*** Please show work in Excel with formulas used.

Review Concept Box 16.2. The investor-developer would not be comfortable with a 7.8 percent return on cost because the margin for error is too risky. If construction costs are higher or rents are lower than anticipated, the project may not be feasible.

1. Based on the fact that the project appears to have 9,360 square feet of surface area in excess of zoning requirements, the developer could make an argument to the planning department for an additional 10 units, 250 units in total, or 25 units per acre. How would this affect financial feasibility? What could be included in such an argument? Why would a public regulatory institution be interested in increasing density to 25 units per acre? Why not?

2. Instead of (a), suppose the developer could build a 240-unit luxury apartment complex with a cost of $83,000 per unit. What would such a project have to rent for (per square foot) to make an 8 percent return on total cost? What risk factors would the developer have to consider?

Concept Box 16.2 Preliminary Feasibility AnalysisApartment Project Development

Physical Feasibility: Goal: To provide a preliminary development plan analysis to determine whether an apartment project can be built on a specific site in accordance with regulatory requirements and leased at current rental rates in order to justify land acquisition. Site: 10 acres or 435,600 sq.ft. Asking price: $2,800,000 Basic project description/zoning: Setback requirements: 15% Circulation requirements: 15% Maximum units per acre: 24 (based on a unit mix of 1-, 2-, and 3-bedroom apartments; weighted average=900 sq.ft.weighted average=900 sq.ft. per unit) Parking requirements: 1.5 spaces per unit @ 400 sq.ft. per space Open space, berms, landscape, support area: 1.0 acre (required) based on 240 units Maximum building height: 2 stories Physical feasibility (in square feet):
Gross land area	435,600
Less: Setbacks	65,340
Circulation	65,340
Open space/support/other	43,560
Area available for building development:	261,360
Less: Surface parking, 240 units 1.5 spaces 400sq. ft.240 units 1.5 spaces 400sq. ft.	144,000
Net surface area available for building	117,360
Proposed total footprint areas for buildings, (240 units 900sq . ft.)2240 units 900sq . ft.2 stories	108,000
Excess (or deficiency) of square footage versus zoning requirements:	9,360
Conclusion: It appears that the site can accommodate a 240-unit apartment project and comply with zoning requirements.
Financial Feasibility:
Construction cost per unit: $80,000 240 units$80,000 240 units	$ 19,200,000
Asking price for land:	2,800,000
Total project cost:	$22,000,000*
Gross revenue after lease-up and stabilization:
Rent: $1.10 per sq.ft. @ 900 sq.ft. @ 240 units12 months240 units12 months	$2,851,200
Less:
Average vacancy (5%)	142,560
Operating expenses (35%)	997,920
Net operating income	$ 1,710,720
Return on total cost ($1,710,720 $22,000,000)$1,710,720 $22,000,000	7.78%
Approximate value based on NOI:
If cap rate=.078If cap rate=.078	$ 22,000,000
If cap rate=.08If cap rate=.08	$ 21,384,000
If cap rate=.07If cap rate=.07	$ 24,439,000
Conclusion: Project may be feasible if the investor/developer is willing to accept a total return on cost of 7.8%. If, upon completion, investors are pricing comparable projects at a cap rate of .08, this proposed project would not be feasible because value ($21,384,000) is less than cost ($22,000,000). If projects are being priced at cap rates of .07, the project would produce a sizable development profit of $2,439,000 (or $24,439,000$22,000,000).