Property Development Opportunity Assessment

Assignment Overview

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 feasibility report on this opportunity including answers to the specific questions. The report needs to include all the details for questions 1A from the project brief and 2A from the building redevelopment brief. The other questions only need the answers.

A set of architect drawings is provided for your assessment and reporting. The perspective renditions are to assist your understanding of the building. Note that both gross areas (GFA) and net areas (NLA) are referenced in the drawings. They are also reasonably dimensioned to allow a broad check on their reasonableness. However, this has been undertaken for you in both briefs, which leads you through the interpretation of the areas.

Architect drawings : Project brief

The project is a five-storey building on a corner sloping site. Level 2 is at ground level for the main street entry and the ‘subbasement B2’ is at ground level for the ‘back road’ bounding the site. Subbasement B2 is office space as is part of the ground floor and levels 1–3. Basement level B1 is car parking together with amenities and a plant area room (building services) plus a waste management room. There are also some car parks external to the building. The ground floor has a showroom and retail area fronting the main street with offices further back. The amenities can be considered for the use of retail and office tenants. There are external decks on each of levels 1–3. In this brief, you are provided with construction costing area rates, rentals, development costs and criteria.

In reviewing the architect drawings and the listed sm areas for GFA and NLA (not notated) you note the following:

Listed sm areas for GFA and NLA

• B2 shows a GFA of 738sm. You have measured the non-NLA segments and note the deductions result in an NLA of 685m2.
• B1 lists conflicting GFAs, however, 820m2 is selected plus the 140m2 building services room and 18m2 waste management room. The amenities service the bike and locker area and are not considered to be part of NLA.
• The ground floor shows a total GFA of 1,253m2 plus a mezzanine area of 200m2. NLA areas are 227m2 for the showroom, 189m2 for the retail and 603m2 for the offices and also 35m2 for the amenities (toilet area). You assess the mezzanine space and conclude an NLA of 180m2.
• L1 and L2 have identical areas. The GFA of each building is 788m2 and the deck area over part of the roof adjacent is 13m2. NLA areas are 663m2 for offices, 20m2 lobby, 35m2 amenities and you assess a deduction of 1m2 on the deck to achieve NLA.
• L3 has a GFA of 592m2 for offices, 16m2 entry lobby and 35m2 of amenities. There is a small deck of 13m2 and a large deck to the adjacent roof which you have upped to 215m2. NLA for offices is 473m2 plus the lobby and amenities. You assess the deductions to achieve NLA for the decks as 1m2 and 7m2 respectively.

The leasing advice is that B2 offices will achieve $370/m2, L1 offices $430/m2, L2 offices $460/m2 and L3 offices $480/m2. The showroom will achieve $500/m2, ground floor retail and also offices $430/m2 and ground mezzanine $320/m2. Decks will be $130/m2. Carparks will be $90/week covered and $70/week uncovered. Naming rights will achieve $70,000 p.a.

The land area is 3,009m2 and can be acquired for $7,750,000 with a 15?posit and settlement in eight months. A surveyor report at $5,000 and legal costs of $10,000 will be incurred. You assess the cost of core designers as 11% of the construction cost at construction start. In addition, specialist consultants required are a topographical survey for $8,000, geotechnical/environmental investigations for $65,000, a planner for $15,000 and a traffic engineer for $15,000. Existing buildings on the site will cost $220,000 to demolish. There will be no further costs to achieve vacant possession.

A quantity surveyor has provided indicative area cost rates of $3,050/m2 for commercial building areas, $900/m2 for mezzanine areas, $1,100/m2 for B1 services and waste rooms, $1,500/m2 for the car park level, $2,200/m2 for the level B2 building and $500/m2 for the additional costs for decks. The roof plant area will incur an extra cost of $80,000 and works external to the building $150,000. You assess the need for a contingency of 7% applied to the construction estimate. Further to this, you are advised of a highly inflationary market with continuing construction cost escalation of 8.5% p.a. from the beginning of the design/construction period. The market is such that at the construction start the contractor will also have built-in an allowance for escalation until the end of the development. This will have a 0.60 factor to take into account the cash flow exposure.

Following the land purchase, it will take 1.5 months to select and assemble the design team and a further seven months until construction starts. A 12-month construction period is envisaged.

It is expected that the leasing package will include a contribution to tenant fit-out equivalent to a two-month rent-free period which is to be capitalised into the development costs. Leasing agent fees will be 17% of the lease first-year rental. The leases are long-term with rent review every three years. Leasing brochures will cost $15,000, legal fees $25,000 and the NLA survey plus other fees $12,000. Outgoing costs of Council rates and water taxes for the site during development are assessed as $92,000 p.a. The Council Development Levy and likely consent processing costs have been assessed as $300,000. The Watercare Growth Charge and Power Board contribution for power supply is $200,000.

The expected capitalisation rate for the building is 5.2%. The interest charge on total funds is 7.5%. No management costs or project sale agent fees are charged to the project as these are considered an overhead by the developer.

• Question 1A. What is the calculated development profit %?
• Question 1B. 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 following scenarios?

• SCENARIO 1: Only half of the building contingency is used, cost escalation reduces by 1% pa and the contractor completes construction one month ahead of the programme.
• SCENARIO 2: The construction start is delayed by two months due to a protracted building consent issue. During this period the market deteriorates and overall the need to provide tenant inducements increases to the equivalent of a four-month rent-free period for the 30% of tenancies (by revenue value) that were not pre-leased with the earlier inducement.

Please note: There is no need to enclose your workings.

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 increasing rentals and reducing 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 17%. The relevant refurbishment criteria are assessed as follows. Assume that the new rentals come into effect with the refurbishment.

• The current book value is $19,000,000.
• Refurbishment construction cost is $3,000,000, consultant fees are $360,000 and other costs (excluding fit-out contribution) are $100,000.
• One month of year-one revenue will be provided for tenant fit-out contributions.
• Debt capital will be 40% with 8% interest.
• Rentals will be $430/m ² for L1–3 offices with no additional charge for the balconies. B2 offices will be $370/m ² and all ground floor areas $425/m ² excluding the mezzanine will attract no extra charge. All car parks will be $90/week and naming rights will be $55,000.
• Rental escalation will be 7.5% pa (compounding) and applied at years 4, 7 and 10.
• Current occupancy is 60% and this will increase, yr2 to 65%, yr3 to 75%, yr4 to 85%, yr5 to 90% and yrs 6–10 to 100% (assessed uniformly across all revenue streams).
• Tenant outgoings of $120/m ² are applied to all lettable areas.
• Cost escalation of 6?ch year.
• Management costs of 2% of revenue.
• 10 year sale cap rate of 5.5%.

Question 2A. What are the IRR equity and the NPV equity of the investment?

Question 2B. Prepare a graph showing the net rental stream over years 1–9.

Question 2C. Following a review of the refurbishment scope and design the refurbishment cost is increased by 15% and the year 2 occupancy forecast reduces to 60% together with 70% for year 3. What is the change to the IRR equity and NPV equity in question 2a? There is no need to enclose your workings.

Summary of Assessment Requirements

The assessment required the student to prepare a feasibility report for a property development opportunity as a development manager. Key requirements included:

1. Feasibility Report Structure:

   • Address all details for Question 1A (development profit %) and Question 2A (IRR and NPV equity).

   • Provide answers to all other questions (1B, 2B, 2C).

   • Include supporting charts/graphs: pie chart for project costs, net rental stream over years 1–9.

2. Data and Inputs Provided:

   • Architect drawings with GFA and NLA for all levels.

   • Construction costing, rentals, development and refurbishment costs.

   • Land acquisition costs, consultants’ fees, demolition, leasing, and external costs.

   • Assumptions on contingency, escalation, cash flow, interest, management costs, tenant inducements, and capitalisation rates.

   • Tenancy occupancy forecasts and rental escalation for a 10-year investment analysis.

3. Key Calculations Required:

   • Development profit % and impact of scenarios on profit.

   • IRR equity and NPV equity for refurbishment investment.

   • Analysis of scenario changes on IRR and NPV.

   • Graphical representation of cost breakdown and rental streams.

4. Assessment Expectations:

   • Demonstrate ability to interpret architectural drawings for GFA/NLA.

   • Apply financial modelling for property development feasibility.

   • Show understanding of investment appraisal, cash flows, and sensitivity analysis.

   • Present findings clearly and professionally, using appropriate charts and graphs.

Step-by-Step Mentoring Approach

The academic mentor guided the student in a structured and sequential manner:

Step 1 – Understanding the Brief and Data

• Mentor explained the role of a development manager and the purpose of a feasibility report.

• Helped the student interpret GFA/NLA from architectural drawings and understand building components for accurate cost allocation.

• Reviewed all costs, rentals, and assumptions to ensure clarity before calculations.

Step 2 – Calculating Development Profit (Question 1A)

• Mentor guided the student to:

  • Determine total project costs (land, construction, consultants, demolition, leasing costs, contingencies).

  • Calculate total expected revenue from leases, car parks, and naming rights.

  • Compute development profit % and understand how scenario changes (cost escalation, construction timing, tenant inducements) affect profitability.

• Advised on presenting results clearly, including a pie chart for project costs (1B).

Step 3 – Investment Appraisal for Refurbishment (Question 2A)

• Mentor explained concepts of IRR (Internal Rate of Return) and NPV (Net Present Value) for equity investment.

• Guided the student to:

  • Account for refurbishment costs, debt funding, and interest.

  • Model rental streams, occupancy rates, and escalation assumptions over 10 years.

  • Apply tenant fit-out contributions, outgoings, and management costs in cash flow projections.

• Emphasized sensitivity analysis for 2C scenario changes (cost increase, reduced occupancy) and its effect on IRR/NPV.

Step 4 – Graphical Presentation (1B and 2B)

• Mentor showed the student how to:

  • Prepare a pie chart showing the five components of project costs.

  • Plot net rental stream over 9 years to visualize cash inflows and trends.

• Ensured charts were labeled clearly and tied to the narrative.

Step 5 – Reporting and Professional Presentation

• Mentor guided the student to:

  • Structure the report logically, including introduction, assumptions, calculations, scenario analysis, graphs, and conclusions.

  • Use professional formatting, clear language, and consistent terminology.

  • Include proper referencing for any secondary data sources.

Outcome and Learning Objectives Achieved

Outcome

• The student produced a comprehensive feasibility report addressing all questions.

• Calculations for development profit, IRR, NPV, and scenario impacts were accurate and clearly explained.

• Charts and graphs were integrated to enhance understanding and presentation.

• The report demonstrated critical evaluation of assumptions and sensitivity analysis.

Learning Objectives Covered

1. Financial and Investment Analysis – Understanding IRR, NPV, development profit %, and scenario sensitivity.

2. Technical Interpretation – Reading architectural drawings and calculating GFA/NLA accurately.

3. Feasibility Modelling – Integrating construction, leasing, and refurbishment costs into financial analysis.

4. Critical Thinking and Decision Making – Evaluating how changes in costs, occupancy, or schedule affect profitability.

5. Professional Reporting Skills – Presenting findings in structured, clear, and professional formats, including charts and graphs.

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