_RE_Development Midterm
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FINA 6240: Real Estate Development
1.
List three feasibility considerations that would need to be assessed during the feasibility period. Indicate which items you would pursue first and why. A feasibility period is crucial before buying a development property for several reasons. Real estate development projects are significant financial commitments. A feasibility period gives you the chance to carefully evaluate the property and the development plans under consideration, which can help you spot any potential risks or problems. As a result,
you are better equipped to make decisions and can possibly avoid buying an asset with overwhelming problems. The following are the three feasibility considerations I would pursue to assess during the feasibility period on this project. First and foremost, I would begin by doing a thorough review of the title search report and considering the title insurance. A title search report provides information on the property's ownership history and any potential legal claims or disputes related to the title. Reviewing this report helps confirm that the property has clear and marketable title, which is essential for any real estate development project. Without a clear title, your development plans could be hindered, delayed, or even derailed by legal disputes. The title search report will reveal any existing liens or encumbrances on the property. Identifying these issues is crucial because they can affect your ability to secure financing for the project. Lenders typically require clear title to provide loans for development. You
may need to resolve any outstanding liens before proceeding. Even with a review of the title search report, I believe considering title insurance can be beneficial as well. Title insurance provides a safety net for developers and property buyers. Even with a thorough title search, there's always a risk that hidden title issues could surface in the future. Title insurance policies help protect you from financial loss due to undiscovered title defects, fraud, or legal challenges related to the property's title. When we consider title insurance, we’re taking steps to mitigate potential legal risks and hefty legal costs. Lenders typically
require title insurance to protect their interests in the property. Having title insurance in
place can make it easier to secure financing for the development project. Additionally, title insurance provides peace of mind to investors and developers by protecting their investment in the property. Overall, this is an important step because title insurance acts as a safeguard against potential title-related challenges that could disrupt your development plans or result in significant financial losses.
Secondly, I would conduct an environmental due diligence of the property. Environmental Due Diligence is the process that evaluates the environmental conditions and risks associated with a property. Lending institutions typically require environmental due diligence before they will finance a real estate purchase, refinance an existing loan, or accept collateral for a construction loan. If a property is held as collateral for a loan, environmental due diligence is also usually required, as any problems would compromise
the collateral property’s value. Environmental due diligence is also often required by public agencies before they release grant funding for projects related to real estate developments and improvements. Suppose environmental due diligence is performed before purchasing a property. In that case, the purchaser can gain protection from being held accountable for any pre-existing contaminations on the land according to
the Comprehensive Environmental Response, Compensations, and Liability Act provisions. If this process is not completed, the new owner can be held responsible for repairing the contamination. As the developer, we want to make sure we are making and saving as much money as possible. Environmental due diligence may reveal specific design or construction considerations, such as the need for soil remediation, pollution prevention measures, or habitat preservation. This information can inform the design and construction plans, helping developers avoid costly changes during the later stages of the project and make sure that the project is being laid on a stable and healthy foundation. Overall, environmental due diligence is a crucial part of the feasibility period for real estate development because it helps identify and address environmental risks, legal compliance issues, and financial liabilities.
Last but not least, I would begin with a financial feasibility analysis to help me determine
whether the potential development project is likely to be profitable. It gives a thorough overview of the possible return on investment (ROI) and determines if the costs of
purchasing and developing the property can be compensated by the anticipated profits. This analysis goes hand in hand with determining buyer funding and financing. In this scenario, if I am the purchaser, I need to make sure that I have enough capital and backup
to go through with this project in the first place. Before purchasing the property, you need
to secure financing for the acquisition and development. The results of such a financial analysis are crucial in obtaining funding from lenders or investors. They want to see that the project is financially sound and likely to generate returns. All in all, a thorough financial analysis before diving into a project provides the basis for informed decision-
making, budgeting, securing financing, and managing financial risks associated with the project. Without an in-depth financial analysis, you may be making a significant investment without a clear understanding of the potential financial outcomes, which can be financially risky.
2.
Based on the General Land Use Plan designation for the site and the assumptions referenced above, analyze the alternative uses which could be considered on the site and determine the maximum project production cost to make each scenario feasible.
Maximum Construction Cost
Profit Margin
Office
$ 34,589,913.46 $ 7,295,278.85 Office + Retail
$ 31,755,176.54 $ 6,795,031.15 Apartment
$ 28,274,228.93 $ 6,180,746.28 Apartment + Retail
$ 30,045,062.26 $ 6,493,246.28 Condo
$ 17,369,694.69 $ 4,256,416.71 Condo + Retail $ 19,140,528.02 $ 4,568,916.71 Please refer to the attached excel as well as Exhibit A in this PDF file for a more detailed analysis and calculations. For the purpose of this analysis, I assumed Apartment and Condo number of units, average square foot per unit, to get the buildable square footage. These numbers were assumed through a quick internet search and analysis.
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Related Questions
Required:
(a) Calculate the payback period, accounting rate of return and net present value of each of thepotential projects.(b) Explain which of the three potential investment projects should be undertaken. Yourexplanation should be based on the results of your calculations in part (a).|(c) Critically discuss the approaches to investment appraisal used in part (a). As part of yourcritical evaluation, identify what additional information might be used to improve the approachto investment appraisal.
arrow_forward
Discuss what reason to decide whether to accept or reject a project. Your should refer to all four investment appraisal methods
arrow_forward
FE Practice Question, Please explain in details to help me study. Thank you.
arrow_forward
When measuring the investment performance of something as broadly defined as real estate, What one must keep many things in mind?
arrow_forward
(a) Calculate the, the Payback Period, and the net Present Value of for each project.b) For each of the above methods of project appraisal recommend which project should be taken up.c) Using all the information gathered from the above techniques which project would you recommend giving the reasons for this decision.d) Explain the uses, limitations and merits of the Payback Period compared to Net Present Value in investment appraisal.
arrow_forward
Read the case “Langtry Falls Expansion Plan”. After reading the article critically discuss and evaluate the issues in the Langtry benchmark-setting decision.
arrow_forward
i. Whether profitable project or non-profit project the time value of money is
important consideration among project planners and profesions develop a case of
your choice demonstrating future value and present value computations to
validate this statement ii. Define the following terms a) Cost benefit analysis b)
Time value of money c) Capital d) Multiple rate of return e) Institutional appraisal
arrow_forward
The TELOS study that determines whether a project can be completed in an acceptable time frame isa. a schedule feasibility study.b. a time frame feasibility study.c. an on-time feasibility study.d. an economic completion feasibility study.e. a length of contract feasibility study.
arrow_forward
Discuss which tools you would use to decide whether a project is worthy of financing? Also, specifically when do you think the Payback method is most often used?
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Project Appraisal and Financing.
We have studied the subject under the following headings . Please prepare a flowchart or a table where the features get highlighted. The purpose is to establish that you have understood the concepts in a broad manner.
Selection of Project
Time Value of Money
Investment Criteria
Project cash flows
Project Risk Analysis
Financing of Project
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Describe the method used to evaluate investment projects?
arrow_forward
What is sensitivity analysis? How might it be used in real estate development?
arrow_forward
What factors should a company consider when it decides whether to investin a project today or to wait until more information becomes available?
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discusses the acronym TELOS which providesguidance for accessing project feasibility. The term stands for technical, economic, legal,operational and schedules feasibility. Discuss these feasibilities briefly. And elaboratecost-benefit analysis under economic feasibility
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how to assess financial support project whether there is a need to conduct a financial analysis. What are the possible aspects you will consider in conducting a financial analysis of that project?
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Explain Due Diligence in Real Estate Investment Risk Analysis?
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Write the formula to evaluate the investment worth of projects?
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QUESTION 1
The accounts manager of VM Gym & Sports has been asked to evaluate a potential capital
investment of a set of rowing machines. The following data is available for cach project:
Machine 1
Machine 2
RM
RM
Cost (immediate outlay)
500,000
245,000
Expected annual profits (losses)
Year 1
I.
80,000
84,000
Year 2
90,000
136,000
Year 3
116,000
126,000
Year 4
146,000
150,000
Annual running costs
30,000
24,000
Annual service costs
36,000
20,000
Estimated residual value equipment
40,000
30,000
*The total annial running and service costs for Machine 2 in the first year is RM 36,000
The committee has estimated a cost of capital of 30% and employs the straight-line method
of depreciation for all fixed assets when calculating net profit. The following discount factors
are given:
Year
Cost of capital
10%
50%
0.909
0.667
2.
0.826
0.444
3.
0.751
0.296
4.
0.683
0.198
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Several proposed capital projects which are economically acceptable may have to be ranked due to constraints in financial resources. In ranking these projects, the least pertinent is this statement.
A. A ranking procedure on the basis of quantitative criteria may be established by specifying a minimum desired rate of return, which rate is used in calculating the net present value of each project.
B. In selecting the required rate of return, one may either calculate the organization’s cost of capital or use a rate generally acceptable in the industry.
C. If the internal rate of return method is used in the capital rationing problem, the higher the rate, the better the project.
D. If the net present value method is used, the profitability index is calculated to rank the projects. The lower the index, the better the project.
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Describe the project-screening tool method used to evaluate the investment projects?
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Which one of the following activities best exemplify capital structure decisions. For this exercise you will be choosing more than one option for your answer:
Determine the most adequate mixture of debt and equity to be maintained.Obtain a short-term loan to purchase materials.Identify two capital investment projects.Determine the cost of each source of capital.Determine the return of a potential project.Calculate the cash flows for a project.Assess the terms of loans and evaluate potential long-term financing options.
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SECTION D 1. The Kazungula Bridge is an important project for Botswana. Collect important information about it and perform a stakeholder analysis of the project.
2. Taking any one of the projects you identified in Botswana, perform a risk analysis on it.
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How can we consider the information for a typical investment project with a service life?
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- Required: (a) Calculate the payback period, accounting rate of return and net present value of each of thepotential projects.(b) Explain which of the three potential investment projects should be undertaken. Yourexplanation should be based on the results of your calculations in part (a).|(c) Critically discuss the approaches to investment appraisal used in part (a). As part of yourcritical evaluation, identify what additional information might be used to improve the approachto investment appraisal.arrow_forwardDiscuss what reason to decide whether to accept or reject a project. Your should refer to all four investment appraisal methodsarrow_forwardFE Practice Question, Please explain in details to help me study. Thank you.arrow_forward
- When measuring the investment performance of something as broadly defined as real estate, What one must keep many things in mind?arrow_forward(a) Calculate the, the Payback Period, and the net Present Value of for each project.b) For each of the above methods of project appraisal recommend which project should be taken up.c) Using all the information gathered from the above techniques which project would you recommend giving the reasons for this decision.d) Explain the uses, limitations and merits of the Payback Period compared to Net Present Value in investment appraisal.arrow_forwardRead the case “Langtry Falls Expansion Plan”. After reading the article critically discuss and evaluate the issues in the Langtry benchmark-setting decision.arrow_forward
- i. Whether profitable project or non-profit project the time value of money is important consideration among project planners and profesions develop a case of your choice demonstrating future value and present value computations to validate this statement ii. Define the following terms a) Cost benefit analysis b) Time value of money c) Capital d) Multiple rate of return e) Institutional appraisalarrow_forwardThe TELOS study that determines whether a project can be completed in an acceptable time frame isa. a schedule feasibility study.b. a time frame feasibility study.c. an on-time feasibility study.d. an economic completion feasibility study.e. a length of contract feasibility study.arrow_forwardDiscuss which tools you would use to decide whether a project is worthy of financing? Also, specifically when do you think the Payback method is most often used?arrow_forward
- Project Appraisal and Financing. We have studied the subject under the following headings . Please prepare a flowchart or a table where the features get highlighted. The purpose is to establish that you have understood the concepts in a broad manner. Selection of Project Time Value of Money Investment Criteria Project cash flows Project Risk Analysis Financing of Projectarrow_forwardDescribe the method used to evaluate investment projects?arrow_forwardWhat is sensitivity analysis? How might it be used in real estate development?arrow_forward
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SEE MORE QUESTIONS
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