Your Aunt Ginger and Uncle Fred own a building in Bushwick, Brooklyn that they bought about 30 years ago, which they run a shoe manufacturing business out of. They heard you have become a wiz at real estate development since you graduated from Schack six years ago and so far have built or redeveloped several buildings on your own, and want you to develop their property for them on a fee basis. They are constantly bombarded by phone calls from brokers and developers interested in buying their property, but they keep hearing that Bushwick is an “up and coming” neighborhood and want to make the profit themselves and retire on the income. They have asked you to analyze development options and put together a basic proposal, since they have no experience in real estate development and want to dance their way into retirement with a steady stream of income.
They are interested in two options:
1 – Develop a multi-family rental building, Ginger’s preference
2 – Develop as commercial (retail or office) only, Fred’s preference
They went to the expense of having some basic zoning work done and have relayed to you the following information:
Lot dimensions: 75’ wide x 100’ deep.
Existing Square Feet: 7,500 on 1 single story.
FAR permitted for a commercial building: 2.0
FAR permitted for a residential building: 3.0
Height restriction: 70’
Rear setback requirements: none – corner lot
Typical loss factor for multi-family residential is 15%, assume 0% for commercial.
Assume that with commercial development, they can add one story to the building, but with residential they would have to demolish and build new.
They also heard that construction costs/time frames are generally as follows:
Residential Hard Costs – $300 PSF – 24 months to plan, build and occupy
Commercial Hard Costs – $225 PSF for new space – 12 months to plan, build and occupy
Commercial renovation costs – $75 PSF – 6 months to plan and build
Soft Costs – ~15% of Hard Costs
Your Assignment:
Prepare a report for them of 3 – 5 pages with the following sections:
1.Executive Summary: Explain what option you have selected and why you believe this is the best strategy to pursue for them. Talk about your vision of what you intend to build and why you think it is optimal, including basic information about the total debt and equity needed, expected returns, and risks of the project. (1-2 paragraphs)
2.Strategy: Explain the steps they must take to realize the plan you have laid out in a clear digestible format, including the team members that will need to be involved, and how you intend to organize them. Include the basic timeline of the project that you anticipate. (2 -3 paragraphs, plus you may use charts to explain your plan)
3.Feasibility Analysis: Explain how you arrived at your recommendation using the following analyses:
a.Physical Feasibility. Describe what they can build, and what conclusion you have made as to the optimal floor sizes, height and general building layout. Provide a basic sketch for each floor, and an elevation of the building you intend to develop for them.
b.Market Analysis. Provide some basic back-up to your rental assumptions. Cite 3 area comps for each project type.
c.Budget Projections. Provide a Sources & Uses Table, include interest carrying costs, and your fees to handle the project for each option and provide the numbers side by side.
d.Projected Returns. Provide a basic stabilized pro forma to prove how much value your project has added, and what the cash flow will be of the completed project. Analyze the return for the owners.
Notes:
1 – Market Analysis. You should provide 3 comps for each use type from publically available websites to back up your market assumptions.
2 – Operating Expenses upon Completion of Development. You may assume 35% of revenues as operating expenses for a residential project, and 25% for a commercial project, in order to arrive at an NOI. For the sake of simplicity assume full occupancy for each project.
3 – Financing. Assume an interest rate of 6% for construction financing, 4% for permanent loans for commercial projects and 3.00% for residential projects. Assume 50% LTC in construction financing, 70% LTV for permanent financing, and that banks will value the land at $100 per buildable square foot. A personal guaranty and completion guaranty is required during construction.
4 – Equity. Ginger and Fred sold a lot of shoes, and have savings of ~$2,000,000 in their retirement accounts.
5 – Value of Final Building. Assume a 5% cap rate valuation for both properties upon completion.