4. Feasibility Studies

Question 1

What is feasibility judgement?

Answer 1

Checks whether the development is worth doing, usually based on financials

Question 2

What are the two measurement of financial criteria options?

Answer 2

On completion or over a period of time

Question 3

What profit is generally required for the decision to go ahead?

Answer 3

25% TPC

Question 4

What profit is generally required for the decision to go ahead?

Answer 4

25% TPC

Question 5

What are the 5 categories of cost?

Answer 5

Land
Design
Construction
Development
Financing

Question 6

What are the 2 types of revenue?

Answer 6

Developments being leased - NLA, outgoings, carparks
Developments being sold - sum of each unit

Question 7

How are office NLAs measured?

Answer 7

To inside faces of external walls/core structure at 1.5m height

Question 8

What 4 things are included in NLA?

Answer 8

Columns, lift lobbies, toilets, tea making areas

Question 9

What 7 things are excluded in NLA?

Answer 9

Fire egress stairs, lifts, electrical cupboards, vertical ducts, escalators, firehouse reels with 1.5m height, ground floor entrance lobbies/lift access

Question 10

What is NLA for shopping centres?

Answer 10

Centre of tenancy walls

Question 11

What is NLA for industrial?

Answer 11

GFA

Question 12

How is net:gross ratio affected by structure?

Answer 12

Thinner structures have higher ratios

Question 13

What is developer/tenant costs for offices?

Answer 13

Developer provides basic services and tenant pays fitout

Question 14

What is developer/tenant costs for supermarkets?

Answer 14

Developer provides building shell and tenant (basic fit for purpose and fire exits) and a certain amount of power, tenant pays fitouts and excess power required

Question 15

What is developer/tenant costs for industrial?

Answer 15

Developer provides shell fit for purpose, everything else paid by tenant

Question 16

What is the end sale value for tenanted and outright sold buildings?

Answer 16

Tenanted = net revenue / cap rate
Sold outright = total sum of components

Question 17

How do you calculate development profit?

Answer 17

Sale value - cost
(/cost to get as % of TPC)

Question 18

What has the biggest influence on development profit?

Answer 18

Risk profile;
Low risk - 20%
Most - 25%
High risk - 25%
Premium developments - 30-40%

Question 19

When is development profit realised?

Answer 19

When all sales are complete

Question 20

How do you calculate return percentage?

Answer 20

1 year income after costs / total project costs

Question 21

What is the investor’s cost and yield?

Answer 21

Investment cost = sale value
Yield = revenue / sale value

Question 22

When are revenues maximised?

Answer 22

When all tenant needs are met

Question 23

When are cap rates smallest?

Answer 23

When investors pay highly for the asset

Question 24

What is a limitation and alternative to sale on completion?

Answer 24

Limitation - some projects need more time to ramp up/reach full potential or realise benefit from refurbishment
Alternative - measure long term investment return (IRR)

Question 25

Why does IRR measurement give a better reflection of investment worth?

Answer 25

Because it also accounts for inflation and rent reviews incorporating capital gain

Question 26

How does the trend in total return change over time?

Answer 26

Income return always positive Capital return changes with market cycle Total return depends on proportions

Question 27

When was Auckland CBD office property total returns negative?

Answer 27

2008-2010

Question 28

What is the IRR?

Answer 28

The interest rate per annum that would result in NPV of 0 (breakeven)

Question 29

Why is IRR more equitable than initial yield?

Answer 29

Because it reflects the impact of inflation

Question 30

What IRR is required for an investment to be considered worthwhile?

Answer 30

Needs to be 4-6% above commercial interest rates

Question 31

How do you calculate PV?

Answer 31

FV / (1+i)^n

Question 32

What is the NPV?

Answer 32

Present value of all future cash flows

Question 33

When is the NPV positive?

Answer 33

Wen the interest rate used is above the target return on capital

Question 34

What percentage of TPC should the developer generally have as equity?

Answer 34

Around 30%

Question 35

What are the 3 types of financing?

Answer 35

Senior debt (from bank - 1st mortgage) - least expensive Mezzanine debt (from financier - 2nd mortgage) - riskier so higher interest rate and may have other fees Joint venture with financier - financier provides most capital and takes a share of profits

Question 36

What are the 8 things on the bank finance checklist?

Answer 36

1. Approve building contract, contractor, consultants, programme and cash flow 2. Bank appoints QS and valuer to check 3. May require 10% minimum on contingency 4. Tripartite deed - builder, developer, bank (bank completes if developer defaults) 5. Developer uses own funds before bank 6. No side agreements affecting pre-sale values 7. Loan max 80% of sales 8. Guarantees - personal, joint, company, key person

Question 37

What are 4 common mistakes for new developers seeking finance?

Answer 37

1. Low equity position and underestimated costs 2. Does everything themselves which increases risk 3. No true fixed price contracts 4. Not using site for maximum value