Problem 3

Acme Investors is considering the purchase of the undeveloped Baker Tract of land. It is currently zoned for agricultural use. If purchased, however, Acme must decide how to have the property rezoned for commercial use and then how to develop the site. Based on its market study, Acme has made estimates for the two uses that it deems possible, that is, office or retail. Based on its estimates, the land could be developed as follows:

	Office	Retail
Rentable square feet	95,000	77,500
Rents per square foot	$25.00	$31.00
Operating expense ratio	38%	45%
Avg. growth in NOI per annum	3%	3%
Required return (r)	12%	13%
Total construction cost per square foot	$105	$105

Which would be the highest and best use of this site?