Setting:

The year is 2021. Claire Clever is a young lady who graduated from Virginias Business School just three years ago with an MBA degree and secured a position with a large marketing company. Initially, she liked her job very much, but it began to bore her. She was unhappy with her boss, who was always refusing to listen to her creative ideas. While sitting at her desk one day, Claire daydreamed about a new, more interesting career.

Two weeks later Claires mother called to say that her Uncle Bud Wiser, from Williamsburg, Virginia, had passed away and that Claire had inherited most of his money. Uncle Bud had also attended Virginia, and had always been very proud of being a Hokie. Claire couldnt believe that she was going to receive part of Wisers inheritance. She barely knew her uncle. However, the inheritance came with a condition that she would have to use the money in order to invest in a project that would help the people of Williamsburg and also promote Virginia Tech in some way. Then, all the profits from the project would be Claires. If she did not accept the conditions of the inheritance, she would not receive any of the money. She decided to accept the terms, in honor of her uncles last wishes.

Following her uncles funeral, held in Williamsburg, Claire decided to stay in town and determine what would be a beneficial project. At the funeral, Claire bumped into her Auntie Anne who owns Busch Gardens in Williamsburg. Auntie Anne suggested that Claire consider the opportunity of building a shopping mall adjacent to Busch Gardens. Auntie Anne is also a Virginia Tech graduate and really liked the idea of Hokie themed shopping center. Claire thought maybe she could call it Mount Hokie, to honor Uncle Buds great love of Virginia Tech. Auntie Anne loved the idea too.

Her head full of thoughts, Claire drove back to D.C. in order to quit her job. After emptying her apartment, she moved to Williamsburg to get started on her project. The idea of a medium-scale shopping mall with sufficient parking seemed to be very promising. The relevant question was: Would it also be a good investment?

Claire needed experienced input about this project, as she lacked the necessary knowledge of the demand of the area and the economics behind the land development process. It was clear she needed a consultant. Claire remembered Bob Builder Jr., an old friend from high school, whose father was a land developer in the Williamsburg area. She decided he was the right person to talk to. Bob Builders land development company, Big Builders, was not far away from Busch Gardens. After having made an appointment with Bob on the phone, their conversation went like this:

Bob: Now, Claire, tell me more about your plans for that mall.

Claire: Since your office is just an hour away from Busch Gardens, I was wondering if you ever heard about the demand for a shopping facility near the theme park.

Bob: Let me tell you Claire, if I werent so wrapped up with projects here in town, I might have started a project like you have in mind. Yes, indeed, there is a demand for a mall in or around Busch Gardens. So Claire, what can I do for you?

Claire: Well, I do understand that you are very busy, but do you think you could be a consultant to me about this mall? See, I have experience in managing and marketing, but, to be honest, I dont know much about land development and construction.

Bob: My first advice to you is that you follow the three basic rules of land development: first, location; second, location; and third, location.

Claire: I got it!

Bob: Good, good. Well, since I have developed a few shopping centers, I actually can be of some help to you.

Bob agreed to take over this consulting job after negotiating his fee. The new business partners set another appointment to talk about the project in further detail. This conversation went as follows:

Bob: Since our last meeting, I dug out some old documentation on previous malls I developed. It is always important to produce good documentation. It can be very handy, when doing a similar project, as is the case now. It helps me to formulate a preliminary estimate and the estimate itself will assist us in the determination of the projects feasibility.

Claire: But dont you need some more information to compare the new with the old projects?

Bob: That is why you are here. I need to know from you what kind of mall you had in mind and what your financial situation looks like.

Claire: I would like the shopping mall to be comprised of smaller retailers. A customer should have the impression that he or she is strolling down a town street with small and medium sized shops, of course all under one roof. It is also important that this place provides sufficient parking without offering the customer an unsightly view of a big parking lot. I want to provide attractive architecture and landscaping, particularly given its location next to Busch Gardens, rather than just constructing a big ugly cubicle.

Bob: It seems that you really trying to be in keeping with the theme park character. That is good. In terms of square feet, what size of floor space are we looking at?

Claire: Oh, I havent really thought about that. How much will it be if, lets say, we have thirty smaller and fifteen bigger stores?

Bob: (making some calculations on the corner of his newspaper) I would say we are looking at about 175,000 SF. That is a nice number to work with and shouldnt be located too far away from the theme park itself.

Claire: Yes, and I have already looked around for a piece of property. Well, I actually have a certain spot in mind, but I just dont know if we can build there. Im hoping to call it Mount Hokie.

Claire described the location of the land to Bob. The next day he found out that it really was an appropriate location, who the landowner was, and what the conditions and the zoning codes were. They agreed to meet again the next week.

Assignment 1

Imagine you work in the office of Big Builders and Bob asks you to work on the Mount Hokie Project. Prepare a professional memo for him stating the costs for the 8 items listed below as well as the total project cost for the shopping facility in Williamsburg in the correct year (2021). Use the information provided in the text you have read before and the additional information given below.

You know that Big Builders has developed an essentially similar shopping facility in Splash Springs in 2005. You obtained the companys records from Bob and found that the actual costs for this shopping center were:

1		Land	$ 2,652,000
2		Site development	$ 1,080,000
3		Utilities (Water and Sewer)	$ 321,000
4		Electrical reticulation	$ 68,000
5		Shopping facility (69,500 SF)	$ 3,929,000
6		Parking lot (300 spaces)	$ 489,000
7		Landscaping	$ 70,000
8		Various Fees	$ 1,119,000
	Total project cost		$ 9,728,000

Total project : $9,728,000

The following construction cost indices were researched and will help determine the adjustment in price due to the difference in time and location of the two projects:

Year	Splash Springs	Williamsburg
2005	0.95	0.83
2021	1.95	1.75

Consider the following facts:

• Claire was able to purchase the land for $ 3,040,000.
• Construction is expected to start in 2023.
• Assume a linear relationship of the costs based on the area of the floor plan.
• The site selected will allow for 700 parking spaces and the cost of the parking lot is proportional to the number of parking spaces.
• For the last half-year or so there has been an extreme shortage of companies specialized in installing electrical reticulations. Hence, it will be very difficult to find a subcontractor bidding a low price. Assume the unit cost of electrical reticulation in Williamsburg in the year 2023 will be 1.45 times the unit cost of Splash Springs in 2005. In addition, you know that the costs for electrical reticulation are directly proportional to the floor space.
• Landscaping costs are about 18% of the parking lots construction cost due to Claires concern about the appearance of the shopping facility in the community.
• Claire received an estimate for site development, which stated: The site work should cost $2,135,000 at 2021 prices. You need to add an inflation allowance of 4% per year to this estimate if construction is to take place later than 2021.
• For an annual inflation rate, assume a rate of 4% per year.
• The item "various fees" will be 25% of the construction cost.

Your memo should include:

• A table of the itemized costs for the Mount Hokie Project
• The Mount Hokie project total cost
• Any additional assumptions made
• A paragraph that answers the following questions:
  • How accurate do you think your cost estimate is likely to be?
  • What additional information do you need to improve the accuracy of your estimate?
  • What information do you need if you are to give Claire an indication as to the feasibility of the venture from a technical and financial point of view?

Attached to your memo:

Calculations of the itemized costs