Lakhasly

Chapter 3: Feasibility Study in
Development Process

Introduction
•Developershaveastrongintuitivef eelforaproject’s
viabilitybasedonearlystages.
•Theymustformallydemonstratethisinthefeasibility
study, whichisstagethr eeofth edevelopment
process.
Importance of Feasibility Study
•Thefeasibilitystudyisacriticalmanagementtoolthat
providesriskcontrolandorganization.
•Itcontinuallyrefinesastheprojectp rogresses,
ensuringthatallaspectsarecovered.
Detailed Examination
•Thefeas ibilitystudyshouldgobeyondsuffici encyto
serveasanoptimizationtool.
•Sensitivityanalysishelpstoexamin eallma jor
decisionsandfeaturestoensurethebestplan.
Single Feasibility Study
•Asinglefeasibilitystudyfortheentireprojectensures
consistencyandcoherenceacrossallparticipants.
•Ithe lpsinseeinghowindivid ualcommit ments
contributetothecollectivegoal.
Interdisciplinary Nature
•Thefeas ibilitystudymightbeginins tagetwoand
extendintostagefour.
•Itis inhere ntlyinterdisciplinaryandinvolves
collaborationacrossvariousdomains.
Definition and Elements
•Thischapte rcoversacomprehensive definitionof
feasibilityanddiscussesthekeyel ementsoft he
feasibilitystudyindetail.
Definition of Feasibility
•A realestatepr ojectis'feasible'whenitsati sfies
explicitobjectiveswith inspecificconstraintsand
limitedresources.
Key Points of Graaskamp's Definition
•Feasibilityneverdemonstratescertainty
•Satisfyingexplicitobjectives
•Executionandtimingmatter
•Testedwithinspecificconstraints
•Broaddefinitionbeyondvalueexceedingcost
Initiating the Feasibility Study
•A typicalfeasibilitystu dyincludesanex ecutive
summary,marketstudy,re venueprojections,
preliminarydrawings,maps,costes timates,
financinginformation,gove rnmentconsiderations,
andvalueestimates.
Simple Project Example
•Example:A setofdupl exesin adevelopedareawith
existingarchitecturaldrawings.
•Feasibilitystudyinvolvesapplyingupdatedmarket
informationtoaprovencourseofaction.
Complex Project Example
•Example:A5,000-acremas ter -plannedcommunity
(MPC).Involvesex tensiveinfrastructure,lo ng-term
trends,andnumerousp rofession alssuchas
architects,planners,andengineers.
•Note:1Acre=4,046.86m
2
Government and Regulatory Involvement
•Governmentbodiesandpolitical consultantsare
ofteninvolvedfromtheoutset.
•Feasibilitystudiesmustmeetre gulatory
requirements, includingcomprehensiveappra isals
andmarketanalyses.
Role of Lenders
•Lendersrequirede tailedfeasibilitystud iestoassess
risk.
•Theymustba lancecostbur denondeveloperswith
theneedforthoroughduediligencetoavoidfinancial
disasters.
Components of the Feasibility
Study
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Components of the Feasibility Study
•Executivesummary
•Mapsofthesiteandsurroundingarea
•Photographsofthesite
•Renderingsoftheproposedproject
•Marketstudy
•Revenueandoperatingcostprojections
•Electronicvaluationmodel
•Documentedcostprojections
•Developmentschedule
•Backgroundonkeyplayers,includingprojectconsultants.
Critical Analytic Elements
•Sensitivityanalysis
•Reviewofrisks,wi thappr opriateriskmanagem ent
techniques;and
•Confirmationoffeasibilityforeachparticipant
The Market Study
•Themark etstudyisthebasisofthefea sibili ty
analysis.
•Itan alyzeslong-termtrendsatva riouslevelsand
helpsdevelopanabsorptionschedulefortheproject.
Steps in a Market Study
•Examinenationaleconomicconditions
•Segmentationofthepopulationfore castan dthejobgr owthforecastisusuallyan
extremelyimportantpartoftheanalysis.•Investigatecomparableproperties
•Tode terminethefeatures,function s,andbene fitsofthosepropertiesthatar e
importanttothemarket.•Projectabsorptionschedules
•Howmany unitsatwhatp riceoverwhattim eperio dwillthetarg etmarketbelikel y
toabsorb?
Preliminary Drawings
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Initial Commitment
•Ifan idea’s viabilityisestabli shedduringstagetwo,money
mustusuall ybecommittedtomoredet ailedd rawingsin
stagethree.
•Preliminarydrawingsshowexteri orelevations,floor
layouts,rentablesquare feet,parking,typeofHVAC
systems,etc.
Consistency and Teamwork
•Usingthesamearchit ectandengineerthroughoutthe
entireprocesshel psmaintainconsistency ,minimizes
learningcurves,andprom otesunderstandingofth e
developer’sobjectives.
•Communicationamongthedevelopmentteami sessential
fromthebeginning.
Importance of High-Quality Design
•High-qualitydesignmakesbuilding sfunctional,cost-
effectivetooperate,andens uressu ccessfulleasing
andmanagement.
•A successfulprojectismarketable, manageable,and
cost-effective.
Considerations in Preliminary Drawings
•Marketingappeal
•theproject’seyeappealtoprospectivetenants•Cost
•Easeofongoingmanagement
Site-Specific Design
•A projectthatfitsonesit ewellisoften lesssuccessf ul
whenreplicatedonanothersite.
•Earlyrefineme ntsindesigncanpreventstructures
thatarehar dtobuild, manage,orlea se,and can
reducepublicsectoropposition.
Context and Urban Setting
•Buildingsshouldinterac taestheticallywith their
surroundings.
•Contextincludessize andscale,massingandsetbacks,
landscaping,circulation,lighting,s tylisticdetails,and
more.
Learning from Architecture
•Developerscanlearnaboutarchi tecturebyvi siting
greatbuilding sandstudyinghowtheyfitwitht he
cityandfunctionforoccupants.
•Thishelpsi ncreatingappeal ingspa cesthatgenerate
newmarketdemand.
Value of Outstanding Architecture
•Researchintothevaluecr eatedbyoutst anding
architecturesuggeststhatattractivedesign
landmarkscanbringhigherreturns.
•Somelender sandinvestorspreferto beassocia ted
withbig-namearchitects.
Construction and Total Cost
Estimates
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Cost Estimation Challenges
•Estimatingactualcostsisdifficult.
•Thecost oflandisusua llykno wn,butsiteprepar ation
costscanbeunpredictablewithoutextensivesoilanalysis.
•Off-siteinfrastructure costsmustalso beaddedtoon- site
costs.
Estimating Construction Costs
•Readilyaccessiblegu ideslikeRSMeansBuilding
ConstructionCostDataandSageEstimat ingsoftware
canhelp.
•Developerscomparein-houseproj ectionswithlocal
generalcontractors’estimates.
Communication with Contractors
•Discussingcostestimateswi thcontractor sand
subcontractorshelpsrefinepr ojectdetails,makin git
moreattrac tivetotenants,lessexpensiveto
construct,andmorecost-effectivetooperate.
Including Soft Costs
•Totalcostesti matesinclude softcostsf ormarketing,
financing,insurance,consulta nts,andadministrative
work.
•Marketingcouldstartbefore constructionisc omplete,
andpostconstructioncostsforinitialoperationsare
included.
Professional Services Fees
•Feesforoutsideprofessionalservicesvary.
•Developersneedtodecidewhentospen dadditional
dollarsforcontrolli ngriskandenha ncingfuture
returns.
Lenders’ Fees and Carrying Costs
•Lenderschargevar iousfees,andcarryi ngcostsmust
becounted.
•Localgover nmentscollectpropertytaxe sthroughout
development,andinsurancecostsmustinclud e
variousformsofcoverage.
Experience-Based Estimates
•Estimatesformarketing,fin ancing,pr opertytaxes,
insurance,andadministrativec ostsarebasedon
experienceandtrends.
•Accurateestimateshelpp rojecttheleas e-upperiod
andinitialoccupancycosts.
Contingency Funds
•Contingencyfundsforunexpectedcostsandoverruns
areessential.
•Theallo wancetypicallyrangesfrom5to10p ercent,
dependingontheperceivedaccuracyofot her
estimates.
Elements of Cost Estimates
•Landcost
•Siteandinfrastructurecosts(on-siteandoff-site)
•Designfees(architectureandengineering)
•Hardcosts(laborandmaterials)
•Entitlementcosts(consultants,publicagencyfees)
•Financingcosts(loancommit mentfees,intere st,
loanfees)
•Marketingcosts(promotion, advertising,lea sing
commissions)
•Preopeningoperatingcosts
•Legalfees
•Accountingandauditcosts
•Fieldsupervision(inspection)costs
•Overhead
•Propertytaxes
•Contingencies
•Developmentfees
Feasibility Analysis
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Features and Amenities ΔΣ΍ήϟ΍Ϟ΋ΎγϭϭΕ΍ΰϴϤϟ΍
‡Featuresandamenitiessh ouldbedeterminedby
analyzingthesuccessofcomparabledevelopments.
‡Projectedrentsorsalesshouldbebasedont ruly
comparableprojects.
Comparison Grid
•A well-preparedfeasibilityanalysisinclude sa
comparisongridinthemarketana lysissection ,
identifyingcompetitiveprojectsandadju stmentsfor
differences.
•Thishelpsestimatetheproject’sNOIaccurately.
Calculating NOI
•NOICalc ulation:Potentialrevenuesminusvac ant
spaceequalseffectivegrossrevenue.
•Effectivegrossrevenue(EGR )minusoperat ing
expenses(OPEX)equalsNOI.
Discounted Cash Flow
•Feasibilityisbasedondiscountedc ashflo wwiththe
discountratetakenfromthemarket.
•Historicalreturnnumbersaread justedforexpected
inflationandfinancialconditionchanges.
Determining Discount Rate
•Thediscountrateisde terminedbyreviewing
historicalreturnsandexpectedchanges.
•Theanal ystshouldconfirmtheratebycon sulting
withactiveinvestors.
Value and Cost Comparison
•Usingthedisco untrate,p rojectedcashflowsareredu ced
toac urr entvalueandcomparedwi ththeprojectedt otal
cost.
•A projectisfeasibleifva lueexc eedstotalcost, legaland
ethicalrulesaremet, andthedeveloper hasnecess ary
resources.
Cash Flow Projections
•Expectedcashflowsforeach ofthenextten yearsa relaid
out.
•Thefina lyearincludesexpectedcashfl owfromthe
propertysale.
•Theleng thoftheanalysisper iodsho uldcaptur eany
unusualexpectedcashflows.
Sensitivity Analysis
•A sensitivityanalysischeckswhetherprojectaspec ts
canbeimproved.
•Thisturnsa feasibilitystud yfr omastaticfinancial
analysistoadynamicplanningtool.
Important Caveat
•Electronicspreadsheetmodelsc aneasilyforce
feasibilitybychangingnumbers.
•Thiscanlea dtoissues duringlaters tageso f
development.
The Enterprise Concept
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Introduction to the Enterprise Concept
•Treatingrealestateasan ongoingbusin essiscrucial
duringstagethree.
•Operationsmanagementplaysacritica lro leinall
phasesofrealesta tedeve lopmentandte nant
businessneeds.
Redefining Market Positions
•Buildings,likebusinesses, needtocont inuall y
redefinetheirmarketpositionsandseeknewniches.
•Treatingrealestateasab usinessrequiresaggressive
managementtoremainviable.
Evolving Demands and Design Flexibility
•Realestate assetshavealonglif einaf ixe dlocation,
butuserdemandsconstantlyevolve.
•Designflexibi lityisre quiredforlong-termoperat ing
successinthisdynamicenvironment.
Management Operations in Complex Projects
•Projectswithsignifican tmanagemento perations,like
hotels,havecomplexfeasibilitystudies.
•Keyques tionsincludetheimpo rtanceof
managementtolong-termsuccess andthe qualityof
selectedmanagement.
Responsibility for Management
•Determiningresponsibilityiscruc ial:Isitthe
developer,thetenant,orhasthe riskbeenp assedon
throughanuncondi tional presaletoalong-term
investor?
Bringing It All Together
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Overall Construction Schedule
•Theoverallconstruction scheduleisac omp ositeof
thevariouscomponents.
•Itis usuall ycompiledbytheprojectma nager, who
coordinatesparticipantstofacili tatetimely
completion.
Resumes of Key Participants
•Applicableportionsoftheresum esofkeyparticipants
giveinv estorsandlendersconfidencet hatthe
developmentteamhasthecapacityto completethe
projectsuccessfully.
Maps, Drawings, and Other Visuals
•Maps,drawings ,andothervisualsshowthel ocationan d
siteofthed evelop menttoori entreviewers.Architectural
renderingsandphotographso fthesubje ctproperty,as
wellascomp lement aryandcompetitiveprojects,help
completethevisualsummary.
Investors and Lenders
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Introduction
•Preliminarydiscussionswithinves torsandlenders
progresstoamoreformallevelinstagethree.
•Thedeve loperfindsthemostappropriat elong-term
investor,permanentlender, constructionlender,and
possiblyajointventurepartner.
Investors
•Duringtheinterim periodbet weenstagestwoandsix,t he
formalfeasibilit ystudyisundertaken,designworkisdo ne,
governmentrelationsareworked out,andtenantrelations
arenegotiated.
•Substantialfront-endfundsfromot hersourcesmaybe
needed.
Venture Capital Period
•Theinterimperiodcanbeseenasaventurecapitalperiod.
•Investorslookforhighretur nsduetothehi ghrisk
involved.
•Developersuseasmuchlessexpen sivefinan cingas
possibleandminimizetheexpensivefinancing.
Lenders
•Developersusetheproject’sest imatedval ueto
searchfordebtfinancing.
•Permanentlenderslookatretu rnandr isk,while
constructionlendersprefersimpleproj ectsbyskilled
individualstheyhaveworkedwithbefore.
Matching Lenders and Investors
•Developersshouldknowlenders’ andinvestors’inter ests,
histories,self-images,andpreferredportfoliomix.
•Largerinstitu tionsfinancelargerprojects,whileregi onal
banksandcomme rcialbank sfocusonsmaller,local
projects.
Sequence of Financing
•Thetypi calsequenceinvolvesliningupthelarge st,
lowest-costpermanentloanfirst,whichservesas the
takeoutloanfortheconstructionlender.
•Thediff erencebetweentotalprojectcosta nd
availablefinancingistherequiredequity.
Critical Concept
•Matchingtherightlender sandinves torswiththe
developmentiscrucial.
•Developersmayhireamortgageorinvestmentbanker
butrema inresponsibleforma kingtheproject
happen,withfinancingbeingcriticaltotheoutcome.
Entitlements and Other
Government Considerations
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Government Agencies and Entitlements
•Governmentagenciesareresp onsibleforissuingthe
necessaryentitlementsfortheproject.
•Inso meareas,obtainingentitlementsisah ighly
politicalprocess.
Political Process and Local Environment
•Developerswhomisjudgetheloca lpolitica l
environmentorsuggestaprojecttha tdoesn otfitthe
community’slong-terminterestsca nhavedifficulty
eveniftheytechnicallymeettheletterofthelaw.
Involving Local Government Representatives
•Somerepres entativesoflocalgovernmentneedtobe
involvedinthedeterminationoffeasibility.
•Ifre gulatorsunderstandallthepre ssuresonthe
developmentandhowitmeetspublica ndprivate
objectives,theyaremorelikelytosupporttheproject.
Support from Municipal Staff
•Manymunici palstaffaretechnicallywell- trainedand
willsuppor tadevelopmentconcepti fit fitswiththe
city’smasterplan.
•Earlyrecruitm entofthepublicsectorinthe
developmentprocessiscrucialforsupport.
Turnover in Public Offices
•Turnoverinpublicoffice scanpo seproblemsfor
developerswhenprojectsconfli ctwiththepla tforms
ofnewlyelectedofficials.
•Earlierapprovaldoesnotguaranteesupportfromnew
administrations.
Risk Control Techniques
During Stage Three
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Introduction
•Severaltechniquesar eavailabletocontrolriskduring
stagethree.
•Themostcommononesaredescribedinthissection.
Using Best Available Information
•Usingthebesta vailablei nformationanddoin g
rigorousdataanalysisinthefeasibilitystudyisamajor
riskcontroltechnique.
•Thebett ertheinformationan deffortin estimatingall
revenuesandcosts,thelessriskinvolved.
Balancing Feasibility Analysis
•Overdoingthefeasibilityan alysiscan extendthe
developmentprocessandwastetimeandmoney.
•Thedeve loper’sjudgmentiscrucialtodetermi nethe
rightbalance.
Financing Arrangements
•Financingduringstagethree affectsthesharingo fproject
risks.
•Thecons tructionlenderandthedeveloperhavedif ferent
preferences,andthetradeoffsdependo nprojectq uality,
lenderanddevelop erstrengt h,andcapitalmarket
conditions.
Permanent Lenders
•Permanentlendersfocusonthetradeoffbetweenrisk
andreturn.
•HigherDSCRand lowerLTVrati osincreas ethe
likelihoodoftimelypaymentand totall oanbalance
collectionincaseofdefault.
Investors' Perspectives
•Investorswantlatecashcont ributionsand assurances
foradditionalcashneeds.
•Theyaimtom aximizeaf ter-ta xreturnswithout
personalliability.
Design Plan Review
•A formalreviewofthea rchitect’sdesignpl anby
professionalsandpublicofficialsiscrit icalforri sk
control.
•Morereview instagethreemakesn egotia tionsin
stagefoureasier.
Checking Utilities and Infrastructure
•Thedeve lopershouldensuretheavailab ilityof
utilitiesandinfrastructure.
•Earlydiscussi ons,documentation,andformal
commitmentsforpublicfacilitiesa ndservice sare
essential.
Sharing Costs
•Inac omp etitiveworld,sharinginfrastructur ecosts
withthecit yorthroug hjointventur esand
public/privatepartnershipscanhelpmanagerisks.
Checking Details
•Developersshouldensurethatco ntractorsand
subcontractorshavethenecessarypermitsand
licenses.
•Structuralwarrantiesandinsur anceincontractsare
criticalforriskmanagement.
Structural Warranties and Contracts
•Providingstructuralwarran tiesinthearchitect’s
contractandensuringfin ancialwor thofparticipants
supportriskmanagement.
•Clearlydrawncontrac tsfacilitatestr ongnegotiation
positions.