Lecture 2: An Introduction to Feasibility Analysis & Real Estate Process Project Overview

© JR DeLisle, Ph.D.

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– 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


Project Deliverable 1: Static Analysis


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/

http://jrdelisle.com/cases_tutorials/

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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”?


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/

http://jrdelisle.com/research/


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


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

http://images.google.com/imgres?imgurl=http://www.mgmbill.org/Searching-small.jpg&imgrefurl=http://www.mgmbill.org/search.htm&h=201&w=350&sz=23&tbnid=PqTzXBeYwWEYAM:&tbnh=66&tbnw=116&hl=en&start=2&prev=/images?q=searching&svnum=10&hl=en&lr=lang_en


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


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


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


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%


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


Context: Problem Statement


Investor Profiles


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?

http://jrdelisle.com/market_update/

http://jrdelisle.com/glossary/



© JR DeLisle, Ph. D.

Real Estate Market Analysis


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


Competitive Analysis


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


Real Estate Market Analysis


Static and Environmental Attributes

Jones ◊ Rappe ◊ Chang Consulting, LLC


Parcel Data Search

http://www.metrokc.gov/gis/Mapportal/iMAP_main.htm#


PID – Tax Records


Transaction Information from Parcel Map


Environmental Attributes

2006 Team B1


Dynamic Location Attributes

• Geographic Location– Orientation– Linkages– Tributary analysis: connection

• Transportation Access– Mode– Physical Access: Walkability– Travel anxiety or aggravation

• Exposure– Visual– Ingress/egress


Location and General Linkages

26

Site

Site

South Lake Union

Fremont

Jones ◊ Rappe ◊ Chang Consulting, LLC


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


Micro-Linkages: Ingress/Egress


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.

http://jrdelisle.com/cases_tutorials/Cases/jCase1_BldgEnvV5%20-%20Copy.pdf


Seattle Planning Process: Overview


Seattle Codes


Seattle Zoning Designations


Seattle Zoning


Seattle’s Urban Villages


Building Envelopes: A Modular Approach

• Site Size

• Lot Coverage Ratio (LCR)

• Height Restrictions

• Parking Requirements– Parking Index– SF/Stall

• Floor Area Ratio (FAR)


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)]


Total Replacement Cost (TRCm): Overview


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$


Change Rationale: Zoning, Traffic


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


Trade Area Delineation: Rings are Out

Is this the Trade Area?


Trade Area Delineation

5 Minute drive

15 Minute drive

10 Minute drive

SITE


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


Competitive Analysis

To learn how to identify competitors and land uses, see: Tutorial 3: Reverse Directory.

http://jrdelisle.com/cases_tutorials/Tutorials/jTut3_ReverseDirv14.pdf


Competitive Information Sources: Commercial Brokers Association

www.commercialmls.com

Search all


CBA: Properties for Sale Output


Market Analysis and Synergy

2006 Team F


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.

http://jrdelisle.com/cases_tutorials/Tutorials/jTut4a_EASIDemV1.pdf




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?


Demographic Analysis


Select Trade Area


Apply Customized Trade Area Analysis


Target Market


Profiles & Trends


Target Market Analyis


Step 9: Alternative Uses and Scenarios

For more info, see: The Interactive Design-Marketing Model in Determining Highest and Best Use

http://jrdelisle.com/research/IDMModel_AJJ85.pdf


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


The Value Proposition: Cost < >Value ?

Value * Rate = Income

Value

* Rate

Income

Frontdoor

Value * Rate => Income Value <= Income Rate

Backdoor


Frontdoor Model: Sequence

Land

Hard & Soft Costs

TRCm

TRCm

NIr

* Wcc

/ NIR

GIr

NIR = 1 – (Er + Ptx + Vr)


Backdoor Model: Reverse Engineered

Land

Hard & Soft Costs

TRCj

TRCj

NIm

/ Wcc

/ NIRGIm

Market

NIR = 1 – (Er + Ptx + Vr)


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%


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.

http://jrdelisle.com/cases_tutorials/Cases/jCase3_FDBDv6.pdf




Alternative Use: Numbers and More Numbers

2006 Team C1

To get your costs in line, see: Case 2: Total Replacement Cost Analysis.

http://jrdelisle.com/cases_tutorials/Cases/jCase2_TRCmV11.pdf


Discounted Cash Flow (DCF) Analysis


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


Most Fitting Use: An Integrated Approach

For more info, see: Case 6: Most Fitting Use.

http://jrdelisle.com/cases_tutorials/Cases/jCase6MostFittingUseV2.pdf


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


Alternative Use Recommendation


Step 10: Final Use Specification & Packaging


Project Profile


Design Concepts

2006 Team A2

2006 Team C1

2006 Team B1


Final Design and Financials

For info on fine-tuning DCF, see: Case 5: Discounted Cash Flow Analysis.

http://jrdelisle.com/cases_tutorials/Cases/jCase5_DCFv26.pdf


Financial Snapshot & Implementation


Implementation Timeline, Risk Mgmt. and Marketing


Exit Strategy and Conclusion


Timeline

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Lecture 2: An Introduction to Feasibility Analysis & Real Estate Process Project Overview

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