Bohan, A Course Project

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Apr 3, 2024

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COURSE PROJECT Feasibility and Market Analysis Instruction s In this course project, you will explore how cash flow forecasting is based on a series of assumptions that can and should change with more information . Except as indicated, use this document to record all your project work and responses to any questions. At a minimum, you will need to turn in a digital copy of this document to your facilitator as part of your project completion. You may also have additional supporting documents that you will need to submit. Note: Though your work will only be seen by those grading the course and will not be used or shared outside the course, you should take care to obscure any information you feel might be of a sensitive or confidential nature. Complete each project part as you progress through the course. Wait to submit the project until all parts are complete. Begin your course project by completing Part One below. Submit your completed project on the final project assignment page online. Information about the grading rubric is available on any of the course project assignment pages online. Do not hesitate to contact your facilitator if you have any questions about the project. 1 Feasibility and Market Analysis Nolan School of Hotel Administration © 2023 Cornell University

Part One Forecasting Rents and Occupancy Rates In this part of the course project, you will provide your estimate of the stabilized occupancy for the various components of Cayustoga Center as summarized in the provided rent roll spreadsheet. To complete this part of the course project, you will review the Cayustoga Center rent roll spreadsheet and summarized information below from the supply and demand analysis performed in this module. Using your estimates of the capture rates for each of the components, you will complete the occupancy forecast. The supply and demand analysis in this module revealed the following: ● The multi-family units are approximately 8.4% of the existing supply of four- and five- star apartment units in the Lancaster metro area. ● The multi-family units will take two years to stabilize. o Year 1 vacancy is expected to be 15%. o Year 2 vacancy is expected to be better than the market; the project will capture more than its fair share of demand. In addition, the opening of the project is expected to serve the significant unaccommodated demand in the market. ▪ The expected market vacancy for four- to five-star multi-family units is expected to be 1.7% in Year 2. ● The retail is approximately 2.7% of the existing supply of neighborhood retail in the Lancaster metro area. o The Upscale Grocery Anchor site will be fully occupied from the start of the project under a 30-year ground lease. o The Main Street Retail space will take three years to stabilize. ▪ Year 1 vacancy is expected to be 30%. ▪ Year 2 vacancy is expected to be 15%. ▪ Year 3 vacancy is expected to be better than the market because the Main Street portion of the project will capture more than its fair share of demand. In addition, the grocery-anchored portion of the retail project will be fully occupied on a ground lease from Day 1. ● The expected market vacancy for Neighborhood Retail is expected to be 7.0% in Year 3. 2 Feasibility and Market Analysis Nolan School of Hotel Administration © 2023 Cornell University

Instructions: 1. Complete the Cayustoga rent roll spreadsheet using your estimates of the capture rate. The spreadsheet mirrors the information above with one exception: The capture rate is specified at 100% as shown in the blue cells. 2. Provide a summary projection of the stabilized occupancy. You can find this information in the spreadsheet calculated in the Occupancy tab, Column K, Rows 6, 7, and 8. Enter response: The Main Street would have a 93% occupancy and the Apartments would have an 98.3% occupancy. 3. Provide a justification for each capture rate estimate. Offer a short narrative detailing why you feel the capture rate is correct. Note : Your capture rate estimate cannot result in a project occupancy of more than 100%. Enter response: The Main Street would have a 93% occupancy and the Apartments would have an 98.3% occupancy. Both of these are solid estimates. Since the multi- family units make up 8.4% of the apartments in the Lancaster area, there are many attractive amenities, great location, and they are new I believe this number would be fairly accurate. In regards to the retail component, I think with the fact that they offer a range of retail including both national and local, and they plan to be around 93% occupancy by the 3rd year this is also an accurate description. 3 Feasibility and Market Analysis Nolan School of Hotel Administration © 2023 Cornell University

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Part Two Forecasting Revenues, Expenses, and Cash Flows In this part of the course project, you will use the Cash Flow Estimates Template spreadsheet for the Cayustoga Center to focus on benchmarking and a “what if” analysis. To complete this part of the course project, you will benchmark expenses for a provided scenario using both external sources and best practices provided in this module. You will then perform a “what if” analysis to explore cash flows when certain parameters are changed. You may refer back to the Cash Flow Estimates Template Instructions to assist you. Part A — Benchmarking Instructions: Review the following scenario and update the “Cash Flow Estimates” spreadsheet based on the provided information. Scenario: Imagine you work for RealCo, the developer of the proposed Cayustoga Center project. You are responsible for helping to finalize the forecast of revenues and expenses for the project. The project was put on hold for various reasons, and you were provided with the projected performance when the project was shelved. The occupancy forecast has both the updated market occupancy and capture rates for the various spaces. The market occupancy forecast has been updated using external sources and the capture rate is determined by your evaluation of the project’s relative positioning within the market. To complete the forecast of revenues, your RealCo team has updated the inputs as follows: ● Miscellaneous retail revenues will start at $0.21 per square foot. ○ Inflation is expected to be 4% in Year 2, 3.5% in Year 3, and 3% in Years 4 and 5. ● Miscellaneous multi-family revenues will start at $310 per unit. ○ Inflation is expected to be 4% in Year 2, 3.5% in Year 3, and 3% in Years 4 and 5. 4 Feasibility and Market Analysis Nolan School of Hotel Administration © 2023 Cornell University

● Cost recovery remains at zero for the Upscale Grocery Anchor. ● Cost recovery will start at $4.20 for Main Street Retail - National tenants. ○ Inflation is expected to be 5% in Year 2, 4% in Year 3, and 3% in Years 4 and 5. ● Cost recovery will start at $4.05 for Main Street Retail - Local tenants. ○ Inflation is expected to be 5% in Year 2, 4% in Year 3, and 3% in Years 4 and 5. Your updated Year 1 expense assumptions should include the following major changes: ● $0.10 for taxes and insurance for the Upscale Grocery Anchor. While this ground lease tenant has a triple-net lease, your forecast needs to account for general liability insurance. ● Updates to most categories of retail and multi-family expenses. The net result is a slight increase in the totals for both property types. Solution: Use this link to download and review the Cash Flow Estimates solution for Part A . Part B — “What If” Analysis Instructions: Review the following scenario and update the “Cash Flow Estimates” spreadsheet based on the provided information, then answer the questions that follow. Scenario: Imagine that RealCo has asked you to perform a “what if” analysis to explore cash flows if certain parameters are changed. RealCo would like you to specifically explore changes to the space configuration based on input from the leasing team. RealCo asks you to model the following changes : ● Provide 60,000 square feet of “National” Main Street Retail in lieu of 50,000 square feet. ● Provide 30,000 square feet of “Local” Main Street Retail in lieu of 40,000 square feet. o This maintains the same total Main Street Retail area but changes the mix of tenants. ● Provide 55 units of Studio Multi-Family in lieu of 30 units. ● Provide 75 units of 1-Bedroom Multi-Family in lieu of 90 units. o This maintains the overall area of the multi-family complex by replacing 15 of the 5 Feasibility and Market Analysis Nolan School of Hotel Administration © 2023 Cornell University

1-bedroom units at 850 net square feet with 25 studio units at 510 net square feet. The changes increase the multi-family unit count by 10 units. The changes maintain the overall square footage of the project but have the potential to increase the cash flows. Since the overall net building area remains constant, the local planning authorities agree that no formal approval process is needed to make these changes to the project. You are asked to update the spreadsheet. Working with your team, you have developed the following new inputs for revenues: ● Miscellaneous retail revenues will start at $0.21 per square foot. o Inflation is expected to be 4% in Year 2, 3.5% in Year 3, and 3% in Years 4 and 5. ● Miscellaneous multi-family revenues will start at $310 per unit. o Inflation is expected to be 4% in Year 2, 3.5% in Year 3, and 3% in Years 4 and 5. ● Cost recovery remains at zero for the Upscale Grocery Anchor. ● Cost recovery will start at $4.20 for Main Street Retail - National tenants. o Inflation is expected to be 5% in Year 2, 4% in Year 3, and 3% in Years 4 and 5. ● Cost recovery will start at $4.05 for Main Street Retail - Local tenants. o Inflation is expected to be 5% in Year 2, 4% in Year 3, and 3% in Years 4 and 5 . You and your team have updated the expense benchmarks to reflect the changes in space allocation using both external sources and your internal best practices. In addition, you have updated your analysis based on input from RealCo’s leasing team, who indicate a slightly higher leasing expense as compared to the scenario in Part A. This is true for the Main Street Retail space due to the higher costs of negotiating with national tenants, while the increased leasing expenses for the multi-family units reflect the increased unit count. Your updated inflation guidance calls for 5.0% inflation in Year 2, 4.0% inflation in Year 3, and 3% inflation in Years 4 and 5. Solution Download and review the Cash Flow Estimates solution for Part B . 1. Do you think the “what if” scenario in Part B has promise? Why or why not? Enter response: I do think the “what if” scenario has promise because the revenue still exceeds the expenses after calculating the possible scenarios. 2. How would you support the revenue and expense figures if asked to justify your 6 Feasibility and Market Analysis Nolan School of Hotel Administration © 2023 Cornell University

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assumptions? Enter response: The slight changes in the build allow for an increase in net revenue each year. The numbers alone justify the assumptions. The multi family apartments are using a rent per unit evaluation starting at $310/unit rather than charging per square foot. Because of this, increasing the number of units by 40 drastically increases revenue. The retail space uses rent per square foot evaluations starting at .21/sq.ft, so although decreasing the space size does lower the rent revenue, it will only be slightly. For example, the difference in the retail space will be a loss of $4200 in the first year; however, the difference in the rental space will start at $12,400. This means the changes will have a positive change starting around $8200. 7 Feasibility and Market Analysis Nolan School of Hotel Administration © 2023 Cornell University

Part Three Determining Feasibility of a Real Estate Project In this part of the course project, you will explore the valuation of the Cayustoga Center project. To complete this part of the course project, you will update the Valuation Spreadsheet template based on a provided scenario using both external sources and best practices provided in this module. You will then perform a “what if” analysis to explore cash flows when certain parameters are changed. Part A — Valuation Instructions: Review the following scenario and update the “Valuation Spreadsheet” template based on the provided information. Scenario: RealCo has asked that you update the forecast of revenues and expenses because the Cayustoga Center project was shelved due to the global pandemic. Your revised forecast of Revenues, Expenses, and Net Operating Income from the “Cash Flow Estimates” template are shown below . RealCo has also asked you to update all the investment and valuation parameters that 8 Feasibility and Market Analysis Nolan School of Hotel Administration © 2023 Cornell University

were used previously. You have determined that all the assumptions are still valid, except for the following: ● Change the EGI and NOI figures as indicated in the image above. ● A reasonable estimate of the Terminal Year Net Operating Income is $6.575 million. ● You estimate $1 million in leasing concessions in Year 1 to achieve the initial tenant mix in the retail and multi-family components of the project. o You do not expect any further concessions or non-recurring expenses for the remainder of the holding period. ● Project costs have increased from $80 million to $83 million. ● The interest rate on mortgage financing has increased to 5.0% from 4.5%. Solution Download and review the Valuation Spreadsheet solution for Part A. Part B — “What If” Analysis Instructions Review the following scenario and update the Valuation Spreadsheet template based on the provided information, then answer the questions that follow. Scenario Imagine that RealCo has asked you to perform a “what if” analysis to explore cash flows if certain parameters are changed. RealCo specifically would like you to explore changes to the space configuration based on input from the leasing team. RealCo asks you to model the following changes: ● Provide 60,000 square feet of “National” Main Street Retail in lieu of 50,000 square feet. ● Provide 30,000 square feet of “Local” Main Street Retail in lieu of 40,000 square feet. o This maintains the same total Main Street Retail area but changes the mix of tenants. ● Provide 55 units of Studio Multi-Family in lieu of 30 units. ● Provide 75 units of 1-Bedroom Multi-Family in lieu of 90 units. o This maintains the overall area of the multi-family complex by replacing 15 of the 1-bedroom units at 850 net square feet with 25 studio units at 510 net square feet. The changes do increase the multi-family unit count by 10 units . 9 Feasibility and Market Analysis Nolan School of Hotel Administration © 2023 Cornell University

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Your revised forecast of Revenues, Expenses, and Net Operating Income from the “Cash Flow Estimates” template are shown below . RealCo has also asked you to update all the investment and valuation parameters that were used previously. You have determined that all the assumptions are still valid, except for the following: ● Change the EGI and NOI figures as indicated in the image above. ● A reasonable estimate of the Terminal Year Net Operating Income is $6.595 million. ● You estimate $1 million in leasing concessions in Year 1 to achieve the initial tenant mix in the retail and multi-family components of the project. o You do not expect any further concessions or non-recurring expenses for the remainder of the holding period. ● Project costs have increased from $80 million to $85 million due to the addition of 10 units to the multi-family component of the project. ● The interest rate on mortgage financing has increased to 5.0% from 4.5%. Solution Download and review the Valuation Spreadsheet solution for Part B. 1. Using metrics from the Analysis tab, do the financial outcomes for RealCo improve under the scenario in Part A relative to the base case? Enter response: Although the project itself is still a sound development project, the scenario in Part A would slightly decrease NOI for everything but the lenders yield. 10 Feasibility and Market Analysis Nolan School of Hotel Administration © 2023 Cornell University

2. Recall that the “what if” analysis in Part B changes the retail and multi-family space allocations relative to the scenario in Part A. Using the posted solutions as your guide, do you feel that the “what if” analysis scenario in Part B is better than the scenario in Part A? Why or why not? Enter response: I think the analysis scenario in Part B would be the better proposed change. Part A, as previously stated, would decrease the investors NOI; whereas, Part B would provide a a slight increase. To submit this assignment, please refer to the instructions in the course. 11 Feasibility and Market Analysis Nolan School of Hotel Administration © 2023 Cornell University