1

課程三 : 不動產開發財務分析

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討論重點

開發程序投資策略分析財務可行性分析現金流量分析財務報表預測資金來源 , 融資決策分析風險分析

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Three Common Development Situations

• There are three common development situation each presenting the developer/investor with different development and investment possibilities

Use in search of a site: use to site

• this is the most sensible approach

• the most efficient way to turn ideas into reality

Site in search of a use: site to use

• developer investigates a need for specific real estate

Capital looking for investment

• investor has cash and needs to invest -- e.g. venture capitalist

4

不動產開發

services

tax

user fees

capitalcapital gain

Political SystemSocial System

Enterprise System

Public

Sector

ConsumptionSector

ProductionSector

Sites

serv

ices

tax

rentals, purchases

FinanceSector

Interest

Construction CostRegulation

Mortgage PaymentsREGULATION

MACRO

ECONOMICS

The Real Estate Asset Creation Process• As discussed in previous lecture the creation of real estate asset

requires a complex and dynamic interaction between several groups:

• Production sector

• Consumption sector

• Financial sector

• Public sector

• Real estate development occurs only in the presence of interaction between these key groups

• The lead group is the production sector

• The key player is the developer, the entrepreneur who makes things happen

The Players in real estate asset creation process: The Developer

• The Developer (entrepreneur): selling time+money– as prime mover seeks maximum possible return with minimum

commitment

– Return consists of following

• profit from sale to long-term investors

• long term equity position (for which the developer may or not put any cash)

• development fee for “doing the development”

• developer may also profit through entities that sell services to the development -- ethical questions?

– Prime risk bearer in terms of financial commitment and time

Primary Decisions by Developer

• The real asset creation decision is an investment decision.

• Uncertainties from space that is yet to be created require answers to following questions:– How should the site be acquired?

– What type of financing should be obtained?

– How should the developer deal with general contractor?

– Should major tenants be presigned?

– Should the developer take a joint venture partner?

– Should developer presell the equity to passive investors?

– Should outside management firm be employed?

– What government approvals will be needed?

– What development risk-control techniques should be employed?

A Key Player: The Consumer

• The consumer is the key player

• It is the demand from the consumer that gives the developer the idea to develop

• While the developer may propose, ultimately the consumer decides whether to accept or reject the project

• Thus estimating demand from space users is key to success of any development --- more about this later

Other Players

• The Contractor

• General Contractor

• Subcontractors

• Architects, Engineers, Lawyers

• Regulators

• zoning

• building codes

• certificate of occupancy

Relationship between project cost and project value

Requireddevelopmentperiodfinancing

Construction loan

JVP Contribution

Developer’s contribution

Projectcost

=

Permanent loan

Long term equitycontribution

Sale price tolong term investors

Project valueV=NOI/Ror discountedcash flow

=

Difference isdevelopment profit (or loss)

Project represents economic success if lower box exceeds upper box = economic value added (EVA)

Risk-Return Perspectives of Players

• The measures of return used by various participants in the asset creation process are derived primarily from two sources (see figure)

• project cost– construction interest; JVP profit; real estate tax; insurance;

contractors profit, architect lawyers and engineers fees etc

• project value– permanent loan interest; real estate tax, return on equity; capital

gains; federal income tax; tax shield etc.

• Participants need to evaluate the different possible combinations of theses factors in light of their own goals and objectives

12

投資策略分析 Investment Strategy

• Identify investment objectives• Analysis of the investment environment

– market analysis

– legal analysis

– sociopolitical analysis

• Plans and policies • Forecast of cash flows• Decision criteria

– financial criteria

– nonfinancial criteria

13

Investment objectives

• growth• protection of purchasing power• diversification• tax shelter• regular return• capital gain• retirement income• rapid recovery of equity• entrepreneurial profit

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Feasibility Analysis

• Successful Real Estate Project begins with sound feasibility analysis

• Strategy study

• Market study

• Legal studies

• Physical design studies

• Compatibility studies

• Financial studies

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Stage 2: IDEA REFINEMENT

Stage 3: FEASIBILITY

Stage 4: CONTRACT NEGOTIATION

Stage 5: COMMITMENT POINT

Stage 6: CONSTRUCTION

Stage 7: INITIATION OF OPERATION

Stage 8: ASSET MANGEMENT

STOP

STOP

STOP

STOP

Stage 1: IDEA INCEPTION

REAL ESTATE DEVELOPMENT MODEL

DEVELOPER

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Plans and policies

• contracting• rent fare• large equity• loan amount and type• depreciation plan

…

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Business Strategies

• Developers generally specialize in one more phases of real estate in accordance with their expertise

– Develop and manage for a long holding period

• leasing and management skills are important

– Develop and sell after lease-up period or normal vacancy

• sell to institutional investors, e.g. insurance co.

• may continue to manage

– Develop land and building for lease in master planned development

• build to suit for single tenants

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財務可行性分析Real Estate Capital Budgeting Techniques; Highest and Best Use Analysis

• Front Door Approach• Given total project determine the required rent

• Back Door Approach• Given market rent determine justified project cost

CAPITAL BUDGET

MARKET orREQUIREDRENT

FRONT DOOR

BACK DOOR

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Shopping center development可行性分析例題

• Consider the case of a small 2-story suburban shopping center on an 800 坪(pin) site costing $300,000,000. The building has 400 pins of space per floor. Construction cost is at a rate of $30,000 per pin, fees and construction interest equal $10,000,000, and indirect cost is $20,000,000. The total budget is thus $354,000,000. It is hoped that lenders will provide 80% of the required funds (or $283,200,000). The term of loan will be 20 years and interest rate is 11.5%, with monthly mortgage payments. The balance of funds required, at least $70,800,000, assuming no working capital and no cost overruns, would be provided by a partnership of equity investors. They require only 6% cash dividend (equity dividend rate or before tax return) on their investment each year. Experience has shown that operating expenses will approximate $5005/pin of gross leasable area or GLA. Real estate taxes are running about $100 per pin for comparable properties in the area. Property management indicates cash replacement cost of $200,000 a year for carpeting, and vandalism loss. Vacancy rate is assumed to be 5%.

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Site : 800 pins Space per floor : 400 pins

Site Cost : $300,000,000

Construction Costs : $30,000/pin = $24,000,000

Fees : $10,00,000 Indirect cost : $20,000,000

Total Capital Budget : $354,000,000

Lenders Share of funds : 80%

Term of Loan : 20 years

Interest Rate : 11.5%

With Monthly Mortgage Payments

Debt Service Constant : .127968

Highest and Best Use Analysis: shopping center

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Balance funds required (equity) : $70,800,000

Equity Dividend Rate : 6%

Operating Expenses : $500/pin of GLA

Real Estate Taxes : $100 /pin of GLA

Replacements reserve : $200,000

Vacancy rate : 5%

Case Illustration

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Some Basic Investment Concepts

1. TOTAL PROJECT COST = SITE ACQUISITION COST + CONSTRUCTION COST + FEES AND INTEREST = $354,000,000

2. LOAN TO VALUE RATIO = 80%

3. LOAN AMOUNT = (.8)(354,000,000) = $283,200,000

4. DEBT SERVICE = $238,200,000x.127968 = $36,241,544

5. EQUITY DIVIDEND RATE (EDR)= 6%

6. Gross Leasable Area (GLA) = Total Square footage in the building (400*2=800 pins)

7. Building Efficiency Ratio (BER) = 85%

8. Net Leasable Area (NLA) = 680 pins

Construction Budget: $24,000,000

Indirect Cost and Development Fees: $30,000,000

Total Capital Budget: $354,000,000

+

=

1-loan to cost ratio=.2

Cash Equity required: $70,800,000

Equity Dividend Rate: 6%

20 yrs. 11.5% monthly pay

Mortgage loan:$283,200,000

Loan to Cost Ratio: .8

Debt Service Constant: .127968

Debt Service: $36,241,544

x

=

x

=Before Tax Cash Flow: $4,248,000

x

=

x

=

$40,489,544

+

Site Acquisition Cost: $300,000,000

FRONT DOOR APPROACH : LOAN TO VALUE RATIO

CONTINUE NEXT PAGE

Net Operating Income : $40,489,544

Operating Expenses: $400,000+

Real Estate Tax: $80,000+

Replacement Reserve:$200,000+

Effective Gross Income: $41,169,544

(1 - Vacancy Ratio) : .95

Potential Gross Income: $43,336,322

Net Leasable Area: 680 pins

Rent Required: $63,729.95/pin,year

=

=

=

$5,301.83 per pin monthly

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Sensitivity analysis

space per floor rent5310.82877

100 19995.2292150 13468.829200 10205.6289250 8247.70885300 6942.42881350 6010.08593400 5310.82877450 4766.96208500 4331.86874

vacancy raterent5310.82877

0 5045.287330.01 5096.249830.02 5148.252380.03 5201.327140.04 5255.507630.05 5310.828770.06 5367.326940.07 5425.040140.08 5484.00797

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funds borrowed rent5310.82877

0 2827.657380.1 3138.05380.2 3448.450230.3 3758.846650.4 4069.243070.5 4379.63950.6 4690.035920.7 5000.432340.8 5310.828770.9 5621.22519

1 5931.62161

rent loan to value ratio loan am ou n t4500 0.54 1911600005000 0.7 2478000005500 0.86 3044400006000 1.02 361080000

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interest rate rent5310.828766

0.08 4302.577310.085 4440.1579930.09 4580.016368

0.095 4722.0776940.1 4866.2662

0.105 5012.5054280.11 5160.718566

0.115 5310.8287660.12 5462.759438

0.125 5616.4345250.13 5771.778763

sensitivity analysis

40004500500055006000

0.06 0.08 0.1 0.12 0.14

interest rate

mon

thly

rent

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資本預算步驟 Capital Budgeting

• 確定投資年限• 衡量原始投入成本• 估計現金流量.我們必須遵守下列兩個原則:

*考慮攸關現金流量*增量現金流量才是攸關現金流量:

/沉入成本不包括為攸關現金流量/機會成本須列為攸關現金流量/對其他單位的影響效果須準確認定因本計劃所帶來的效

• 風險分析 .• 折現率• 計算現金流量的現值.• 比較現值與成本

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資本預算決策準則• 回收期間法 ; 折現後回收期間法• 淨現值法 : NPV

• 內部報酬率法 : IRR( MIRR)

• 獲力指數法 : PI

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Incremental cash flowsyear 0 1 2 3 4 5 6

(1) net income 4,512,163 5,712,745 6,979,349 8,317,595 9,733,711 11,234,608

(2) depreciation expenses 2,700,000 2,700,000 2,700,000 2,700,000 2,700,000 2,700,000

(3) cash flow from operation 7,212,163 8,412,745 9,679,349 11,017,595 12,433,711 13,934,608

(4) cash flow from investment 72,800,000- 100,000- 105,000- 110,250- 115,763- 121,551- 127,628-

(5) total cash flow of the project 72,800,000- 7,112,163 8,307,745 9,569,099 10,901,833 12,312,160 13,806,980

7 8 9 10 11 12 13

12,827,958 14,522,285 16,327,067 18,252,848 20,311,364 22,515,688 24,880,386

2,700,000 2,700,000 2,700,000 2,700,000 2,700,000 2,700,000 2,700,000

15,527,958 17,222,285 19,027,067 20,952,848 23,011,364 25,215,688 27,580,386

134,010- 140,710- 147,746- 155,133- 162,889- 171,034- 179,586-

15,393,948 17,081,575 18,879,321 20,797,715 22,848,475 25,044,654 27,400,800

14 15 16 17 18 19 20

27,421,696 30,157,731 33,108,701 36,297,163 39,748,304 43,490,260 47,554,463

2,700,000 2,700,000 2,700,000 2,700,000 2,700,000 2,700,000 2,700,000

30,121,696 32,857,731 35,808,701 38,997,163 42,448,304 46,190,260 50,254,463

188,565- 197,993- 207,893- 218,287- 229,202- 240,662- 5,053,900

29,933,131 32,659,738 35,600,808 38,778,875 42,219,103 45,949,598 55,308,363

現金流量估算

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payback period 6.70 years

NPV 8% 115,143,928

10% 80,872,781

12% 54,642,564

15% 25,877,733

18% 5,734,371

IRR 19.08%

PI 8% 2.58

10% 2.11

12% 1.75

15% 1.36

18% 1.08

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rents NPV IRR

25877732.9 0.190770941

45000 -41171928.2 0.084315419

50000 -24409512.9 0.111354545

55000 -7647097.63 0.137942928

60000 9115317.636 0.164351719

65000 25877732.9 0.190770941

70000 42640148.16 0.217331491

75000 59402563.42 0.244119681

80000 76164978.69 0.271187748

Sensitivity analysis 敏感性分析

operating expensesNPV IRR

25877732.9 0.190770941

450000 27071341.42 0.192656331

500000 26811861.3 0.1922464

550000 26552381.19 0.191836504

600000 26292901.08 0.191426644

680000 25877732.9 0.190770941

720000 25670148.81 0.190443123

800000 25254980.63 0.189787554

860000 24943604.49 0.189295933

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Vacancy rate NPV IRR

25877732.9 0.190770941

0 37346753.87 0.208922681

0.05 25877732.9 0.190770941

0.08 18996320.32 0.17991436

0.12 9821103.542 0.165462802

0.16 645886.7661 0.151017347

0.2 -8529330.01 0.136549996

0.25 -19998351 0.118382401

0.3 -31467371.9 0.100043814

0.32 -36054980.3 0.092637723

0.16 0 0.15

0.55 -88930893 0

tax rate NPV IRR

25877732.9 0.190770941

0.15 43511558.52 0.215040437

0.2 37633616.65 0.207187889

0.25 31755674.77 0.199107429

0.3 25877732.9 0.190770941

0.35 19999791.03 0.182144887

0.4 14121849.15 0.17318879

0.45 8243907.278 0.163853162

0.5 2365965.405 0.154076573

0.55 -3511976.469 0.143781405

0.6 -9389918.343 0.132867523

0.65 -15267860.22 0.121202455

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Terms of the loan NPV IRR

25877732.9 0.190770941

6 -102577922.5 0.002933456

10 -24678184.86 0.112976592

15 10725440.39 0.166640217

20 25877732.9 0.190770941

25 33316975.3 0.202894188

30 37214861.74 0.209319929

interest rate NPV IRR

25877732.9 0.190770941

0.07 77465867.05 0.283443808

0.08 66362794.78 0.262128183

0.09 55035813.71 0.241178997

0.1 43506274.46 0.220654129

0.11 31795092.62 0.200604329

0.115 25877732.9 0.190770941

0.13 7907656.117 0.162084603

0.14 -4231215.035 0.143663365

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Scenario analysis the most likely case the best case the worst case

Expected holding period 20 20 20

Total initial investment 354,000,000.00$ 354,000,000.00$ 354,000,000.00$

Initial equity investment 20% 70,800,000.00$ 70,800,000.00$ 70,800,000.00$

net working growth rate 5% 5% 5%

Net leasable area 680 800 500

Vacancy rate 5% 3% 10%

Initial annual rent per pin annualy 65000 70000 55000

Rent growth rate 3% 5% 2%

Miscellaneous income initial 204000 300000 120000

growth rate 3% 3% 3%

operating expenses initial 80,000.00$ 680,000.00$ 680,000.00$

growth rate 3% 3% 3%

loan am ou n t 80% 283,200,000.00$ 283,200,000.00$ 283,200,000.00$

interest rate 11.50% 10.00% 13.00%

terms 20 20 20

mortgage constant 0.127971556 0.115802597 0.140589085

debt service 36,241,544.60$ 32,795,295.59$ 39,814,828.97$

Depreciation 20 20 20

tax rate 30% 30% 30%

required rate of return one quity 15% 15% 15%

情境分析

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Scenario analysis the most likely case the best case the worst case Expected value

probability 0.1 0.8 0.1

payback period 6.7 3.37 n.a.

NPV 25877732 144689622 -89270191 109412451.7IRR 19.07% 35.736 n.a.

PI 1.36 2.99 -0.23

Scenario analysis

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財務報表預測 ForecastingBasic assumptions

Expected holding period 20 years

Total initial investment 354,000,000.00$ Initial equity investment 20% 70,800,000.00$ net working growth rate 5%Net leasable area 680 pins

Vacancy rate 5%Initial annual rent per pin annualy 65000Rent growth rate 3%Miscellaneous incomeinitial 204000

growth rate 3%operating expenses initial 80,000.00$

growth rate 3%

loan am ou n t 80% 283,200,000.00$ interest rate 11.50%terms 20 years

mortgage constant 0.127971556

debt service 36,241,544.60$ Depreciation 20 years

tax rate 30%required rate of return one quity 15%

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0 1 2 3 4 5Investments

(1) Initial equity Investment 70,800,000.00-$ (2) net working capital 2000000 2100000 2205000 2315250 2431012.5(3) change in working capital -2000000 -100000 -105000 -110250 -115762.5 -121550.625(4) total cash flow of investment72,800,000.00-$ 100,000.00-$ 105,000.00-$ 110,250.00-$ 115,762.50-$ 121,550.63-$

Operations

(1) Potential gross income 44,200,000.00 45,526,000.00 46,891,780.00 48,298,533.40 49,747,489.40 (2) Vacancy allowance 2,210,000.00 2,276,300.00 2,344,589.00 2,414,926.67 2,487,374.47 (3) Miscellaneous income 204,000.00 210,120.00 216,423.60 222,916.31 229,603.80 (4) Effective gross income 42,194,000.00 43,459,820.00 44,763,614.60 46,106,523.04 47,489,718.73 (5) Operating expenses 680,000.00 700,400.00 721,412.00 743,054.36 765,345.99 (6) Interest expenses 32,368,052.86 31,898,355.85 31,371,703.71 30,781,190.07 30,119,071.15 (7) Depreciation expenses 2,700,000.00 2,700,000.00 2,700,000.00 2,700,000.00 2,700,000.00(8) Income before taxes 6,445,947.14 8,161,064.15 9,970,498.89 11,882,278.61 13,905,301.59 (9) Taxes (30%) 1,933,784.14 2,448,319.24 2,991,149.67 3,564,683.58 4,171,590.48 (10) Net income 4,512,163.00 5,712,744.90 6,979,349.23 8,317,595.02 9,733,711.11

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不動產融資 Real Estate Financing

ThriftsCommercial BanksInsurance companiesPension FundsREITsCredit UnionsGovernmentsNonfinancial businessHouseholdsForeign Investors

Mortgage BankersMortgage BrokersReal Estate BrokersInvestment BankersGovernment agenciesSyndicators

DevelopersOwners of HomesOwners of income PropertiesLand Owners

SUPPLIESOF CAPITAL

SERVICE GROUPS USERS OF CAPITAL

Equity

Debt

E

D

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The Players: Development Financing• Joint Venture Partner

• provides equity funding for development in return for development profit

• The Construction Lender

• short term debt financing for project

• take-out commitment

• The Permanent Lender

• provides long term financing

• concerned with long term viability of project & loan security– Loan to value ratio; debt coverage ratio; income; equity -- market

value is critical

• Long term Equity Investor: usually passive investor, limited partner

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Sources of Development Financing

During Construction After Construction

project cost

construction loan

developers equityJVP equity

Permanent loan

Long term investors equity

Permanent Loan Closing

42

Project development financing: An overview

• Estimating cost

• hard cost

• soft cost

• Construction loan

• short term loans

• open-end or “spec” loan

• floating interest rate : Prime rate plus mark-up

• method of disbursement

– draw request; retainage

• commitment letter

• availability of permanent financing– “spec” loan or open end loan

– mini-perm loan

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Project development financing• Permanent loan

• permanent or take-out commitment

• contingencies

– minimum rent-up;

– maximum period to acquire construction loan;

– approval of design changes;

– provision for gap financing

• Other provisions• recourse versus non-recourse

• assignment of commitment letter to construction lender

• Triparty buy-sell agreement where permanent lender buys construction after completion

44

Mortgage amortization table

Loan am ou n t 283200000

Interest rate 0.115

terms 20 yea r s

Debt service 36241544.6

year Proportion outstanding loan am ou n t Debt service principal pay me n t interest payment

0 1 283200000

1 0.986322416 279326508.3 36241544.6 3873491.737 32368052.86

2 0.970986298 274983319.5 36241544.6 4343188.743 31898355.85

3 0.953790532 270113478.6 36241544.6 4869840.892 31371703.71

4 0.934509619 264653124.1 36241544.6 5460354.526 30781190.07

5 0.912890716 258530650.7 36241544.6 6122473.447 30119071.15

6 0.888650318 251665770.2 36241544.6 6864880.464 29376664.13

7 0.861470547 243968458.9 36241544.6 7697311.257 28544233.34

8 0.830994975 235337776.9 36241544.6 8630682.048 27610862.55

9 0.796823955 225660544.1 36241544.6 9677232.755 26564311.84

10 0.758509381 214809856.6 36241544.6 10850687.5 25390857.1

20 0 0 36241544.6 34081440.85 2160103.751

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風險分析 Risk Measures

– Debt Coverage Ratio (DCR) = Net Operating Income/Debt Service=40,489,544/36,241,544=1.1172.

– Default Ratio (DR) = (Operating expenses + Real Estate Taxes + Replacement Reserve+ Debt Service)/PGI=(400,000+80,000+200,000+36,241,544)/43,336,362=0.85

Project could withstand a vacancy of x% = (1- DR)

= (1 - .85) = 15%

46

折舊費用計算 Depreciation expensesDepreciation tablesite cost 300000000 Building cost 54000000

Construction cost 24000000 Useful life 20

Fees 10000000 method straight-line

Indirect cost 20000000

Total construction cost 354000000

year Building Depreciation expenses Acuumulated depreciation

0 54000000 2700000

1 51300000 2700000 2700000

2 48600000 2700000 5400000

3 45900000 2700000 8100000

4 43200000 2700000 10800000

5 40500000 2700000 13500000

6 37800000 2700000 16200000

7 35100000 2700000 18900000

8 32400000 2700000 21600000

9 29700000 2700000 24300000

10 27000000 2700000 27000000

11 24300000 2700000 29700000

12 21600000 2700000 32400000

13 18900000 2700000 35100000

14 16200000 2700000 37800000

15 13500000 2700000 40500000

16 10800000 2700000 43200000

17 8100000 2700000 45900000

18 5400000 2700000 48600000

19 2700000 2700000 51300000

20 0 2700000 54000000

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報酬衡量 Return measurement

1. Equity Dividend Rate (EDR) = Before Tax Cash Flow/Initial Equity Investment=6%.

2. Return on Investment (ROI) = Net Operating Income/Total Capital Investment=40,489,544/354,000,000=0.11438

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財務槓桿分析 Principles of Financial Leverage

• POSITIVE LEVERAGE– ROI > MC

– EDR > ROI

– EDR > MC

• NEGATIVE LEVERAGE– ROI < MC

– EDR < ROI

– EDR < MC

• NEUTRAL LEVERAGE

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Financial Leverage Analysis

• A 11.438% return on investment is lower than either the interest rate of 11.5% or the mortgage constant of 12.769%

• Thus we have negative leverage• A small drop in borrowed funds permitted a large

increase in cash equity. This improved the solvency position .

• When interest rates are high more equity (often raised through partnerships) is used to improve project feasibility.

50

決策準則 Decision Criteria

• financial criteria– measure of return - measure of risk

* ROI * payback period

* NPV * debt coverage ratio

* IRR * default ratio

* leverage

• nonfinancial criteria– management reputation

– environment acceptance

– neighborhood

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Making a decision

• Accept or reject

• Modification

• Planning

• Executing

• Controlling, monitoring

附錄 : Front door 及 back door 的簡要公式The preceding front door can also be summarized in the form of an equ

ation:

TCB[(L/V*MC) + (1 - L/V)*EDR]

RPGI = --------------------------------------------------------

[1.0 - (EXP + RE T + VAC + RES)]WHERE:

RPGI= Required Potential Gross Income

TCB = Total Capital Budget or Project cost

L/V = Loan-to-value ratio

MC = Mortgage Constant

EDR = Equity Dividend Rate

EXP = Operating expenses as % of GPI

RE T = Real estate as % of PGI

VAC. = Vacancy as % of PGI

RES = Replacement reserves as % GPI.

The backdoor can also be summarized in the form of following equation.

PGI

TCB = ------------------------------------------------------

[(L/V*MC) + (1 - L/V)*EDR]

--------------------------------------------------------

[1.0 - (EXP + RET + VAC + RES)]

WHERE:

PGI = Potential Gross Income

L/V = Loan-to-value ratio (or Loan-to-cost ratio)

MC = Mortgage Constant (loan repayment per $1)

EDR = Equity Dividend Rate (Before tax equity return)

EXP = Operating expenses as % of PGI

RE T = Real estate as % of PGI

VAC = Vacancy as % of PGI

RES = Replacement Reserves as % PGI

Illustration: assumptions

• Zoning data

• permitted use = apartment

• parking space per unit = 180 sq. ft

• Project data

• lot area = 200 sq. ft. x 300 sq.ft.

• building cost/sq.ft = $60/ sq. ft

• Furnishings = $2,000/unit

• Land Cost = $15.00/sq. ft

• parking = $8.00/sq.ft

• number of units = 70 units

• proposed project = 2-BDRM units, 1000 sq.ft./unit

Illustration: Assumptions• Financing data:

• loan to value ratio = 75% of total cost

• interest rate = 12%

• amortization period = 20 years

• Market data:

• expense ratio = 22% of PGI

• real estate tax ratio = 10% of PGI

• vacancy = 8% of PGI

• replacement resrve = 2%

• market rent for 2-BDR apartment = $800 - $1,000

• building efficiency ratio = 85%

• before tax return on equity = 9% EDR

Illustration• Total project cost

– Land = 200 x 300 x $15 = $900,000

– Building = 70 units x 1000 sq.ft./unit x $60 = $4,200,000

– Furnishings = $2,000/unit = 70 x 2000 = $140,000

– Parking = $8/sq.ft. = 70 x 180 x 8 = $100,800

– Total project cost = $5,340,800

Illustration: Front Door

$5,340,800[(.75x.011011x12) + (.25x.09)]

RPGI = --------------------------------------------------------

[1.0 - (.22 +.10 + .08 +.02)]

= $649,345.94/.58

= $1,119,717.14

Potential Gross Income = $1,119,717.14

Rent/unit/year = $15,995.96

Rent/unit/month = $1,332.99

Question: Is the proposed project feasible?

Illustration: Back door

Potential Gross Income = $1000 x 70 x 12 = $840,000

$840,000

TCB = ------------------------------------------------------

[(.75x.011011x12) + (.25x.09)]

--------------------------------------------------------

[1.0 - (.22 + .10 +.08 + .02)]

$840,000 /.209653448 = $4,006,611.90

Total construction budget should be no more than $4,006,612, if the project is to break even within this particular rental market. This figure is significantly lower than the project cost used in the front door analysis

59

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