PROP342 - Property Development Assignment - The University of Auckland

Assignment Task

Develpment Criteria

This building has been constructed. The assignment adopts physical aspects of the building but not from final drawings or the schemes used for earlier assignments. The Development Criteria are generally representative of current market conditions and were not taken from this project. No contact is to be made please with the owner or architect. This assignment is intended as an exercise for the preparation of commercial and investment assessments together with report writing to produce a Financial Feasibility Report but without reference to current markets for leasing and sale. All figures are as realistic as possible. In recognition of recent building cost inflation the rentals are ‘to be achieved’ rather than necessarily reflecting the current market. All numbers that you require are provided below

1. Feasibilty Report

You are a Development Manager for a Property Development organisation. The CEO has given you the following information on a specific development opportunity and has asked that you prepare and submit a FINANCIAL FEASIBILITY REPORT on this opportunity including answers to the specific questions. The report needs to include all the details for questions 1a and 2a. The other questions only need the answers.

This assignment document includes preliminary architect drawings for your assessment and reporting. The perspective renditions are to assist your understanding of the building. For the determination of the various gross building area components you are to utilise the dimensions shown on the drawings. The irregular shapes can be readily assessed by adding or subtracting rectangles and triangles, including assessing small dimensions from adjacent dimensioned grids.

The project is a four storey building with three levels of basement carparks. It also has a gym and cycle storage area with amenities in one of the basements. A feature is the distinctive façade appendage creating a box like effect Three of the floors have balcony areas. There are some concerns on the market parameters because of the recent increases in building costs but the feasibility is to proceed on the parameters as listed. A decision to proceed or not will be made when the market stabilises and the results of this Feasibility Report are understood.

Your report is to include a Commercial Assessment for the opportunity. You will need to assess the Gross Floor Areas (GFA) to prepare your calculations for the assessment of cost. The Gross Floor Area for the ground level is shown on the drawing and this can be utilised. A colleague has previously assessed all the leasable spaces and determined the net/Gross ratio for each floor as follows: Ground floor 88%, first floor 97%, 2nd 97%, 3rd 96% and 4th 93%. Balcones are 95%. (The ratios are quite high because of the very large floor plates and compact core.)

The leasing advice is that all the office and retail area on the ground level can be leased for $500 psm. Level 1 will achieve

$550, Levels 2 - 3 $590 psm and Level 4 $610 psm. Balconies will lease for $230 psm and carparks $115 per week. The cycle parks will not attract a rental. In addition, revenue of $300,000 pa for naming rights is expected. Access parks (for the disabled) are noted as not attracting a rental. (You need to count the carpark numbers on the drawings. Exclude visitor parks outside the building).

The land area is 4,340sm and can be purchased for $11,300,000 with a 15?posit and settlement in 7 months. A surveyor report at $10,000 and legal costs of $14,000 will be incurred. You assess the cost of core designers as 11.5% of the building estimate. In addition, specialist consultants required are a topographical survey for $10,000, geotechnical / environmental investigations for $45,000, planner $10,000 and traffic engineer $15,000. You assess the need to provide $25,000 for other specialist reports not identified at this time.

Existing buildings on the site will cost $125,000 to demolish. There will be no further costs to achieve vacant possession.

A Quantity Surveyor has provided indicative area cost rates of $2,550 psm for basement areas, $3,800 psm for building areas,

$3,150 psm for basement amenity/gym area and $530psm for the balconies. The roof plant area cost is advised as being included in the cost rate for the building areas. Further to this you are advised of continuing construction cost escalation of 4.5% pa. At construction start you assess that the construction contract will be subject to inflationary costs affecting 65% of the price. You assess the need for a contingency of 8.5% applied to the construction budget including inflation. Further advice is that the cost of all external works (roadways, retaining walls, landscaping, external patios) will be $800,000.

Following land purchase it will take 2.5 months to select and assemble the design team and a further 10 months to construction start. A 16.5 month construction period is envisaged.

It is expected that the leasing package will include a contribution to tenant fitout equivalent to a 1.7 month rent free period which is to be capitalised into the development costs. Leasing agent fees will be 18% of the lease first year rental. The leases are long term with rent review each 3 years. Leasing promotion material will cost $60,000, legal fees $25,000 and the NLA survey plus other fees $20,000. Outgoing costs of Council rates and water taxes for the site during construction are assessed as $66,000 pa. The Council Development Levy has been established at $600,000, the Watercare growth levy is $440,000 and other assessed costs including Building Consent fees are $160,000.

The expected capitalisation rate for the building is 6.1%. The interest charge on total funds is 8%. No management costs or project sale agent fees are charged to the project as these are considered an overhead by the developer.

1. What is the calculated development profit % ?
2. Prepare a Pie Chart showing the 5 components of the Total Project Cost

If there are changes in the following criteria during the project what is the change in $ to the development profit in Question 1a for each of the scenarios below (There is no need to enclose your workings).

1. SCENARIO 1: Only 4% of the building contingency is used and the contractor completes construction 1 month ahead of

3. SCENARIO 2: The construction start (at the last minute) is delayed by 2 months due to a protracted resource consent During this period the market deteriorates and overall the need to provide tenant inducements increases to the equivalent of 3.5 months rent free period for the 50% of tenancies (by revenue value) that were not pre-leased.

2. Building Development

Assume the same building was developed a long time ago and is owned by your organisation. You have been asked to carry out a feasibility study to refurbish the building with a view to increase rentals and reduce the vacancy rate. An Investment Assessment evaluating the performance over 10 years is expected. The target IRR for equity funds in property assets for your organisation is 15%. The relevant redevelopment criteria is assessed as follows. Assume that the new rentals come into effect with the refurbishment.

• Current book value is $70m
• Total Project Cost for the redevelopment is $13m inclusive of inflation provision
• Debt capital will be 40% with 5% interest
• Rentals will be $490 psm for all offices, $190 psm balconies, $110 pw for Naming rights will be $200,000.
• Rental escalation of 5% pa (compounding) applicable in stages at years 4, 7 & 10
• Current occupancy is 50% and this will increase, yr2 to 65%, yr3 70%, yr4 90% and yrs 5-10 100% (assessed uniformly across all revenue streams)
• Tenant outgoings of $140 psm are applied to all lettable areas
• Cost escalation of 5 ?ch year
• Management Costs of 1% of revenue
• 10 Year sale cap rate of 5%

a. What is the IRR equity achieved and the NPV equity of the investment?

b. Prepare a graph showing the Net Rental Stream over the 10

c. Following a review of the redevelopment scope and design the redevelopment cost is reduced by 15% and tenant liaison allows the year 2 occupancy forecast to increase to 70% together with 80% for year 3. What is the change to the IRR and NPV in question 2a above. There is no need to enclose your workings).

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