Troy Martin Development Corp. was recently given the opportunity to bin on an attractive development site in downtown Chico. The executives at Troy Martin, including Troy, believe there is growing demand for high end offices due to the growing demand by companies in the area. The investors at Troy Martin expect to achieve a 12.5% return on development projects and do not wish to begin developments if such returns cannot be achieved. Isaac Shuman is the Head of Development at the firm who was given the task of assessing the feasibility of the Martin office project.

Below are the cost and income data Isaac has collected for the project:

Land of $37/GSF

Hard costs of $73/GSF Soft costs of $35/GSF Rent of $38/LSF

Op Costs of $12/GSF

Vacancy of 6% of leasable footage Loss factor of 30% of gross footage

1. Calculate the expected return for the Troy Martin office development project as well as the risk premium. Does the expected return meet the investors threshold of 12.5% return on cost?