Assumptions: Develop realistic assumptions for this hypothetical real estate dea

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Assumptions: Develop realistic assumptions for this hypothetical real estate dea

Assumptions: Develop realistic assumptions for this hypothetical real estate deal and describe how you arrived at those assumptions in your cover sheet:
Location of Property: Assume the same metro area as you used in Project #4.
Number of Apartments: 51
Gross Square Feet: Assume that the apartments average 1,100 gross square feet (which includes a pro-rated 10-15% of common areas).
Timing of Project: Assume the land is acquired using the developer’s equity in Month 0 and a 2-year construction loan is secured in Month 1. Construction begins in Month 7. The project is stabilized (95% occupancy) at the end of Month 24.
Land Costs: Use the estimated land cost per zoning ft2 for your metro as provided in the table “Metro Land and Construction Costs” (which can be found in Brightspace in the “Development Financing” content section).
Hard Construction Costs: Use the estimated hard cost per building ft2 for your metro as provided in the table “Metro Land and Construction Costs” (which can be found in Brightspace in the “Development Financing” content section).
Soft Construction Costs: Assume all soft construction costs (including Developer’s overhead) are equal to 25% of hard costs.
Construction Loan: Assume the annual interest rate on the construction loan is 9.75%. The loan is structured as a 24-month negative amortization line of credit. The initial principle of the loan is equal to the total of the hard and soft construction costs. Draws on the loan are made on the first day of each month as shown in the schedule in Box 2, Column B in the example.
Permanent Financing: “Permanent financing” is secured at the end of Month 24 in the form of a 10-year mortgage loan in an amount equal to the original principal of the construction loan. (In effect, assume that the interest costs of the construction loan are paid out of the developer’s equity).
Average Initial Monthly Rent. Use the average initial rent you determined you used in Project #4.
Monthly Operating Cost: Use a figure of $682/month/unit as in Project #4.
First Year NOI: Assume that the first year’s NOI is as calculated in the unlevered case in Project #4.
Property Value Upon Stabilization: Assume at the end of Month 24 the property is appraised at a value equal to (the first-year NOI (from Project #4)) ÷ (going-in cap rate (from Project #4)).
Required Return on Capital: In determining the minimum rent necessary to make this project desirable, assume a required minimum first-year return on invested capital at the project level (unlevered) of 6%.
Cap Rate Upon Stabilization: Assume that the property’s cap rate upon stabilization is the same as you used to determine purchase price in Project #4.
Important! Don’t “doctor” your assumptions in order to make the project “work.” It’s part of our class experiment to see in how these hypothetical deals “pencil out” when the assumptions are honestly and realistically formulated.
Questions: Construct a model similar to that shown in class and posted in the “Development Financing” section in Brightspace. Answer the following questions based on your model and the results it gives, using your initial assumptions as a baseline.
Under your initial baseline assumptions, does the project “pencil out”? In other words, does it appear sufficiently attractive to pursue (and perhaps do a detailed month-by-month NPV analysis)? Why do you think the project should be pursued or dropped?
What is the effective cap rate you paid for the property in your development scenario (first-year NOI ÷ total development cost)? Is it higher or lower than the going-in cap rate you paid when you purchased an identical building in Project #4?
Based on the value of the property upon stabilization, have you increased or decreased your equity by undertaking this development project? (In other words, did you make or lose money!) What is the projected “equity multiple” generated by this project?
Is the minimum monthly rent required (Box 4) higher or lower than the initial monthly rent you estimated in Project #4?
What is the most you could you pay for the land to have your “minimum monthly rent” (Box 4) equal to your “initial monthly rent” (Project #4)?

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