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Lecture 2: An Introduction to Feasibility Analysis & Real Estate Process Project Overview. October 6, 2010. Feasibility Process. Definition of Feasibility Problem General Problem Statement Client Perspective Strategic Evaluation Positional Analysis - PowerPoint PPT Presentation
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© JR DeLisle, Ph.D.
Lecture 2: An Introduction to Feasibility Analysis &
Real Estate Process Project Overview
October 6, 2010
© JR DeLisle, Ph.D.
Feasibility Process• Definition of Feasibility Problem
– General Problem Statement– Client Perspective
• Strategic Evaluation– Positional Analysis– Selection and modification of Feasibility Model
• Data Selection and Collection– Capital Market Profile– Spatial Market Analysis: Macro and Micro
• Preliminary Analysis and Identification of Alternatives– Spatial Considerations– Financial Considerations
• Use Filtering and Selection of Most Likely Candidate– Goodness-of-fit criterion– Satisfaction of Client Goals
• Refinement of Alternative and Verification of Use– Product Specification– Risk Management and Due Diligence
• Implementation, Monitoring and Feedback
© JR DeLisle, Ph.D.
Project Deliverable 1: Static Analysis
© JR DeLisle, Ph.D.
Dimensionality of Real Estate
What are the three key dimensions of Real Estate?
Linkages
Environment
Static
S…. E….. L ….
S…. E…. L….
For more info on using in Feasibility Studies, see Case 4: http://jrdelisle.com/cases_tutorials/
© JR DeLisle, Ph.D.
Three Major Attributes of Real EstateThree major attributes of real
estate . . .
– L,– L,– L.
LL
L
. . . . . . . ulnerable,
. . . . . . . ulnerable,
. . . . . . . ulnerable.The 2009 regime of real estate . . .
– D– D– D
. . . . . . . istressed, . . . . . . . istressed, . . . . . . . istressed.
Three major attributes of real estate . . .
– L,– L,– L.
The 2010 + regime of real estate . . .
Liability, Litigation, Liquidity (NOT!)
L, L, L
Butt, what the “L”?
© JR DeLisle, Ph.D.
Types of Real Estate Feasibility Problems
• Site in search of a use– Profile site– Identify alternative uses and users– Match most probable user to site
• Use in search of a site– Profile user and establish real estate needs– Identify alternative sites– Match site to user
• Investor in search of involvement– Profile investor– Establish investment criteria– Identify alternatives– Match investor to alternatives
For more background, see Graaskamp: A Holistic Perspective at http://jrdelisle.com/research/
© JR DeLisle, Ph.D.
Site in search of a use
• Site in search of a use– Profile site– Identify alternative uses and users– Match most probable user to site
© JR DeLisle, Ph.D.
Use in search of a site
• Use in search of a site– Profile user and establish real estate needs– Identify alternative sites– Match site to user
Classify User: Assess Needs
© JR DeLisle, Ph.D.
Investor in search of involvement
• Investor in search of involvement– Profile investor– Establish investment criteria– Identify alternatives– Match investor to alternatives
0
100
200
300
400
500
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
Private Investors
REITs
Pension Funds
Foreign InvestorsPublic Untraded FundsLife Insurers
© JR DeLisle, Ph.D.
Ten Steps to Feasibility Site in Search of Use
1. Problem Statement2. Situational Analysis3. Legal-Political-Ethical4. Physical-technical5. Dynamic Location Attributes6. Market Trends and Needs7. Market Analysis8. Alternative Site Specification9. Alternative Site Analysis10. Project Implementation, Monitoring & Feedback
© JR DeLisle, Ph.D.
A Definition of Feasibility
A real estate project is “feasible” when the real estate analyst determines that there is a reasonable likelihood of satisfying explicit objectives when a selected course of action is tested for fit to a context of specific constraints and limited resources.
James A. Graaskamp
For more background, see Graaskamp on Real Estate
© JR DeLisle, Ph.D.
Project: Process Overview
Real Estate Process
© JR DeLisle, Ph. D.Project Outline: Market Overview
• Macro-economic Situation– General economy and implication– Real Estate capital markets and capital flows
• Regional/Local Market– Overall state of economy and implications– Real estate market overview; cycle stage, conditions…. – Regulatory environment; political mindset– Growth and trends
• Market structure; overview• Major public projects of note (e.g., light rail, bridges)
Real Estate Process
© JR DeLisle, Ph. D.Project Outline: Static Attributes
• A. Site Profile• Size, shape, topography• Utilities and infrastructure• B. Existing Improvements• C. Ingress/Egress• Existing and potential• Pedestrian circulation• D. Legal Profile• Ownership• Easements, if any• E. Controlling legal/political attributes• Zoning, Land Use Controls, Incentives…• Private Restrictions• Other Constituencies (e.g., neighborhood, environmental, planning,
political)• F. Implications
Real Estate Process
© JR DeLisle, Ph. D.Project Outline: Alternative Uses
• Identification of alternative uses– General statement– Preliminary specifications– General Building Envelopes– TRC, FD/BD Analysis– Site allocation
• Filtering analysis: Evaluation of Alternative Uses– Goodness-of-fit– Stress Tests/Trade-offs
• Market• Legal/Political
Physical• Financial• Recommended Use
– Most likely use (s)– Development Strategy
Real Estate Process
© JR DeLisle, Ph. D.Project Outline: Financial Analysis
• General parameters• Frontdoor/Backdoor• Discounted Cash Flow• Sources of capital• Risk/Return Analysis• Project timing
Real Estate Process
© JR DeLisle, Ph. D.Project Outline: Neighborhood and Market
Delineation• Identify primary trade area; subareas• General Condition• Role in market; positioning Static/Structural Perspective
Land usesPhysical: age, conditionTenant mix: who’s in, who’s not
Strategic linkages• Existing and proposed transit• Pedestrian routes; volumesDynamic/Successional Perspective• Life cycle stage• Trends• Synergies Implications of Neighborhood/Submarket Analysis
Real Estate Process
© JR DeLisle, Ph. D.Proposed Design
• Site Plan– Ingress/Egress/Parking– Building Package/Design– Elevations….
• Conclusion
Construction Costs per RSMeans
Project Name: Eric's Project Name: University District
Description: Apartments, Low Rise
Description: Retail Stores
Location: SEATTLE, WA Location: SEATTLE, WA 82.28571Size: 56,000 gross
square feet $62.14Size: 11,200 gross
square feet
COST BREAKDOWN Low Median High COST BREAKDOWN Low Median HighTotal Project Cost $2,761,000 $3,480,000 $4,659,000 Total Project Cost $542,000 $731,000 $963,000 Site work [Find products] $247,000 $345,000 $546,000 Plumbing [Find products] $19,000 $32,000 $56,000 Masonry [Find products] $54,000 $134,000 $219,000 HVAC [Find products] $42,000 $58,000 $87,000 Finishes [Find products] $290,000 $396,000 $497,000 Electrical [Find products] $48,000 $68,000 $96,000
Equipment [Find products] $89,000 $132,000 $200,000 Total Mechanical and Electrical $130,000 $167,000 $225,000
Plumbing [Find products] $212,000 $280,000 $350,000 HVAC [Find products] $136,000 $168,000 $247,000
Electrical [Find products] $159,000 $208,000 $284,000 Total Mechanical and Electrical $552,000 $701,000 $874,000 Per-Unit Cost $45,000 $68,000 $102,000 Per Unit Mechanical and Electrical $8,000 $13,000 $17,000
RSMeans® Preliminary Cost EstimateRSMeans® Preliminary Cost Estimate
BackDoor JustifiedBackdoor Step 4: Final TRCj Calculation
TRCj = (Gim * NIR)Wcc
=84,083*73.5%0.005642312
10,953,168$
Frontdoor/ Backdoor Reconciliation
Approach TRC Rent/sfFrontdoor Budget 10,897,719$ 12.90 Backdoor Justified 10,953,168$ 12.97 Gap to Rationalize -0.51%
© JR DeLisle, Ph.D.
Step 1: Problem Statement
• Strategic Overview• Nature of Decision• Goals and Objectives• Business Considerations• Constraints• Scope of Analysis
– Inclusive vs. exclusive approach– Dynamic vs. static approach– Stochastic vs. deterministic
© JR DeLisle, Ph.D.
Context: Problem Statement
© JR DeLisle, Ph.D.
Investor Profiles
© JR DeLisle, Ph.D.
Step 2: Situational Analysis
• Strategic Overview– Macro-economic Environment– Capital Market Environment– Spatial Environment– Space User Environment
• Preliminary Site Assessment– Situational Analysis: The Context– Positional Analysis
• Context in which it fits/operates• Draws on Structure, Succession and Situs Theory
– Opportunity Analysis: What it could be?
© JR DeLisle, Ph. D.
Real Estate Market Analysis
© JR DeLisle, Ph. D.
Situational Overview
LOCATION:
• Portage Bay
U-District
• Brooklyn Ave NE and NE Boat St
• UW Campus north of site
• Water to South
ZONING:
• IC-45-US zone
• 179,567 sf lot
• 50,200 sf max over land
• 39,584 sf max over water
© JR DeLisle, Ph.D.
Competitive Analysis
© JR DeLisle, Ph.D.
Step 3: SEL-Physical/Technical Context
Static Attributes
• Size and shape• Topography• Drainage, water• Soils and subsoils• Utilities• Ingress/Egress
Dynamic Attributes
• Functional layout• Orientation• Scale & texture• Comfort• Security• Nuisances/Environmental Issues
© JR DeLisle, Ph. D.
Real Estate Market Analysis
© JR DeLisle, Ph. D.
Static and Environmental Attributes
Jones ◊ Rappe ◊ Chang Consulting, LLC
© JR DeLisle, Ph.D.
Parcel Data Search
http://www.metrokc.gov/gis/Mapportal/iMAP_main.htm#
© JR DeLisle, Ph.D.
PID – Tax Records
© JR DeLisle, Ph.D.
Transaction Information from Parcel Map
© JR DeLisle, Ph.D.
Environmental Attributes
2006 Team B1
© JR DeLisle, Ph.D.
Dynamic Location Attributes
• Geographic Location– Orientation– Linkages– Tributary analysis: connection
• Transportation Access– Mode– Physical Access: Walkability– Travel anxiety or aggravation
• Exposure– Visual– Ingress/egress
© JR DeLisle, Ph.D.
Location and General Linkages
26
Site
Site
South Lake Union
Fremont
Jones ◊ Rappe ◊ Chang Consulting, LLC
© JR DeLisle, Ph.D.
Linkages and Connectivity
• Easy vehicle, bus, bicycle access to University District via Eastlake Ave E.• Easy vehicle, bus, bicycle access to Downtown, Capitol Hill, S. Lake Union, Queen Anne.• Eastlake Ave: heavy traffic commuting between Downtown and U. District. 30,000 vehicle trips/day.
University Village
University of Washington
UW Med Center/Husky Stadium
Project Site
Downtown Seattle
Project Site
Capitol Hill
S. Lake Union
Queen Anne
© JR DeLisle, Ph.D.
Micro-Linkages: Ingress/Egress
© JR DeLisle, Ph.D.
Step 4: Legal-Political-Ethical Constraints
• Legal-Political-Ethical Tie– Constraints by law: Legal
• Site constraints• Enterprise constraints (users)
– Constraints by Market• Capital Market & Investor Constraints• Community constraints
– Ethical/Political Constraints• Sustainability and the irretrievable resource commitment• Goodness of Fit
• Dynamic Nature– Many constraints are subject to change/negotiation– Final binding constraints involve trade-offs of legal/political/ethical
For more info on implications, see: Case 1: Building Envelope Calculations.
© JR DeLisle, Ph.D.
Seattle Planning Process: Overview
© JR DeLisle, Ph.D.
Seattle Codes
© JR DeLisle, Ph.D.
Seattle Zoning Designations
© JR DeLisle, Ph.D.
Seattle Zoning
© JR DeLisle, Ph.D.
Seattle’s Urban Villages
© JR DeLisle, Ph.D.
Building Envelopes: A Modular Approach
• Site Size
• Lot Coverage Ratio (LCR)
• Height Restrictions
• Parking Requirements– Parking Index– SF/Stall
• Floor Area Ratio (FAR)
© JR DeLisle, Ph.D.
Sensitivity: 6 vs. 4 Story Office Step 1
Step 1: Calculation Building Envelop
Original NewGross Site SF GSSF 43,560 43,560 Lot Coverage Ratio LC 80% 80%# Stories in Building #St 4 6 Parking Index (#/1,000) PI 4 4 Paving/Stall PS 400 400
43,560 * 80%0.1667 + [ 1.60 ]
34,848 1.7667
= 19,725 SFOriginal 18,837
=
=
BSFmax = GSSF * LC(1/#St) + [(1/(1,000/PI)) * PS)]
© JR DeLisle, Ph.D.
Total Replacement Cost (TRCm): Overview
© JR DeLisle, Ph.D.
TRCm and Sources of Capital
Item CostLand Costs 435,600$ Construction Costs 2,440,468$ Known Soft Costs 139,509$ Const-Related Fees 541,784$ Subtotal of Known Costs 3,557,360$ Financing Fees 314,807$ Total Replacement Cost (TRCm) 3,872,167$
Percent11.2%63.0%3.6%
14.0%
8.1%100.0%
Cost/Fee
74.3%
25.7%100.0%
Permanent Loan = TRC * LV = 3,097,734$ Equity = TRC * (1 - LV) = 774,433$ Total Capital 3,872,167$
© JR DeLisle, Ph.D.
Change Rationale: Zoning, Traffic
© JR DeLisle, Ph.D.
Step 6: Trade Area Delineation
• Micro: Region/City/Sub-market– Spatial trends
• Community or regional growth, spatial skewing, scale and timing• Structure: Sub-market relationship to broader economic base
– Economic Base • Employment: composition, drivers, growth• Elasticity: sensitivity of growth to economic conditions
• Market Segments– Current Market Segments– Projected Growth by Market Segment
© JR DeLisle, Ph.D.
Trade Area Delineation: Rings are Out
Is this the Trade Area?
© JR DeLisle, Ph.D.
Trade Area Delineation
5 Minute drive
15 Minute drive
10 Minute drive
SITE
© JR DeLisle, Ph.D.
Step 7: Competitive Market & Demographics• Competitive Analysis
– Supply: Number– Value proposition– Price points– Competitive advantages
• Market trends and opportunity areas– Aggregate data on local population, employment, income, etc.– Industry trends relevant to the project (e.g., office, retail, apt, ind, hotel)– Significant popular attitudes and trends in location market
© JR DeLisle, Ph.D.
Competitive Analysis
To learn how to identify competitors and land uses, see: Tutorial 3: Reverse Directory.
© JR DeLisle, Ph.D.
Competitive Information Sources: Commercial Brokers Association
www.commercialmls.com
Search all
© JR DeLisle, Ph.D.
CBA: Properties for Sale Output
© JR DeLisle, Ph.D.
Market Analysis and Synergy
2006 Team F
© JR DeLisle, Ph.D.
Step 8: Alternative Uses/Users’ Profiles
• Identify Preliminary Uses– Major property types: retail, office, warehouse– Secondary Property sub-types– Single-use, mixed-use
• Profile preliminary users– Internal Analysis
• Entities & packets of functions• Drivers of Value• Trends & Life cycle stage
– Real Estate Elements• Spatial needs & internal vs. external orientation• Approach to real estate solutions
For a guide to free demographic data, see: Tutorial 4(a): Easi-Demographics.
© JR DeLisle, Ph.D.
Market Segmentation Analysis
• Definition: Homogeneous Groups– Similar within clusters– Different among clusters
• The Five-W’s– Who: classes of consumers (markets)– What: homogeneous subsets– Where: spatially or across markets– When: it is feasible and economically viable– Why: can be targeted
Value Impacts?
© JR DeLisle, Ph.D.
Demographic Analysis
© JR DeLisle, Ph.D.
Select Trade Area
© JR DeLisle, Ph.D.
Apply Customized Trade Area Analysis
© JR DeLisle, Ph.D.
Target Market
© JR DeLisle, Ph.D.
Profiles & Trends
© JR DeLisle, Ph.D.
Target Market Analyis
© JR DeLisle, Ph.D.
Step 9: Alternative Uses and Scenarios
For more info, see: The Interactive Design-Marketing Model in Determining Highest and Best Use
© JR DeLisle, Ph.D.
Alternative Use Decision-Making Process
• Specify Alternative Use Process/Level of Analysis– Determine goals and objectives– Select criteria for evaluation – Assign weight to each criterion (e.g. 1 to 10) – Rate strength of each alternative (1 to 10 scale) – Weight (multiply) strength score by importance score
• Compare– relative rank order of alternatives based on total scores– total score vs. cost/return to make economic trade-off
• Understand– Attribution Analysis– Sensitivity Analysis
© JR DeLisle, Ph.D.
The Value Proposition: Cost < >Value ?
Value * Rate = Income
Value
* Rate
Income
Frontdoor
Value * Rate => Income Value <= Income Rate
Backdoor
© JR DeLisle, Ph.D.
Frontdoor Model: Sequence
Land
Hard & Soft Costs
TRCm
TRCm
NIr
* Wcc
/ NIR
GIr
NIR = 1 – (Er + Ptx + Vr)
© JR DeLisle, Ph.D.
Backdoor Model: Reverse Engineered
Land
Hard & Soft Costs
TRCj
TRCj
NIm
/ Wcc
/ NIRGIm
Market
NIR = 1 – (Er + Ptx + Vr)
© JR DeLisle, Ph.D.
Frontdoor/Backdoor Reconciliation
Approach TRC Rent/sfFrontdoor Budget 3,872,167$ $26.60Backdoor Justified $2,910,982 $20.00Gap to Rationalize 33.0% 33.0%
© JR DeLisle, Ph.D.
In the End, It’s All About the Numbers
2006 Team E2
For more info on making numbers “easy to crunch,” see: Case 3: Frontdoor/Backdoor Analysis.
© JR DeLisle, Ph.D.
Alternative Use: Numbers and More Numbers
2006 Team C1
To get your costs in line, see: Case 2: Total Replacement Cost Analysis.
© JR DeLisle, Ph.D.
Discounted Cash Flow (DCF) Analysis
© JR DeLisle, Ph.D.
Equity Justified: PV of CF + PV Net Reversion
= Ej
NIr
GIr
StabilizedNOI
Sales Price- Sales Exp- Tax on Sale- Mtg. Bal.
Net Reversion
PV C
F
+PV
NR
© JR DeLisle, Ph.D.
Most Fitting Use: An Integrated Approach
For more info, see: Case 6: Most Fitting Use.
© JR DeLisle, Ph.D.
Most Fitting Use: Standardizing Scores
Criteria Office Retail Industrial Apartment Hotel AVGMost Suitable Use 8.4 6.8 5.8 9.8 8.4 7.9Politically Palatable 6.1 8.2 2.6 6.8 6.3 6.0Highest & Best Use 5.9 4.0 3.7 7.5 6.3 5.5Unweighted Ratings 6.8 6.3 4.0 8.0 7.0 6.4
Unweighted Most Fitting Use
Criteria Wgts Office Retail Industrial Apartment Hotel AVGMost Suitable Use 40% 3.4 2.7 2.3 3.9 3.4 3.1Politically Palatable 30% 1.8 2.5 0.8 2.0 1.9 1.8Highest & Best Use 30% 1.8 1.2 1.1 2.3 1.9 1.6Weighted Ratings 100% 7.0 6.4 4.2 8.2 7.2 6.6
Weighted Most Fitting Use
Criteria Office Retail Industrial Apartment Hotel AVGMost Suitable Use 48% 43% 55% 48% 47% 48%Politically Palatable 26% 38% 18% 25% 26% 27%Highest & Best Use 25% 19% 26% 27% 26% 25%Weighted Ratings 100% 100% 100% 100% 100% 100%
Attribution of MFU/Weighted
Criteria Office Retail Industrial Apartment Hotel AVGMost Suitable Use 7% -13% -26% 25% 7% 0%Politically Palatable 2% 37% -57% 13% 5% 0%Highest & Best Use 8% -27% -32% 37% 15% 0%Weighted Ratings 6% -3% -36% 25% 9% 0%
Deviation from Average
© JR DeLisle, Ph.D.
Alternative Use Recommendation
© JR DeLisle, Ph.D.
Step 10: Final Use Specification & Packaging
© JR DeLisle, Ph.D.
Project Profile
© JR DeLisle, Ph.D.
Design Concepts
2006 Team A2
2006 Team C1
2006 Team B1
© JR DeLisle, Ph.D.
Final Design and Financials
For info on fine-tuning DCF, see: Case 5: Discounted Cash Flow Analysis.
© JR DeLisle, Ph.D.
Financial Snapshot & Implementation
© JR DeLisle, Ph.D.
Implementation Timeline, Risk Mgmt. and Marketing
© JR DeLisle, Ph.D.
Exit Strategy and Conclusion
© JR DeLisle, Ph.D.
Timeline