Upon closer review of the market, you have determined that you can only capture a $2\mathrm{.}88\%$ market share of annual office absorption in your primary trade area and are moving forward to develop a new office building with the goal of a one year absorption period. You have located a $1/2$ acre commercial lot zoned for an FAR of $0.7$ at a cost of $$295,000.$ Your direct construction cost including all closing costs, financing fees, and indirect costs except interest on the construction loan will be $$170$ per square foot of building space. The market rent in the primary trade area is $$20$ per square foot and you will need to anticipate market vacancy rate of $12\%$ as determined by your market analysis. Operating expenses for office space in the area is $$2$ per square foot.

you have a construction loan commitment based$$upon $75\%$ LTV at an annual interest rate of $7\%$ with value determined by the market cap rate. The lender will fund $100\%$ of the cost of the land at the initial closing of the land. It will take $16$ months to develop the site and build the building, and you have a take out permanent loan available to pay off the interest only construction loan at that time. You typically attempt to make a development fee of $10\%$ of the direct construction cost, but the lender will only allow a developer fee of the difference in cost and value.

You have identified two recent sales of comparable office buildings in the PTA. One was a $16,000$ SF building that was built $4$ years ago and rented at $$22$ PSF$.$ It sold for

$$3,660,000.$ The second was a $12,000$ SF building that was build $2$ years ago and rented at $$20$ PSF$.$ It sold for $$2,700,000.$

Determine the size of the office building you should develop based upon the market information. Is the lot appropriate for the building size? What is the market cap rate? What is the loan amount? How much total equity will be invested to complete construction? How much development fee can you expect in this deal? Answer for: Building SF allowed, Total Equity, Development Fee, Fee Margin, SF building, cap rate, loan amount, interest. Here are the formulas provided by the professor: Market Demand:

For Sale Housing:

Annual population growth $/$ people per household $=$ new households annually

Households x $\%$appropriate household income x $\%$purchasing $=$ total available market

Total available market x $\%$buying new x market share $($capture ratio$)=$ annual project absorption

Total number of lots $/$ annual absorption $=$ absorption period

Rental Housing:

Households x $\%$appropriate household income x $\%$renting $=$ total available market

Total available market x capture ration $=$ annual lease absorption

Total units $/$ annual lease absorption $=$ lease up period

Office Space:

Number of new office using jobs x SF per employee $=$ total SF office demand

$($Total SF demand $$ vacancy allowance$)$ x market share $=$ annual project demand

Retail Space:

$($HH $ $+$ Employee $ $+$ Visitor $$)/$ Required $ per SF $=$ total SF retail demand

Total SF demand $$ existing supply $=$ SF demand

Market Competition:

For Sale:

Average purchase price x $\%$market area $=$ competitive lot sales price $($value or market price$)$

Income Producing:

NOI $/$ Cap rate $=$ competitive property value

Financial:

For Sale Land Development:

Market driven sales price per lot $=$ value or market price

Cost driven sales price $=$ land $+$ development $+$ interest $+$ profit

Cost $=$ land $+$ development $+$ interest

Cost $/$ number of lots $=$ cost per lot

Sales price per lot x number of lots $=$ total value

Cost per lot x number of lots $=$ total cost

Sales price per lot $$ cost per lot $=$ profit per lot

Profit $/$ sales price $=$ profit margin or mark up$(\%$sales price$)$

Cost $/(100\%$sale price $$ profit margin$)=$ cost driven sales price A & D loans based on total value of all lots $($LTV$)$ or total cost of all lots $($LTC$)$

Total loan divided by # of lots x $1\mathrm{.}2($negotiable$)=$ per lot loan payoff

Total loan divided by per lot loan payoff $=$ loan payback period

Total loan amount x interest rate $=$ total annual interest cost with entire loan disbursed

Annual interest cost $/12=$ peak monthly interest cost with entire loan disbursed

Peak monthly interest $/2=$ average monthly interest during loan payback period

Average monthly interest x loan payback period $=$ total interest cost

Initial advance $+$ total loan $/2=$ average loan during construction

$($Avg loan during construction x interest rate$)/12$ x construction period in months $=$

Interest cost during construction

Equity $=$ cost $$ loan

Owners Equity is initial cash or profit $($for this course!$)$

Per lot close to WIP $=$ total projected cost divided by number of lots

Total projected cost $=$ land $+$ development $+$ total interest cost $+$ carry cost