Description of a downtown vacant Lot

I.The lot is currently used as parking.

• A 36K s.f. vacant block, which is currently used as surface parking.
• The effective gross income (EGI) and operating expenses (OE) of the parking are $2.5M/y & $0.5M/y, respectively.
• The landowner will receive NOI once a year starting now (the first at t =0, the second at t=1,...)
• The parking NOI is stable without growth.
• The discount rate for the parking NOI is 3%/y.

II.The lot can be redeveloped into office.

• The landowner can build a 20-story, 500,000 s.f., office building.
• The construction cost is $200M without inflation, whenever you build.
• The construction period is zero (if you spend $200M at t=0, you receive the first office CF at t=0).
• The discount rate for the construction cost is 3%/y.

III.The office NOI is uncertain.

• The office NOI is currently $16M/year (If you redevelop now, you will receive $16M at t=0).
• The city will decide before t=1 whether to build a convention center (CC) near the vacant lot you are analyzing. The city's decision is uncorrelated with office market conditions.
• If CC is built in the neighborhood, the expected office NOI will grow 2%/y forever from t=2. Without CC, the expected office NOI will not grow.
• The discount rate for the office NOI is 8%/y.
• The following diagram summarizes the office NOI.