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Lecture 8

REAL 4830 Lecture 8: Lecture #8- Financial Feasibility

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Department
Real Estate and Housing
Course Code
REAL 4830
Professor
Unknown

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Lecture #8: Financial Feasibility
TEST #3: FINANCIAL FEASIBILITY
(Financial Analysis: Considering lender criteria and investor return requirements
What makes a Good Project from Developer’s Perspective?
Aility to Fiae Out
o No equity-requirement
- No cash equity
- Land, work-to-date as equity
o Ability to obtain a loan for more than the cost of the project
- Get back some cash already put into the project
- Start something else
Lowest Possible Risk
o Pre-lease/pre-sale
o Management intensity
- Hotel vs. industrial building with NNN lease
o Constraints on competition
- Zoning
- Physical boundaries
- Financing
Is the pojet istitutioal uality?
o How easy will it be to refinance or sell later when you need cash
Does the project help you create an important relationship?
o Doing your first Hilton hotel to get in with that chain
o Doing a Walmart anchored center
o Partnering with a REIT
Does the project help position you in a new business or have diversification effect?
o What’s the dage i eig too speialized?
o What’s the dage i ot speializig?
Does the project help you grow?
Does the project put people to work?
o Helps when asking for a zoning variance
o Lets you keep talented people?
Does the project generate fees for the service end of the business etc., construction
company, leasing fees, property management fees.
Project you can repeat simpler design more time off less supervision
find more resources at oneclass.com
find more resources at oneclass.com
Case Study: Keystone Center
Assuming you can get all the minor details worked out, is the project financially
feasible?
Financial Feasibility Techniques:
o Front Door Analysis: designed to calculate the rent/income required to provide
an adequate return to support the Total Replacement Cost (TRC) for a specified
development
o Back Door Analysis: used to back into the Total Replacement Cost; justified TRC
for a project in light of the Gross Income in the market that it is likely to generate
Financial feasibility should measure and quantify risk
o Risk = degree of error (uncertainty) between assumptions and reality
Financial feasibility should anticipate the law of unintended consequences
o No matter what your plan is, the result will always be a surprise
Fiaial feasiility is all ased o the pofoa
o The document meant to demonstrate the financial logic of a development
o A target, a yardstick, a budget, a profound hope, and sometimes a lie
No matter how honestly/realistically a proforma is drawn up, reality will rarely match it*
Financial Concepts Review:
Debt and underwriting formulas:
o LTV (Loan to Value ratio)= LOAN AMOUNT / FINAL VALUE ESTIMATE
o DCR (Debt Coverage ratio) = NOI / ANNUAL DEBT SERVICE
o Cap Rate = NOI / VALUE
Investor profitability measures:
o ROR (Return on Total Cost) = NOI / TOTAL COST
o ROE (Return on Equity) = NET CASH FLOW / EQUITY
o IRR = INTERNAL RATE OF RETURN
o NPV = NET PRESENT VALUE
find more resources at oneclass.com
find more resources at oneclass.com
Front Door Analysis:
Gie estiates of pojet ost, the lede’s udeitig, ad the oe’s iestet
criteria what rental rate is required to make the project feasible?
Is the achieveable/reasonable
1. Key Assumptions:
2. Process work backward, from the bottom of the proforma up, to determine the required
rental rate
3. Results, Sensitivity
Which assumptions are most speculative?
Conclusion
developer needs a minimum rental rate of $22.80/SF to make the project feasible (this
is supported by market data)
Sensitivity
how sensitive is required rental rate changes in key assumptions (Vacancy Rate, Hard
construction cost, Required ROE)
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find more resources at oneclass.com

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Description
Lecture 8: Financial Feasibility TEST 3: FINANCIAL FEASIBILITY (Financial Analysis: Considering lender criteria and investor return requirements What makes a Good Project from Developers Perspective? Ability to Finance Out o No equityrequirement No cash equity Land, worktodate as equity o Ability to obtain a loan for more than the cost of the project Get back some cash already put into the project Start something else Lowest Possible Risk o Preleasepresale o Management intensity Hotel vs. industrial building with NNN lease o Constraints on competition Zoning Physical boundaries Financing Is the project institutional quality? o How easy will it be to refinance or sell later when you need cash Does the project help you create an important relationship? o Doing your first Hilton hotel to get in with that chain o Doing a Walmart anchored center o Partnering with a REIT Does the project help position you in a new business or have diversification effect? o Whats the danger in being too specialized? o Whats the danger in not specializing? Does the project help you grow? Does the project put people to work? o Helps when asking for a zoning variance o Lets you keep talented people? Does the project generate fees for the service end of the business etc., construction company, leasing fees, property management fees. Project you can repeat simpler design more time off less supervision
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