Peter and Paul Development Plans for a Fringe CBD Assignment

Assignment Task

Case Study

Peter and Paul want to be developers. Peter is a former real estate agent with experience in commercial leasing. Paul is a former accountant. Some time ago they agreed that they would pursue development projects together.

Peter has found a site on the fringe of the CBD which has an existing building and sufficient land to develop another smaller building.

Peter and Paul have a conditional contract to acquire the site and have undertaken substantial feasibility work. Broadly, their plan involves refurbishing and upgrading the existing building as PCA Grade A standard office accommodation and to then sell and/or lease this building. They wish to retain the balance of the site for future development.

In that regard, they have been approached by a number of interested parties as follows:

• an agent representing a State Government department who wishes to lease the entire building;
• a number of institutions such as AMP, Challenger Life, who wish to purchase the building with the “pre-commitment” from the tenant; and
• a major national construction company seeking to assist Peter and Paul in return for the contract for the works and a share of the

The State Government department wishes to lease the building for a term of 10 years with a commencing effective net annual rental of $600/m ² with fixed annual rent reviews of 5% p.a. for the term of the lease.

The existing building has a basement level car park for 160 cars, a ground floor of 735m ² and eleven floors with net lettable areas (NLA) as follows:

The site will cost $35 million with the notional cost of the balance land being $7.5 million. The total cost of refurbishing the building and services is estimated at $40 million excluding consultants, agents and finance costs.

As typical developers, Peter and Paul have no cash to put into the project and have identified a couple of alternative methods of proceeding:

• sell the site contemporaneously with the settlement of their contract;
• finalise the pre-commitment and on-sell the project;
• finalise the pre-commitment, undertake the project and then sell the building immediately or at some future point in time.

Neither Peter nor Paul want to pursue Option 1, Option 2 appears difficult and will result in a lower profit. Therefore, their preferred position is Option 3.

Outgoings are estimated at $80/m ² and there are no leasing incentives required.

You are the development manager for the national construction company and have been given the task of investigating whether or not your company should seek to participate in the project.

Questions

• Prepare a basic feasibility study to identify key criteria such as total development cost, profit, value, return on cost and any other criteria you consider relevant. In considering value, prepare a brief valuation analysis making assumptions about capitalisation rates, You should also note and discuss any assumptions you make and critically analyse any of the developer’s assumptions.
• Outline three (3) alternative financing methods by which your company could structure its involvement. For each method, briefly discuss the advantages and disadvantages of the proposed structure and identify specifically the amount of capital required to be contributed by your company, the rate of return sought and the rationale for requiring this rate of
• What risks are involved in the project and how could they be addressed?

This Accounting and Finance has been solved by our PhD Experts at My Uni Paper.