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The Yatt Club. A Luxury Condominium project. The Yatt Club – Condominium ASSUMPTIONS : The Building : 200 units @ 1200 SF/ unit = 240,000 SF (Core Factor = 15% (240,000 is 85% of the building Gross SF) Therefore, Gross SF = 240,000/.85 = 282,353 GSF (For simplicity, we will ignore parking.).

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The Yatt Club

A Luxury Condominium project


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The Yatt Club – CondominiumASSUMPTIONS:The Building:200 units @ 1200 SF/ unit = 240,000 SF(Core Factor = 15% (240,000 is 85% of the building Gross SF)Therefore, Gross SF = 240,000/.85 = 282,353 GSF(For simplicity, we will ignore parking.)


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ASSUMPTIONS:

Revenue (Sales) = $500/SF =

  • $500/SF * 240,000 SF = $120,000,000

  • Sales Concessions (2% of Revenue)

    .02* $120,000,000 = $ 2,400,000

  • Net Revenue: $117,600,000


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Costs:Hard CostsDirect Construction (“bricks & mortar”) $150/GSF = 150 * 282,353 = $42,352,950Land Development (infrastructure) (For simplicity, a guess) $2,000,000LandTO BE DETERMINED


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Soft Costs (1)

Architecture & Engineering (5% of Direct & LD)

.05 * $42,352,950 = $ 2,117,648

Sales (1.5% for Seller, 2.4% for Buyer of Revenue) .039 * $117,600,000 = $4,586,400

Marketing (rule of thumb: 2% of Revenue)

.02 * $117,600,000 = $2,352,000


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Soft Costs (2)

Finance (assume 70% Loan-to-Value “LTV” or $82,320,000)Loan Origination (1% of Loan)

.01*$82,320,000 = $ 840,000Loan Interest (assume 200 Basis Points > Prime; Prime = 5.00%; therefore, Interest Rate = 7.00%) Assume Loan is outstanding for 2.5 years, but, on average due to construction and sales, estimate only 60% of full balance of $82,320,000 is outstanding.) 82,320,000*.07*2.5 years*.6 = $8,643,600

Developer Overhead/Fee (assume 5% of Revenue) .05*$117,600,000 = $5,880,000


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Profit

  • Profit (assume 12.5% of Revenue) .125*$117,600,000 = $14,700,000


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Residual Land Value (RLV)

RLV = Revenue – Costs – Profit

$117,600,000 – 68,772,598 – 14,700,000

= $34,127,402

= $ 170,637/unit

= $ 142.20/saleable SF

= $ 120.87/F.A.R. SF


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The Yatt Club

A luxury rental apartment


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The Yatt Club – A luxury rental

ASSUMPTIONS:

  • The Building: Identical to Condominium scenario

  • 200 units @ 1200 SF/ unit = 240,000 SF(Core Factor = 15% (240,000 is 85% of the building Gross SF)Therefore, Gross SF = 240,000/.85 = 282,353 GSF(For simplicity, we will ignore parking.)


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ASSUMPTIONS:

  • Gross Rental Income or GRI

    Expected rate of $3.00/SF/Month = $36.00/SF/Year

    $36.00/SF/Year * 240,000 SF = $8,640,000/Year

  • Rental Concessions (2% of Revenue)

    .02* $8,640,000 = $ 172,800/Year

  • Vacancy (4% of GRI)$345,600/Year

  • Effective Gross Incomeor EGI $ 8,121,600/Year


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Expenses

Operating Expenses

Utilities

Real Estate Taxes

Property Management

Advertising

Insurance

For simplicity, assume 35% of EGI

.35*$8,121,600 = $2,842,560


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Net Operating Income (NOI)

NOI = EGI – Operating Expenses

NOI = $8,640,000 – 2,842,560

NOI = $5,797,440


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Value by the Income Approach

Value = NOI/CapitalizationRate

Note: Capitalization (usually “Cap”) rates move inversely to actual value, i.e. as the Cap Rate decreases, the Value increases. Cap Rates are a measure of the predictability (and safety) of future, yearly NOI (or cash flows) measured against other investments of near-absolute certainty (5- and 10-year Treasury Bills). So…

Value (in Oct. 2007) = $5,797,440/4.50% = $128,832,000

Value (in Oct. 2008) = $5,797,440/6.00% = $ 99,624,000


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RLV for Apartment

Oct. 2007 - $128,832,000 - 68,772,598 – 14,700,000 =

$ 45,359,402

$ 226,797/unit

$ 189.00/rentable SF

Oct. 2008 - $99,624,000 - 68,772,598 – 14,700,000 =

$ 16,151,402

$ 80,757/unit

$ 67.30/rentable SF

The Yatt Club as Condo…

$34,127,402


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OK, so what can the architect do?

  • Location – macro and micro

  • Land – amenities and negatives

  • Building

  • Revenue/Income – not all buildings are created equal

  • Cost

  • Time


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Suggested Readings

  • “Angus Cartwright III” Harvard Business School. Case #9-375-376 by William J. Poorvu

  • “Real Estate Finance and Investments: Risks and Opportunities” by Peter Linneman, Ph.D.


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