
¤  Construction cost
¤  50,000 sq. ft x $120 sq. ft = $6,000,000
¤  Total Cost $8,178,000
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“Back-of-the-Envelope” Excel
DEVELOPMENT:
Land Price (per sf) $ 50
Sq Ft/acre 43,560
TOTAL LAND COST $ 2,178,000
Construction Cost (psf) $ 120
Building Size (sf) 50,000
TOTAL BUILDING COST $ 6,000,000
TOTAL PROJECT COST $ 8,178,000
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4.  Your hurdle “Cap Rate” is 8%
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¤  STEP 2. Working backwards, you apply a Return Hurdle
Rate , so you can calculate the breakeven NOI
necessary for the project
¤  Total Cost = $8,178,000
¤  Min. “Quick & Dirty” Cap Rate = 8%
¤  using Cost as “hurdle” Value:

¤  Value = NOI/Cap Rate = $8,178,000
¤  So, “hurdle” NOI = Value x Cap Rate = $8,178,000 * 8%
= $654,240
¤  Do we pass this first hurdle rate test?

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DEVELOPMENT:
Land Price (per sf) $ 50
Sq Ft/acre 43,560
TOTAL LAND COST $ 2,178,000
Construction Cost (psf) $ 120
Building Size (sf) 50,000
INVESTMENT RETURN HURDLE:

Cap Rate 8%
NOI formula =cost*cap rate
NOI $ 654,240
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¤  STEP 3. Calculate property rents required to deliver this
breakeven NOI
¤  NOI = $654,240
¤  Op Ex = 50,000 x $16 = $800,000

Ø  Revenues = $1,454,240
Ø  Bldg. Size 50,000 sf
Ø  Rent per sq. ft = $29.08
¤  Is this achievable in the market?
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DEVELOPMENT: BREAK-EVEN OPERATIONS:
Land Price (per sf) $ 50 Operating Expenses (psf $ 16
Sq Ft/acre 43,560 TOTAL OPERATING EXP $ 800,000
TOTAL LAND COST $ 2,178,000 NOI $ 654,240
Construction Cost (psf) $ 120 REVENUES (NOI +OpExp) $ 1,454,240
Building Size (sf) 50,000 RENT REVENUES (PSF) $ 29.08
Cap Rate 8%
NOI formula =cost*cap rate
NOI $ 654,240
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¤  STEP 4. Compare with current market data of rent/sf for similar
properties:
¤  Current Market rent $32.00
¤  So, market rental rate > breakeven rate of $29.08 is achievable

in this market.
¤  THEREFORE, project is ESTIMATED to deliver a return of above

your Required “cap rate” of 8% (before leverage).
¤  SO, WE PROCEED TO MORE DETAILED ANALYSIS
9/11/1
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DEVELOPMENT: BREAK-EVEN OPERATIONS:
Land Price (per sf) $ 50 Operating Expenses (psf $ 16
Sq Ft/acre 43,560 TOTAL OPERATING EXP $ 800,000
TOTAL LAND COST $ 2,178,000 NOI $ 654,240
Construction Cost (psf) $ 120 REVENUES (NOI +OpExp) $ 1,454,240
Building Size (sf) 50,000 RENT REVENUES (PSF) $ 29.08
TOTAL BUILDING COST $ 6,000,000 MARKET COMPARISON:
TOTAL PROJECT COST $ 8,178,000 Market Rental Rate (psf) $ 32.00
Project Rental Rate $ 29.08
SPREAD: market - hurdle $ 2.92
Cap Rate 8%
NOI formula =cost*cap rate SO, WE PROCEED TO MORE
NOI $ 654,240 DETAILED ANALYSIS…..
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DEVELOPMENT FEASIBILITY
•  NEXT STEP FEASIBLITY ANALYSIS
32
Simple Financial Feasibility Analysis (SFFA)
¤  Most widely employed method for analysis of financial

feasibility of development projects.
¤  SFFA is based on the inputs utilized in commercial
mortgage market (for permanent loans).
¤  Assumes developer will take out largest permanent loan
possible upon completion of the building.
¤  Assumes that LAND + DEVELOPMENT COSTS will equal
market value of the completed property.
¤  See Geltner textbook Chapter 28
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Simple Financial Feasibility Analysis (SFFA)
¤  Obviously, SFFA leaves something to be desired from a

normative perspective, but:
•  It is simple and easy to understand.
•  It requires no specialized knowledge of capital markets
other than familiarity with the commercial mortgage
market (does not even require familiarity with the relevant
property asset market).
¤  SFFA comes in two modes: “Front Door”, & “Back

Door” (See Geltner Text 28.4)
9/11/1
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(SFFA) “Front Door” Procedure: part 1
START WITH COSTS AND END WITH REQUIRED RENT FOR

FEASIBILITY:
Site Acquisition Costs + Construction Costs
= Total Expected Development Cost
X Loan to Value Ratio
= Permanent Mortgage
X Annualized Mortgage Constant or Debt Yield (or =PMT calc)
= Cash Required for Debt Service
X Lender Required Debt Service Coverage Ratio
= Required Net Operating Income or NOI
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(SFFA) “Front Door” Procedure: part 2
Required Net Operating Income or NOI

+ Estimated Operating Expenses (Not passed through to
tenants)
= Required Effective Gross Income
÷ Expected Occupancy Rate
= Required Gross Revenue
÷ Leasable Square Feet
= Rent Required Per Square Foot
9/11/1
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(SFFA) “Front Door” Procedure:
outcome
¤  Question: Is this average required rent per square foot

achievable in current market?
¤  What buffer?
¤  Typical approach for “Site looking for a Use”.
9/11/1
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“Front Door” Example
•  Class B office building rehab project: 30,000 SF (of which

27,200 NRSF).
•  Acquisition cost = $660,000;
•  Rehab construction budget: $400,000 hard costs +
$180,000 soft costs.
•  Estimated operating costs (to landlord) = $113,000/yr.
•  Projected stabilized occupancy = 95%.
•  Permanent loan available on completion @ 11.5% (20-yr
amort) with 120% DSCR.
•  Estimated feasible rents on completion = $10/SF.
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“Front Door” Example
Site and shell costs: $ 660,000
Lender will base
+ Rehab costs: 580,000
mortgage on Market
= Total costs: $1,240,000 Value, not on
What major X Lender required LTV x 80% construction cost.
issue is left = Permanent mortgage amount: $ 992,000
X Annualized mortgage constant: x 0.127972
out here? = Cash required for debt svc: $ 126,948
X Lender required DCR: x 1.20 Or, as per Debt Yield:
= Required NOI: $ 152,338 Debt Yield = NOI/loan
+ Estd. Oper. Exp. (Landlord): 113,000 NOI = Loan *Debt Yield
= Required EGI: $ 265,338 Loan = 992000*12.8%
÷ Projected occupancy (1-vac): ÷ 0.95 = 126,976
= Required PGI: $ 279,303
÷ Rentable area: ÷ 27200 SF
-------------- ---------
= Required rent/SF: $10.27 /SF
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(SFFA) “Back Door” Procedure: part 1
START WITH RENTS & OPERATING COSTS AND END WITH DEVELOPMENT
BUDGET FOR FEASIBILITY:
Total Leasable Square Feet (based on the building efficiency ratio times the
gross area)
X Expected Average Rent Per Square Foot
= Projected Potential Gross Income (PGI)
- Vacancy Allowance
= Expected Effective Gross Income
- Projected Operating Expenses
= Expected Net Operating Income

9/11/1
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(SFFA) “Back Door” Procedure: part 2
= Expected Net Operating Income
÷ Debt Service Coverage Ratio
÷ Annualized Mortgage Constant or Debt Yield
÷ Maximum Loan to Value Ratio
= Maximum Supportable Total Project Costs
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(SFFA) “Back Door” Procedure:
outcome
Question: Can it be DEVELOPED for this including all costs?

Maximum Supportable Total Project Costs
- Expected Construction Costs (Other than Site)
= Maximum Supportable Site Acquisition Cost
¤  Can the site be acquired for this or less?
¤  What profit margin on this site acquisition?
¤  Typical approach for “Use Looking for a Site”.
9/11/1
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“Back Door” Example
•  Office building 35,000 SF (GLA), 29,750 SF (NRA) (85%
“Efficiency Ratio”).
•  $12/SF (/yr) realistic rent (based on market analysis, pre-existing
tenant wants space).
•  Assume 8% vacancy (typical in market, due to extra space not
pre-leased).
•  Preliminary design construction cost budget (hard + soft) =
$2,140,000.
•  Projected operating expenses (not passed through) = $63,000.
•  Permanent mortgage on completion available at 9% (20-yr
amort), 120% DCR.
•  Site has been found for $500,000: Is it feasible?
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“Back Door” Example
Potential Gross Revenue = 29,750 x $12 = $ 357,000
Less Vacancy at 8% = - 28,560
= Effective Gross Income $ 328,440
Less Operating Expenses - 63,000
= Net Operating Income $ 265,000 18433 ⎡ ⎛ 1 ⎞
240
⎤
÷ 1.20 = Required Debt Svc: $ 221,200 = ⎢1 − ⎜ ⎟ ⎥
.09 / 12 ⎢⎣ ⎜⎝ 1 + .0912 ⎟⎠ ⎥⎦
÷ 12 = Monthly debt svc: $ 18,433
è Supportable mortgage amount = $ 2,048,735
÷ 0.75 LTV = Min. Reqd. Value: $ 2,731,647 Or, as per PV calc:
Less Construction Cost - 2,140,000 Interest Rate: 9%
------------ ----------- Term: 20 years
è Supportable site acquisition cost: $ 591,647. Loan =PV(9/12,240,-18433)
= $2,048,735
So, the project seems feasible... What major
issue is left out
here?
9/11/1
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Problems with SFFA:
¤  Do NOT confuse an SFFA feasibility analysis with a
normatively correct assessment of the desirability of a
development project from a financial investment
perspective.
¤  SFFA does not compute the value of the completed
property.
¤  Hence, does not compute the NPV of the development
investment decision:
¤  NPV = Value – Cost
¤  SFFA merely computes whether it is possible to take out a
permanent loan to finance (most of) the development
costs.
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DEVELOPMENT PROJECT
FEASIBILITY
•  DETAILED ANALYSIS INCLUDES:

1.  Detailed development budget - cost
2.  Detailed operating proforma – value
3.  Feasibility of Project: Value less Cost
46
FEASIBILITY ANALYSIS ITERATIONS
Determining if the Deal is Worthwhile
¤  Back of the Envelope Analysis

¤  Quick technique to evaluate the further expenditure of
time and capital
ALTERNATIVES & ITERATIONS
¤  Detailed Feasibility Analysis

¤  Detailed Discounted Cash Flow Projections
INPUT CHANGES & ITERATIONS
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DEVELOPMENT PROJECT FEASIBILITY
q  TWO TYPES OF PROJECT BUDGETS ARE IMPORTANT FOR
PROJECT FEASIBILITY:
§  Construction & Absorption Budget:
§  Covers construction (& lease-up, for “spec” projects);
§  Relates to the “COST” side of the NPV Equation.
§  Operating Budget:
§  Covers “stabilized” period of building operation after lease-up
is complete;
§  Typically developed for a single typical projected “stabilized
year”;
§  Relates to the “BENEFIT” side of the NPV Equation.
q  FINAL EVALUATION OF INVESTMENT RETURNS:
NPV = Benefits – Costs = Value of Property – (Cost of Devel+Land)

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LIMITATIONS OF FEASIBILITY ANALYSIS
¤  Just because a project is financially feasible, does
not necessarily mean that it is desirable as an
investment.
¤  Just because a project is not feasible using debt

financing, does not necessarily mean that it is
undesirable:
¤  A project may appear “not feasible” with debt
financing, yet it might be a desirable project from
a total return to investment perspective (say with
more equity financing).
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NPV = BENEFITS - COSTS
¤  Benefits and costs must be measured as “apples vs apples”.

¤  That is, in dollars over time:
•  As same point in time (such as Present Value at start).
•  Adjusted to account for different risk at different stages.
¤  Use detailed DCF analysis: time and risk can be accounted for by
using risk-adjusted discounting of cash flow projections.
¤  Key is to identify: opp. cost of capital (OCC) or Discount Factor
•  Reflects amount of risk in the cash flows in that phase.
•  Can be applied to either discount CFs back in time, or
•  To grow (compound) CFs forward in time.
•  Optimally, to the projected time of completion of the
construction phase.
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FEASIBILITY => INVESTMENT ANALYSIS
•  The correct way to evaluate the financial economic
desirability of a development project investment:
NPV = Benefit – Cost
= Value of PROPERTY – Cost of DEVELOPMENT
“THE NPV INVESTMENT DECISION RULE”:

1.  MAXIMIZE THE NPV ACROSS ALL MUTUALLY-EXCLUSIVE ALTERNATIVES; AND
2.  NEVER CHOOSE AN ALTERNATIVE THAT HAS: NPV < 0.
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FEASIBILITY => INVESTMENT ANALYSIS
¤  Three considerations are important and unique about
applying the NPV rule to evaluating investment in
development projects vs stabilized operating properties:
1.  “Time-to-Build”: Investment cash outflow occurs over time, not
all at once up front, due to the construction phase.
2.  Construction loans: Debt financing for the construction phase is
almost universal (even when the project will ultimately be
financed entirely by equity), and adds financing costs.
3.  Phased risk regimes: Investment risk is very different (greater)
between the construction phase (the development investment)
and the stabilized operational phase. (Sometimes an
intermediate phase, “lease-up”, is also distinguishable.)
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FEASIBILITY ANALYSIS is NOT…
¤  Don’t confuse a FEASIBILITY ANALYSIS with an assessment
of the investment returns of a development project.
¤  FEASIBILITY ANALYSIS does not compute the comparative
investment value of the completed property:
¤  NPV
¤  IRR
¤  Equity dividend
¤  FEASIBILITY ANALYSIS does not indicate the best capital
structure (how much debt & equity).
¤  SIMPLE FEASIBILITY ANALYSIS just provides the FIRST CUT
analysis that Completed PV covers Development Cost, given
a basic debt structure.
¤  THAT IS, WORTH FURTHER DETAILED INVESTMENT RETURN

ANALYSIS OR NOT? DO DCF PROFORMA => RETURNS
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LESSONS OF THIS CLASS
•  FINANCIAL CHANGES OVER

DEVELOPMENT PHASING
•  FEASIBILITY OF DEVELOPMENT PROJECTS:
•  BOE
•  DETAILED SFFA
•  Need to proceed to detailed DCF
investment return analysis
Copyright ©: Richard Peiser & David Hamilton Professional Real Estate Development 3rd Ed;, Geltner/ Miller/Clayton/Eichholtz Real Estate
Finance 2007;Brueggeman/Fisher, Real Estate Finance & Investments 2011, modified by Dr P Derrington 2015 9/11/16 54

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What are the objectives of the class?

What are the objectives of the class?

What are the steps involved in feasibility analysis?

What are the steps involved in feasibility analysis?

real estate finance II

Class 1: Introduction to Real Estate Development Finance: Project

• Financial Feasibility of Development Projects:

¤ DRIVING FACTORS for FEASIBILITY”

2. Use Looking for a Site:

• VALUATION OF LAND FOR DEVELOPMENT

¤ Called RESIDUAL LAND VALUE

¤ Total Property Valuation:

¤ Construction Cost: $4M

¤ Residual Land Value:

¤ By definition, Residual Land Value (RLV) is dependent

¤ IF THESE VARIABLES CHANGE:

• Alternative uses compared for DEVELOPMENT of a site:

¤ This OPTIMIZATION is the Highest & Best Use analysis.

¤ For a given SITE consider:

Data Input Box:

HIGHEST and BEST USE ANALYSIS:

Textbook reference; Brueggeman Chapter 10

¤ LATER: Feasibility Analysis PROFORMA

¤ You know the site is zone commercial

¤ STEP 1. Determine the total cost of acquiring the site and

¤ Total Cost $8,178,000

¤ Total Cost = $8,178,000

¤ Min. “Quick & Dirty” Cap Rate = 8%

¤ using Cost as “hurdle” Value:

¤ Do we pass this first hurdle rate test?

INVESTMENT RETURN HURDLE:

¤ Op Ex = 50,000 x $16 = $800,000

¤ Is this achievable in the market?

¤ Current Market rent $32.00

¤ So, market rental rate > breakeven rate of $29.08 is achievable

¤ THEREFORE, project is ESTIMATED to deliver a return of above

¤ SO, WE PROCEED TO MORE DETAILED ANALYSIS

• NEXT STEP FEASIBLITY ANALYSIS

¤ Most widely employed method for analysis of financial

¤ Obviously, SFFA leaves something to be desired from a

¤ SFFA comes in two modes: “Front Door”, & “Back

START WITH COSTS AND END WITH REQUIRED RENT FOR

Required Net Operating Income or NOI

¤ Question: Is this average required rent per square foot

¤ Typical approach for “Site looking for a Use”.

• Class B office building rehab project: 30,000 SF (of which

X Expected Average Rent Per Square Foot

= Projected Potential Gross Income (PGI)

= Expected Effective Gross Income

- Projected Operating Expenses

= Expected Net Operating Income

= Expected Net Operating Income

÷ Debt Service Coverage Ratio

÷ Annualized Mortgage Constant or Debt Yield

÷ Maximum Loan to Value Ratio

= Maximum Supportable Total Project Costs

Question: Can it be DEVELOPED for this including all costs?

¤ Can the site be acquired for this or less?

¤ What profit margin on this site acquisition?

¤ Typical approach for “Use Looking for a Site”.

•  Financial Feasibility of Development Projects:

¤  DRIVING FACTORS for FEASIBILITY”

•  VALUATION OF LAND FOR DEVELOPMENT

¤  Called RESIDUAL LAND VALUE

¤  Total Property Valuation:

¤  Construction Cost: $4M

¤  Residual Land Value:

¤  By definition, Residual Land Value (RLV) is dependent

¤  IF THESE VARIABLES CHANGE:

•  Alternative uses compared for DEVELOPMENT of a site:

¤  This OPTIMIZATION is the Highest & Best Use analysis.

¤  For a given SITE consider:

¤  LATER: Feasibility Analysis PROFORMA

¤  You know the site is zone commercial

¤  STEP 1. Determine the total cost of acquiring the site and

¤  Total Cost $8,178,000

¤  Total Cost = $8,178,000

¤  Min. “Quick & Dirty” Cap Rate = 8%

¤  using Cost as “hurdle” Value:

¤  Do we pass this first hurdle rate test?

¤  Op Ex = 50,000 x $16 = $800,000

¤  Is this achievable in the market?

¤  Current Market rent $32.00

¤  So, market rental rate > breakeven rate of $29.08 is achievable

¤  THEREFORE, project is ESTIMATED to deliver a return of above

¤  SO, WE PROCEED TO MORE DETAILED ANALYSIS

•  NEXT STEP FEASIBLITY ANALYSIS

¤  Most widely employed method for analysis of financial

¤  Obviously, SFFA leaves something to be desired from a

¤  SFFA comes in two modes: “Front Door”, & “Back

¤  Question: Is this average required rent per square foot

¤  Typical approach for “Site looking for a Use”.

•  Class B office building rehab project: 30,000 SF (of which

¤  Can the site be acquired for this or less?

¤  What profit margin on this site acquisition?

¤  Typical approach for “Use Looking for a Site”.

•  DETAILED ANALYSIS INCLUDES:

¤  Back of the Envelope Analysis

¤  Detailed Feasibility Analysis

¤  Just because a project is not feasible using debt

¤  Benefits and costs must be measured as “apples vs apples”.

¤  THAT IS, WORTH FURTHER DETAILED INVESTMENT RETURN

•  FINANCIAL CHANGES OVER