Preliminary Feasibility Analysis$$Apartment Project Development

Concept Box $16\mathrm{.}2$

I. 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 $435,600$ square feet.

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 $=900$ square feet per unit$)$

Parking requirements: $1\mathrm{.}5$ spaces per unit @ $400$ square feet per space

Open space, berms, landscape, support area: $1\mathrm{.}0$ acre $($required$)$ based on $240$ units

Maximum building height: $2$ stories

Physical feasibility $($in square feet$)$:

a$.$ Gross land area $435,600$

Less: Setbacks $65,340$

Circulation $65,340$

Open space$/$support$/$other $43,560$

b$.$ Area available for building development: $261,360$

Less: Surface parking, $240$ units $\backslash$times $1\mathrm{.}5$ spaces $\backslash$times $400$ square feet $144,000$

c$.$ Net surface area available for building $117,360$

d$.$ Proposed total footprint areas for buildings, $(240$ units $\backslash$times $900$ square feet$)-$: $2$ 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.

II$.$ Financial Feasibility:

$1.$ Construction cost per unit: $$80,000\backslash$times $240$ units $ $19,200,000$

$2.$ Asking price for land: $2,800,000$

Total project cost: $ $22,000,000*$

$3.$ Gross revenue after lease$-$up and stabilization:

Rent: $$1\mathrm{.}10$ per square foot @ $900$ square feet @ $240$ units $\backslash$times $12$ months $ $2,851,200$

Less:

Average vacancy $(5\%)142,560$

Operating expenses $(35\%)997,920$

Net operating income $ $1,710,720$

$4.$ Return on total cost $($$$1,710,720-$: $$22,000,000)7\mathrm{.}78\%$

$5.$ Approximate value based on NOI:

a$.$ If cap rate $=\mathrm{.}078$ $ $22,000,000$

b$.$ If cap rate $=\mathrm{.}08$ $ $21,384,000$

c$.$ If cap rate $=\mathrm{.}07$ $ $24,439,000$

III. Conclusion: Project may be feasible if the investor$/$developer is willing to accept a total return on cost of $7\mathrm{.}8\%.$ If$,$ upon completion, investors are pricing comparable projects at a cap rate of $\mathrm{.}08,$ 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 $\mathrm{.}07,$ the project would produce a sizable development profit of $$2,439,000($or $$24,439,000$ $$22,000,000).$Problem $16-1$

The investor$-$developer would not be comfortable with a $7\mathrm{.}8$ 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. The asking price of the project is

$$17,200,000$ and the construction cost per unit is $$83,200.$ The current rent to justify the land acqusition is $$2\mathrm{.}7$ per square foot. The

weighted average is $900$ square feet per unit. Average vacancy and Operating expenses are $5\%$ and $35\%$ of Gross Revenue

respectively. Use the following data to rework the calculations in Concept Box $16\mathrm{.}2$ in order to assess the feasibility of the project:

Required:

a$.$ 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. What

is the percentage return on total cost under the revised proposal? Is the revised proposal financially feasible?

b$.$ Suppose the developer could build a $240-$unit luxury apartment complex with a cost of $$155,000$ per unit. Given that NOI is $60\%$ of

rents. What would such a project have to rent for $($per square foot$)$ to make an $8$ percent return on total cost?