1. Good news! Youve inherited a plot of undeveloped land in downtown Chicago from your great aunt. Youve decided to use your good fortune to enter the world of property development after you graduate from ISU. After doing some initial market research, youve identified two possible development projects.

First, you could build an office building on the site. Youve spoken with a broker who tells you that you can expect to earn around $60 /sf/year on new office space in the market. The site is currently zoned for residential, but the city has granted variances to nearby parcels allowing for office development. Youre optimistic that the city will grant you a similar variance allowing a 25,000 sf office building on your lot. Youve spoken to a banker who offered you a loan with a loan-to-value ratio of 85% (a 30-year fixed rate mortgage at 9% APR with annual debt service payments of $38 /sf/year). You anticipate operating expenses will be around $5 /sf/year. Once the building is stabilized, you expect that it will have a value of $460 /sf.

Second, you could build a 100-unit apartment building on the site without changing the current zoning. Once you take into consideration average vacancy rates, similar buildings rent for around $15,000 unit/year with operating expenses around $3,000 /unit/year. For an apartment building, the banker offers a loan with a 95% loan-to-value ratio based on an estimated building value of $144,000 /unit (similarly a 30-year fixed rate mortgage, but with 6% APR and an annual debt service of $1,500 /unit/year).

Calculate the Cash-on-Cash and Return on Assets for each project. Based on this analysis alone, which project produces a better financial return? (40 pts)

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