Final Project
Your Aunt Rosie owns a parking lot in Greenpoint, Brooklyn. She heard you have become a wiz at real estate development since you graduated from Schack six years ago and so far have built or redeveloped several buildings on your own, and wants to figure out if she should close up the parking lot business and have you develop the property as apartments. The parking lot business currently nets her about $30,000. She has asked you to analyze development options and put together a basic proposal, since she has no experience in real estate development.
She’s interested in two options:
1 – Develop a multi-family rental building
2 – Develop condos
They went to the expense of having some basic zoning work done and have relayed to you the following information:
Lot dimensions: 65’ wide x 95’ deep (corner lot)
Zoning: R6B
FAR permitted for a residential building: 2.0
Height restriction: 50’
Rear setback requirements: none – corner lot
Parking Requirements: 1 car for every 2 units if there are 10 or more units
Typical loss factor for multi-family residential is 15%.
They also heard that construction costs/timeframes are generally as follows:
Residential Hard Costs, Rental – $300 PSF – 24 months to plan, build and occupy
Residential Hard Costs, Rental – $400 PSF – 30 months to plan, build and sell
Soft Costs – 20% of Hard Costs for a Rental, 30% of Hard Costs for a Condo
Your Assignment:
Prepare a report for her of 3 pages, plus addenda as necessary, with the following sections:
- Executive Summary: Explain what option you have selected and why you believe this is the best strategy to pursue for her. Talk about your vision of what you intend to build and why you think it is optimal, including basic information about the total debt and equity needed, expected returns, and risks of the project. (1-2 paragraphs)
- Strategy: Explain the steps she must take to realize the plan you have laid out in a clear digestible format, including the team members that will need to be involved, the due diligence that must be performed, and how you intend to organize the team. Include the basic timeline of the project that you anticipate. (2 -3 paragraphs, plus use a timeline chart to show your plan)
- Feasibility Analysis: Explain how you arrived at your recommendation using the following analyses:
- Physical Feasibility. Describe what they can build, and what conclusion you have made as to the optimal floor sizes, height and general building layout. Provide a basic sketch for each floor, and an elevation of the building you intend to develop for her.
- Market Analysis. Provide some basic back-up to your rental assumptions. Cite 3 area comps for each project type.
- Budget Projections. Provide a Sources & Uses Table, include interest carrying costs, and your fees to handle the project for each option and provide the numbers side by side.
- Projected Returns. Provide a basic stabilized pro forma to prove how much value your project has added, and what the cash flow will be of the completed project. Analyze the return for her.
Notes:
1 – Market Analysis. You should provide 3 comps for each use type from publically available websites to back up your market assumptions.
2 – Operating Expenses upon Completion of Development. You may assume 35% of revenues as operating expenses for a residential rental project, in order to arrive at an NOI. For the sake of simplicity assume full occupancy. You may assume a 6% brokerage commission for a condominium project.
3 – Financing. Assume an interest rate of 6% for construction financing, 4% for permanent loans for the rental project. Assume 50% LTC in construction financing, 70% LTV for permanent financing, and that banks will value the land at $200 per buildable square foot. A personal guaranty and completion guaranty is required during construction.
4 – Equity. Rosie has savings of ~$2,500,000.
5 – Value of Final Building. Assume a 5% cap rate valuation for the rental building. Condo values can be estimated based on similar neighborhood listings.
You must model both scenarios in order to prove which project makes the most sense to pursue. Provide the financials side by side in an easy-to-read format for easy comparison.
