Reference no: EM133104400

NBC3004 Construction Economics - Victoria University

Economic Feasibility Study

Project: Development of a new Leisure & Community Centre

Introduction:
This is the brief for the Stage 2 and final exercise for this project Your group has been appointed as Construction Economist by The Proprietary Very Limited Corporation (PVLC) to carry out development and feasibility analyses of the proposed Development of a new Maim. & Community Centre and to provide a commercial justification to PVLC for the development of this property.

The Project Brief issued at the commencement of the project describes the development requirements of PVLC, and the specific elements of the required Financial Feasibility Study. PVLC subscribes to a development and investment strategy which aims to maximise returns and minimise risk to its shareholders - a strategy that the Construction Economist is required to understand and embrace in the provision of advice to PVLC regarding the future use of the property.

An outline of your recommended development concept and appropriate feasibility analyses, together with your recommendation to PVLC's future development of the site, are now required to complete the commission. This all comprises Stage 2.

The feasibility analyses of your proposed development will consider and test the key variables of your recommended development option, and the impact that changes in, for example, rentals, costs, delays, financial structuring, will have on the objectives of your proposed development.

It is very important that you prepare written justification for your development decisions and the reasons why you are prepared to recommend your proposal to your client. You should thoroughly address the risks (commercial, planning, construction etc) inherent in your development, and advise your client of the steps you propose to minimise or remove the risks should PVLC proceed with your recommendation.

Your data is to be based on the recommended development concept outlined in your Stage 1 report. The object of this Stage 2 is to determine whether your proposed development will, after considering the risks involved, provide the owner with a satisfactory investment return, and improve the value of the owner's assets over the next 5 years. If it does neither, what do you recommend the owner's course of action should be regarding the future of the property?

As you undertake the requirements listed below, consider any recommendations that you would make to modify your preferred Stage 1 development option to enhance the potential returns to PVLC. Carefully and fully explain the justification for, and effect of these changes.

Revenue calculation data

• Gross annual rents and outgoings are as provided in the findings/assumptions of your Stage 1, report.

• Sale values for the revenue earning components of your proposed concept are assumed to be as per the findings/assumptions of your Stage 1, report.

Cost assumptions

• Land cost is 9.0 million. Since the land is owned by PVLC there is no purchase costs and legal costs of purchase should not be included.

• Constructlon costs are as per your Stage 1 submission. You may correct any errors discovered in your previous report to ensure costs ore realistic.

• Construction costs should be escalated at 3.o% per annum if not already based upon on the date of commencement.

• Development costs which will be incurred over the development period including rates and taxes, leasing costs, legal fees, etc. are to be provided for, and should be calculated at s.o% of the final construction cost and paid progressively during construction until practical completion and the date of project sale.
• Your project is to be fully funded by an initial injection of PVLC's own fund.

All taxes, GST, tax benefits (including depreciation) are to be excluded from the exercises

Stage 2: Requirements

Requirement 1

Assume that you are the project developer (the developer), and provide a succinct summary of your Stage 1, findings that describes the optimum development that can be undertaken on the site (after considering all the constraints on the site), showing the following (where applicable):
1. Site area.
2. Maximum development permitted by the responsible authority.
3. Maximum gross floor area.
4. Maximum number of car parks permitted by the relevant planning scheme, and the proposed number of car parks within the proposed development.
5. Gross and net areas of useable space classified where applicable, as follows:
i. retail
ii. office (if any)
iii. residential
iv. hotel/restaurants
v. carpark
vi. leisure/fitness (if any)
vii. other
(These classifications are provided by way of example only, and do not indicate the uses to which your proposed development must be put).
6. Gross revenue on completion of project.
7. Outgoings on completion of project.
8. Net revenue on completion of project.
9. Total construction cost of all areas.
10. Design and construction Programme with concept design commencing in conjunction with
your feasibilit y analysis Stage 1 report.
11. Estimate of cost escalation to completion of construction (if not provided in construction budget).
12. Preparation of cash flow schedule.
13. Calculation of project finance costs.
14. Calculation of Total Project Cost comprising:
i. total construction cost
ii. project finance costs
iii. development costs

Assume that you are the project developer and carry out the following.

For the purposes of this exercise, assume that the development will be sold to an investor on practical completion at a price that will yield the following income earning component percentages to the investor in the investor's first full year of ownership, assuming that the development is fully occupied at practical completion:

- Office                             8.00%
- Hotel/restaurants              10.00%
- Residential                        9.00%
- Retail                               7.00%
- Carparking                        8.00%
- Other                              10.00%

Note: The project selling price should be computed on net revenue.

Calculate:

1. The total sale price of the development.

2. The development profit (if any).

3. Is this a good deal for the developer?

4. Does the development meet the developer's expectations? If not, why?

5. What impact, if any, would such an eventuality have on the project selling price to the investor, or on the eventuality of the sale itself?

6. What, if any, adjustment would you make to your proposed development to achieve a "better" result for the developer?

7. What impact does PVLC's site value of $30.o million have on the development profit of the project?

Requirement 3

Using all of the data calculated in Requirement 1, assume that you are the investor/purchaser of the project at the end of the construction period, and that you have purchased the development for an amount that provides you with the yield percentages provided in Requirement 2 above. Note - this is an entirely different exercise to Requirement 1 and 2.

Note: You do not pay tax, and you have paid for the purchase cost using your own equity (which does not attract interest from external financing sources).

Assume:

a. All revenue earning space is leased and occupied for the purposes of this requirement.

b. Commencing rents are reviewed every two years and increased by an amount relating to an estimated CPI increase of 3.o% per annum.

c. Outgoings are payable by the Tenant(s) in addition to the rent. d.You make no further investment in the project.

e. You intend to sell the development after owning it for 10 years and assume you will sell to a buyer requiring an 1o.o% annual return when you sell it at the end of the tenth year of your ownership.

Calculate (over a 10-year period of ownership):
1. Annual net cash flows.
2. Cumulative cash flows.
3. Net present value of the cash flows using a 9.0% discount rate.
4. DCF rate of return (NPV and IRR) calculated over your period of ownership of the property.

- Is this a good investment for you, or would you be better off investing the same amount elsewhere ?
- Provide a full explanation as to whether and why this is a "better" investment than purchasing the above property.

Attachment:- Economic Feasibility Study.rar