The Feasibility Study

1. The Feasibility Study 1.The Definition of Feasibility 2. Initiating the Feasibility 3. An Overview of the Market Study 4. Preliminary Drawings 5. Initial Construction and Total Cost Estimate 6.The Value Statement and Formal Estimate of Feasibility 7.0 Level two Feasibility 8.Techniques of Risk Control during Stage three

2. Definition of Feasibility • According to James A Grasskamp in his classic in 1972, “ A Rational Approach to Feasibility Analysis” “A real estate project is feasible when the real estate analyst determines when there is a reasonable likelihood of satisfying explicit objectives when a selected course of action is tested to fit to a context of specific constraints and limited resources”

3. Continued • From the definition; • feasibility never demonstrates certainty • when it demonstrates it is reasonably likely to meet its goal • by satisfying explicit objectives • selected course of actions and testing it for fit • the selected course of action is tested for fit in context of specific constraints (legal, physical, public sector involvement and financial)

4. Initiating the Feasibility Study • The feasibility study is a formal demonstration that a proposed project is or not viable • In addition to maps, pictures and resume, a typical feasibility study includes an executive summary, a market study, preliminary drawings, cost estimates, information about terms and costs of financing, government considerations and the estimate of value.

5. Continued • Market analysis and tenant relations • Relationship between developers and local government • Various states and federal regulatory agencies

6. The Essentials • Executive summary • Maps • Photographs of the site • Renderings • Electronic valuation model from market study • Documented cost projections plus supporting contractor’s estimate • Time line • Resumes

7. Critical Analytic Elements • Idea and target market for the project from the big picture down to the absorption schedule for today in the particular market niche- progressing from world to nation to region to city to neighborhood to site • A careful enumeration of the target market - number of people, their taste, their income-tied to the specific idea

8. Continued • Identification of appropriate comparable properties (the competition) along with major features, functions, and benefits of each • The foregoing information tied tied into a discounted cash flow model • A sensitivity analysis to move from feasible to optimal, with an individual evaluation of each component of the plan

9. Continued • A review of risk in the optimal configuration with appropriate select risk control technique. • Confirmation that the project is feasible for each participant

10. An Overview of the Market Study • The market study is the most crucial item in the feasibility analysis • It analyses the long term global, national, regional and local trends that were essentially identified during the refinement of idea in stage two • These trends are now formally brought to bear on the existing local situation as the analyst projects an absorption schedule for the project

11. Continued • An examination of national economic conditions ( including international influences) and projected long term trends as well as careful consideration of the characteristics of the region, locality, neighborhood and site. • Long term national trends are often extremely important to the site.

12. Continued • The national trend is particularly apparent in certain regions and is directly relevant in many central cities • As a second step market analyst investigate comparable properties to determine the features, functions of those properties that are important to the market

13. Continued • Third,the market study always conclude with projected absorption schedules for the market segment and for the specific property • How many units at what price over what time period will the target market be likely to absorb? • It is necessary to segment the market carefully

14. Preliminary Drawings • Exterior elevations and specify rentable square feet or salable units, parking type • High quality design is becoming more important • Besides being concerned about how building fits its site and serve its intended tenant, developers should also need to think about how a building blends into the urban setting

15. Initial Construction and Total Cost Estimates • This should include land, infrastructure, and the planned improvements to the land • Although it is easier to list cost categories, it is difficult to estimate dollars associated with the cost • Construction costs can be easily estimated • Developers should use standard industry cost guide to compile house cost projections to yield house cost estimate

16. Continue • At times, the estimating process requires the developers to meet with individual subcontractors • Beyond cost of land and improvements another major cost is that of marketing • Financing costs is another major costs that cannot be ignored • Property taxes • Insurance and administrative costs

17. Typical Cost Estimate • Land cost • Site and development costs • Design fees - Architecture and Engineering • Hard costs- By category, Labor and material • Permitting costs • Financing costs-Permanent loan commitment fees, construction interest, construction loan fees, • Marketing costs-promotion, advertising,leasing commission, brokers’ fees • Preopening operating costs • Legal fees • Accounting costs

18. Continued • Field supervisor (inspection) costs • Overhead • Contingencies • Development fees

19. Lenders and Investors 16/10/08 • Preliminary discussion that began now progress to a much more formal level • Developer is to close the finding on the most appropriate permanent lender and construction lender, equity investor and joint venture • Developers use the estimated value in discussion and encourage participation • Permanent lenders look at their return and associated risk

20. Continued • The exercise involves a projected debt service coverage ratio, a loan to value ratio, and estimation of the projects ability to maintain value through long term appeal in a particular market • Construction lenders usually prefer simple project • To find financiers, developers must know investors and investors needs, their history and self images, and their current preferred mix of their portfolios • Insurance • The critical concept is matching the right lender with the development

21. Building Permits and Other Considerations • The government agencies responsible for issuing building permits for the project • Local Government should be involve in the determination of the feasibility • Avoid time consuming road blocks

22. The Value Statement and Formal Estimates of Feasibility • The result of the market study is an estimated schedule of leasing or sales for the proposed development that projects rent, occupancy and expenses over the leasing period and the number of units over the sell out period • Marketing staff • Builders • Public sector • Lenders

23. Continued • Projected rents are based on truly comparable projects • Using of discounted rate, analyst reduces projected operating flows to current values • The analyst compares the value with the total cost estimated earlier • A project satisfies feasibility criterion if value exceeds total costs

24. Continued • Sensitivity analysis • Once all this is done then project can go ahead. • By changing numbers to satisfy oneself it will surely come back to haunt the developers during the later stages of the project

25. The Enterprise Concept • The constructed space is oriented towards functioning of a particular business and if the business fails the next best use will often generate a a far lower rent from the next user. • Consequently traditional real estate feasibility analysis interwoven with modern business planning

26. Continued • The enterprise concept is a view of the development process as a living , breathing organism with ongoing problem of cash management, just like an operating business • It is necessary to decide on how much of the on going business risk is “developmental” and how much is passed onto tenants or long term investors.

27. Continued • The part passed on generally reduces the developers risk as long as the lease agreements and tenant’s credit are both strong and/or the role of the permanent investor is unconditional • Two kinds of questions are involved; • How crucial is the operating management to the project long term success? And how good is the management (on a relative basis) selected for this development. Is the developer or the tenant responsible? Or has the developer passed on this risk on through an unconditional presale to long term investor?

28. The Notion of Venture Capital • Venture capital financing introduces an additional level of complexity • To keep the development company solvent, the developer may at times may need to trade longer term investments profits for higher immediate development fees and for a way to mitigate the need for larger amount of venture capital

29. Level Two Feasibility • The developer must be concerned with level two perspective of every participant in the development process • Enhanced environmental awareness, more politically active political groups and enterprise concepts • The developer tries to anticipate problems so as to have sufficient flexibility in keeping the development team together

30. Techniques of Risk Control • Feasibility analysis is clearly a major technique • Financing arranged clearly affects the sharing of project risks • Permanent lenders must consider certain interest in the trade off between risks and returns

31. Continued • A formal review of architect’s design plan by every body including the public officials is critical in controlling risks • The developer must begin discussions early, documents meetings, and where ever possible, obtain formal commitments for public facilities and services. • Joint venture with other public sector or with general public

32. Continued • Building permit has been issued to the chosen contractor • Provide structural warranties to the architect’s contract