The investor-developer would not be comfortable with a 7.8 percent return on cost because the margin for error is too risky. If construction costs are higher or rents are lower than anticipated, the project may not be feasible. The asking price of the project is $12,700,000
The investor-developer would not be comfortable with a 7.8 percent return on cost because the margin for error is too risky. If construction costs are higher or rents are lower than anticipated, the project may not be feasible. The asking price of the project is $12,700,000
The investor-developer would not be comfortable with a 7.8 percent return on cost because the margin for error is too risky. If construction costs are higher or rents are lower than anticipated, the project may not be feasible. The asking price of the project is $12,700,000
The investor-developer would not be comfortable with a 7.8 percent return on cost because the margin for error is too risky. If construction costs are higher or rents are lower than anticipated, the project may not be feasible. The asking price of the project is $12,700,000 and the construction cost per unit is $82,200. The current rent to justify the land acqusition is $2.2 per square foot. The weighted average is 900 square feet per unit. Average vacancy and Operating expenses are 5% and 35% of Gross Revenue respectively. Use the following data to rework the calculations in Concept Box 16.2 in order to assess the feasibility of the project:
Required:
a. Based on the fact that the project appears to have 9,360 square feet of surface area in excess of zoning requirements, the developer could make an argument to the planning department for an additional 10 units, 250 units in total, or 25 units per acre. What is the percentage return on total cost under the revised proposal? Is the revised proposal financially feasible?
Transcribed Image Text:Preliminary Feasibility Analysis—Apartment Project Development
Concept Box 16.2
I. Physical Feasibility:
1. Goal: To provide a preliminary development plan analysis to determine whether an apartment project can be built on a specific site in accordance with
regulatory requirements and leased at current rental rates in order to justify land acquisition.
2. Site: 10 acres or 435,600 square feet.
3. Asking price: $2,800,000.
4. Basic project description/zoning:
a. Setback requirements: 15%
b. Circulation requirements: 15%
c. Maximum units per acre: 24 (based on a unit mix of 1-, 2-, and 3-bedroom apartments; weighted average = 900 square feet per unit)
d. Parking requirements: 1.5 spaces per unit @ 400 square feet per space
e. Open space, berms, landscape, support area: 1.0 acre (required) based on 240 units
f. Maximum building height: 2 stories
5. Physical feasibility (in square feet):
a. Gross land area
Less: Setbacks
Circulation
435,600
65,340
65,340
43,560
Open space/support/other
b. Area available for building development:
Less: Surface parking, 240 units × 1.5 spaces × 400 square feet
c. Net surface area available for building
d. Proposed total footprint areas for buildings, (240 units × 900 square feet) ÷ 2 stories
Excess (or deficiency) of square footage versus zoning requirements:
Conclusion: It appears that the site can accommodate a 240-unit apartment project and comply with zoning requirements.
261,360
144,000
117,360
108,000
9,360
Transcribed Image Text:II. Financial Feasibility:
1. Construction cost per unit: $80,000 × 240 units
2. Asking price for land:
Total project cost:
3. Gross revenue after lease-up and stabilization:
Rent: $1.10 per square foot @ 900 square feet @ 240 units × 12 months
Less:
Average vacancy (5%)
Operating expenses (35%)
Net operating income
4. Return on total cost ($1,710,720 ÷ $22,000,000)
5. Approximate value based on NOI:
a. If cap rate= .078
b. If cap rate= .08
c. If cap rate= .07
$ 19,200,000
2,800,000
$ 22,000,000*
$ 2,851,200
142,560
997,920
$ 1,710,720
7.78%
$ 22,000,000
$ 21,384,000
$ 24,439,000
III. Conclusion: Project may be feasible if the investor/developer is willing to accept a total return on cost of 7.8%. If, upon completion, investors are
pricing comparable projects at a cap rate of .08, this proposed project would not be feasible because value ($21,384,000) is less than cost ($22,000,000). If
projects are being priced at cap rates of .07, the project would produce a sizable development profit of $2,439,000 (or $24,439,000 - $22,000,000).
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Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
