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. The asking price of the project is $14,500,000 and the construction cost per unit is $82,600. The current rent to justify the land acqusition is $2.4 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 16.2 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 $141,500 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?

Concept Box 16.2

I. Physical Feasibility:

1. 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.
2. Site: 10 acres or 435,600 square feet.
3. Asking price: $2,800,000.
4. Basic project description/zoning:
   1. Setback requirements: 15%
   2. Circulation requirements: 15%
   3. Maximum units per acre: 24 (based on a unit mix of 1-, 2-, and 3-bedroom apartments; weighted average = 900 square feet per unit)
   4. Parking requirements: 1.5 spaces per unit @ 400 square feet per space
   5. Open space, berms, landscape, support area: 1.0 acre (required) based on 240 units
   6. Maximum building height: 2 stories
5. Physical feasibility (in square feet):

a. Gross land area435,600Less: Setbacks65,340Circulation65,340Open space/support/other43,560b. Area available for building development:261,360Less: Surface parking, 240 units 1.5 spaces 400 square feet144,000c. Net surface area available for building117,360d. Proposed total footprint areas for buildings, (240 units 900 square feet) 2 stories108,000Excess (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: $80,000 240 units$ 19,200,0002. Asking price for land:2,800,000Total project cost:$ 22,000,000*3. Gross revenue after lease-up and stabilization: Rent: $1.10 per square foot @ 900 square feet @ 240 units 12 months$ 2,851,200Less: Average vacancy (5%)142,560Operating expenses (35%)997,920Net operating income$ 1,710,7204. Return on total cost ($1,710,720 $22,000,000)7.78%5. Approximate value based on NOI: a. If cap rate = .078$ 22,000,000b. If cap rate = .08$ 21,384,000c. If cap rate = .07$ 24,439,000

III. Conclusion: Project may be feasible if the investor/developer is willing to accept a total return on cost of 7.8%. 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).

*Includes all infrastructure (roads, drainage, utilities, sewer costs), land, and building costs.