The CEO of Kuehner Development Co. has just come from a meeting with his marketing staff where he was given the latest market study of a proposed new shopping center, Parker Road Plaza. The study calls for a construction phase of one year and an operation phase of five years. The property is to be sold at the end of the fifth year of operation.

Part I. Construction Phase:

The marketing staff has chosen a 12-acre site for the project that they believe they can acquire for $4.5 million. The initial studies indicate that this shopping center will support a floor- to-area ratio of 36.35 percent and a 92.11 percent leasable area ratio. (This means that the gross building area (GBA) will be 190,000 sq.ft., and the gross leasable area (GLA) will be 175,000 sq. ft.]

The head of Kuehner's construction division assures the CEO that construction can keep hard costs to $54 per square foot (GBA) and soft costs (excluding interest carry and all loan fees) to $4.50 per square foot (GBA). The division has decided to subcontract all of the site improvements at a total cost of $760,000.

The Shawmut Bank has agreed to provide interim financing for the project. The bank will finance all of the construction costs and site improvements at an annual rate of 6 percent plus a loan commitment fee of two points. The construction division estimates that 60 percent of the total direct cost will be taken down evenly during the first six months of the construction phase. Kuehner expects to obtain permanent financing from the Acme Insurance Co. at an interest rate of 5 percent for 20 years with a 2.5 percent prepaid loan fee and a 10-year call. Kuehner is expected to make monthly loan payments.

a. What will be the total project cost for Parker Road Plaza (excluding loan commitment fees and interest carry)? What will be the total direct costs?

b. What will be the interest carry for the Parker Road Plaza project? What will be the total loan amount that Kuehner must borrow (including interest carry)? What will be the yield to the lender on this construction loan?

c. What is the total project cost and how much equity must be put into the project each year during the construction phase? (Kuehner will fund both loan commitment fees from project equity.)