Question: In Problem, what would the required gross rents be per square foot and total if your construction and site costs summed to exactly $12 million? Assume all of the same numbers as in Problem 28.11, but now use a debt coverage ratio of 1.25 and a loan to value ratio of 75% and ignore the equity cash on cash requirement. That is, take a lender's perspective to solve for required gross rent.
Problem: (Back Door with Equity Return Requirement) Your firm is considering the development of a 200,000-square-foot [net leasable area (NLA)] warehouse project. Market rents are around $7 per square foot per year with a 10% vacancy rate in the local market. All operating expenses are passed through to tenants except for property taxes, property insurance, and management that you estimate at $1.50 per square foot per year. Mortgage rates are 6.5% for a 20-year amortizing mortgage loan, with a 10-year term and a variable rate of interest that is fixed for the first three years. Construction costs (excluding land) for the warehouse are estimated at $33.37 per square foot, based on 235,294 square feet of gross leasable area (GLA). The minimum required debt service coverage ratio on a permanent loan is 1.25 and investors' first-year required equity yield (or ‘‘return on equity'' or ‘‘cash on cash'' return) is 9.5%. Ignoring the loan to value ratio, what is the maximum you can pay for the land? [This version of the back-door SFFA is different than the pure lender focused approach covered in the chapter. It incorporates investors' minimum required first-year return on equity ROE ¼ BTCF/E, where BTCF ¼ NOI - DS and E is equity investment. The ROE replaces the lenders LTV.