Thi Ngo - R11031460Trey Jameson - R00232399

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TABLE OF CONTENTS

EXECUTIVE SUMMARY........................................................................................................................ 3

PROJECT OVERVIEW............................................................................................................................ 4

ASSUMPTIONS FOR THE SUBJECT................................................................................................... 5

MARKET RESEARCH............................................................................................................................ 6

SITE AND LOCATION ANALYSIS....................................................................................................... 8

RECOMMENDATION............................................................................................................................. 9

FINANCIAL ANALYSIS........................................................................................................................ 12

CONCLUSION........................................................................................................................................ 17

APPENDIX............................................................................................................................................. 18

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EXECUTIVE SUMMARY

This is a Fundamental Real Estate course and we are assigned to do a project on

whether a proposed redevelopment of a property would make physical, as well as

economic, sense. We are given a 10.3 acre tract of land at 4202 78 th Street, Lubbock, TX

79423 for this project. Currently the land is unused, but was previously an unofficial

landfill. This project deals with market and financial analysis for the proposed land to come

up with a solution to whether it will be worth enough to justify redevelopment.

The project includes various data collection, survey and research to conduct the

market analysis and convert the data into inputs to do the financial analysis. Our initial

market analysis suggested that the proposed land has both market demand and needs,

which suggest the land has some economic benefits which might be very attractive in the

market, as the study will depict.

We have determined our target group and have conducted sufficient market

research in order to complete the market analysis. Based on the analysis, we have made the

financial feasibility study by computing the Pro Forma income statement, ratio analysis,

estimated land value, various way of financing/debt services, construction cost using

Marshal and Swift Valuation Service, NPV/IRR computation etc. To compute mathematical

calculations we looked at data from CoStar, RealtyRates.com, Texas A&M Real Estate

Survey, Lubbockcad.org and www.city-data.com/housing.

From the market and financial analysis we have tried to find out the current

position of our proposed land and estimated expected return, and expected net cash flows.

Therefore our main goal is to evaluate a possible economic outcome for the proposed land

through business activity.

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PROJECT OVERVIEW

The subject of the project is a 10.3 acre tract of land located at 4202 78th St, Lubbock, 79423. It is one of a few undeveloped lands in this part of town because it was used as an unlicensed landfill, and is considered a Brownfield site, which needs to be remediated. Also, 30% of the land is in the 100 and 500 year flood zone, which can be reclaimed using a cut and fill procedure.

Our project's purpose is to decide the highest and best use of this land by using a feasibility analysis.

The following is the general information about the subject property:

Land InformationOwner ID O0130501Owner Name: INCE MARK E & SCOTT W

Property Address 4202 78TH StreetLubbock, TX 79423

Land Area 10.3 Acres

Legal Description BLK E2 SEC 11 AB 11 TR CQ AC: 10.3058

Assessed Value $22,446Source: lubbockcad.org

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ASSUMPTIONS FOR THE SUBJECT

Subject's listed price is $250,000 The estimated cost for remediating the site today is $2,000,000 A portion of the tract (1.78 acres or 77,395 SF) is within the 100 and 500 year flood

zone The buildable area of the land is about 7 acres Operating expense (OE) is 30% of the Effective Gross Income in the first year Loan-to-value ratio: 80% Construction loan: 6% , interest only, 1 year period Permanent loan: 4.5%, 20-year term The annual property value growth rate: 1% The holding period: 1 year Required rate of return on the investment: 15%

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MARKET RESEARCH

Potential Renters

The land is located in South Outer Lubbock subdivision. Although the land is within the 79423 zip code area, it is adjacent to the boundaries of zip code 79424 and zip code 79413. The followings is some important information for the demographic around the subject:

Age 1 mi 3mi StateLargest age range 20s - 30sPopulation 11,786 105,731Number of Households 5,276 43,623Average Household size 2.2 2.4Average Income $62,47

3$50,005

% of renters 29% 37% 37%Source: costar.com and city-data.com

The population density in this area is low (522 people/ square mile). Most people are employed in the private companies with the five highest areas of employment:

Architecture and engineering occupations Legal occupations Law enforcement workers including supervisors Health diagnosing and treating practitioners and other technical occupations: Management occupations

From the data above, we can see that majority of people in this area are young working people with above-average incomes. Those people are considered potential renters of our future investment property.

Supply/Demand

From Costar, we found that there are 19 multi-family apartments within 1 mile radius around the subject. Most of these apartments categorized in Class C, Garden type apartments and most of them were built in the 1970s and 1980s. The vacancy rates are decreasing year over year, which is a positive indicator that the demand for rental properties is increasing.1

1 See Exhibit A of the appendix

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Rent Levels

From the October 2014 Lubbock Apartment Statistics, we found that the average rental rates for the apartments built since 2010s is $1.05 and $0.906 for one bedroom and two bedroom respectively. However, we adjusted these rates with the rental growth rate of 1.9%, which is based on 2012 Market Report for Lubbock.

Average rent/SF Adjusted Rent Vacancy RatesOne Bedroom $1.050/SF $1.13/SF 99.3%Two Bedroom $0.906/SF $0.98/SF 99.2%

Source: Lubbock Apartment Statistic-October 2014

The table below is a comparison between our asking rents/SF with other comparables' asking rents/SF

COMPARABLE SUBJECT's AVERAGE ASKING RENT/ SFT

1/1.0 2/2.0 Year BuiltWyndham $1.00 $0.97 1998Dakota $1.16 $0.98 2004Tuscany $1.08 $0.87 2012

Subject $1.13 $0.98  

Vacancy Rates

According to the 2014 Lubbock Apartments Statistic, general vacancy rate for One Bedroom Unit is 99.3% and for Two Bedroom Unit is 99.2. However, the average vacancy rate we researched on Costar for the apartments within 1 mile from the subject is about 5%. Therefore, we think 5% would be an appropriate number to use when estimating the vacancy level for our proposal of multi-apartment.

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SITE AND LOCATION ANALYSIS

There are attractions around the subject that we think would make our suggestion to build an apartment on the land more appropriate:

o There is a lake located to the east of the land, which is an attractive factor to our future residents

o There are many supermarkets within 1 mile from the subject such as Wal-Mart, United Supermarket, Market Street Supermarket, Sprout Farmers Supermarket, etc., which make living here more convenient

o Located to the south of the land are shopping centers such as the group of King Gate Centers, Village Center, Red Mango, etc...

o The site where the subject is located is a low population density area. It is occupied by high-end homes and high-income single families. Moreover, there are many lakes within 1 mile of the site, which make a proposal of apartment to be built on this site more desirable

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RECOMMENDATION

We recommend to construct three storied (Class C, Average) multi-family apartment buildings. There will be 5 one bedroom units and 3 two bedroom units on each floor. The leasable area consists of 80% gross building area (GBA), leaving the rest of the GBA for common places such as stairs, offices, and lobbies, etc.

We choose to have 62.5% of our units are 1 bedroom and 37.5% of our units are 2 bedrooms because the average size of households in this area is low, about 2.4%. Also, most of the apartments nearby the subject are providing mostly 1 and 2 bedrooms units, with the vacancy rates from these units are 0%.

For the parking, we designed to build 328 spaces for residents parking. It is based on the general requirement that 1.5 parking spaces per one bedroom unit and 2 parking spaces per two bedroom unit. However, 328 spaces are expected to be available for 90% of our residents. The rest of the buildable area will be used for landscaping and building facilities for leisure and recreation.

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The table below contains estimated costs for constructing and acquiring the project:

CONSTRUCTION PROPOSAL2

Multi-Family Apartments

Site Area 10.3 AcresConstruction Type Class C, Average Number of Stories 3Number of Buildings 9Parking 328 spaces

Acres SF

Buildable Area 7.21 304,

920 30% of Site

Gross Building Area (GBA) 237,

161

Gross Leasable Area (GLA) 4.45 189,

729 80% of GBA

Parking/Common Area 2.26 98,4

00  

Unit MixNumber of Unit/Floor Total Number SF

One Bedroom/One Bathroom Unit 5 135 782Two Bedroom/Two Bathroom Unit 3 81 1039Total Units 8 216  

2 See Exhibit C in the Appendix.

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DEVELOPMENT COSTS        

CONSTRUCTION COSTSClass C, Average Building Cost Appliance Cost Site Prep. Parking

$73.64 $1,740/unit $0.24 $1080/space

$17,464,536 $375,840 $73,181 $354,240

Total Costs $18,267,797

Flood Zone Preparation Cost        Cost per cubic foot to fill $0.53 Total cubic foot to fill 116,093 CFTotal filling cost $61,529 Cost per square foot to prep $0.24 Total square feet to prep 77,395 SF

Total cost to prep $18,575

Total Cost to prep Flood Zone       $80,104

TOTAL CONSTRUCTION COSTS       $18,347,901

Land Purchase $250,000 Remediation $2,000,000

TOTAL PROJECT COST     $20,597,901          Construction Interest

$1,100,874 (6%, 1 year)

ACCQUISITION PRICE $21,698,775

DEBT SERVICE      LTV 80%Term 20 YearContract Rate (monthly) 4.50%Total Project Cost $20,597,901 Net Loan Proceeds $16,478,321

Initial Equity $4,119,580

Monthly payment $104,250

ANNUAL PAYMENT/DEBT SERVICE       $1,251,000

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FINANCIAL ANALYSIS

Firstly, we came up with the Potential Gross Income for our project, shown in the table below:

POTENTIAL GROSS INCOME CASH FLOW (PGI)     

1 Bed/1 Bath 2 Beds/2 BathNumber of Units 135 81Average SF/unit 782 1039Average Rent/SF 1.05 0.906Average Monthly Rent/Unit $902 $1,015 Average Yearly Rent $1,461,443 $986,522

Yearly Cash Flow From Total Units $2,447,965

Also, we estimated other incomes that we expect to have when we open the apartments, such as: parking fee, deposit, vending machines, and pet fee. The estimated total amount of these incomes is about $91,368 per year.

ANNUAL MISCELLANEOUS INCOME PER UNIT 

Parking $120Deposit Fee $100Vending $100Pet Fee $150Total Income per unit $470

Total MI Income by 90% units occupied $91,368

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After creating the estimation of all costs and sources of incomes, we generated a Net Operating Income Analysis and a Pro Forma Before Tax Cash Flow as the following:

NET OPERATING INCOME ANALYSIS (NOI)

     PGI $2,447,965-VC ($122,398) 5% of PGI+MI $91,368EGI $2,416,935-OE ($725,081) 30% of EGI-CAPX $0NOI $1,691,855  

PRO FORMA BEFORE TAX CASH FLOW

               Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

NOI $1,691,855 $1,724,000 $1,756,756 $1,790,134 $1,824,147 $1,858,805Debt Service $1,251,000 $1,251,000 $1,251,000 $1,251,000 $1,251,000 $1,251,000 BTCF $440,855 $473,000 $505,756 $539,134 $573,147 $607,805

The annual growth rate for the rental rate will be 1.9%, thus NOI will increase at the same rate for the next 6 year period accordingly. In order to evaluate whether this project is a good investment or not, we will have to look at some main financial ratios such as profitability ratios, multipliers, financial risk ratios, and NPV& IRR. Please check the following pages for the financial feasibility analysis's ratios.

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Profitability Ratios

CAPITALIZATION RATE NOI/ Acquisition priceSubject 7.8%Comparable Properties 8.3%

79423 Market Cap Rate 7.6%

The cap rate of the subject is 7.8%, which is a little lower than its most comparable properties (Wyndham, Dakota Arms, Tuscany Apartments). It can be explained by the high acquisition price due to extra costs from land remediation and filling and preparation of flood zone area. These costs are unfavorable factors to developers, that is why the land's selling price is only $250,000 while its value estimated from comparable sales is about $1,058,094.3

However, because the overall market cap rate in the area where the subject located is 7.6%, its cap rate of 7.8% is still a good indicator regarding the potential return on our investment in this area. This can be proven by looking at the Equity Dividend Rate (EDR), which is also known as 'Cash on Cash.' It is one of the most important ratios an investor will look at because it measures the return on actual cash invested in an income-producing property. The subject's EDR is 11%, which is an attractive number of returns as we can see from the table.

EQUITY DIVIDEND RATE (EDR) Before Tax Cash Flow/ Equity InvestmentEquity Investment $4,119,580BTCF $440,855

EDR 11%

Multipliers

EFFECTIVE GROSS INCOME MULTIPLIER (EGIM) Acquisition Price/Effective Gross IncomeAcquisition Price $21,698,775EGI $2,416,935

EGIM 8.98

EGIM of the subject property is 8.98; the acquisition price of this investment is 8.98 times the gross income produced by this property. We believe 8.98 is a good number.

3 See Exhibit B for Land Value Assessment

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Financial Risk Ratios

OPERATING EXPENSE RATIO (OER) Operating Expense/Effective Gross IncomeOE $725,081EGI $2,416,935

OER 30%

We assumed Operating Expenses will be 30% of EGI because the apartment is newly built, thus requires less operating expenses in the first 5 years period.

DEBT YIELD RATIO (EYR) NOI/ Loan AmountNOI $1,691,855Loan Amount $16,478,321

DYR 10%

Debt Yield Ratio means the lender would enjoy a 10% cash-on-cash return on its money if we were foreclosed on the property on day one of the process. A typical lender would look for a minimum of 8%-10%, thus 10% is a positive number for lenders since it makes the loan less risky by higher return.

DEBT COVERAGE RATIO (DCR)Net Operating Income/Debt

Service1st Year NOI $1,691,855Debt Service $1,251,000

DCR 1.35

ECR of less than 1 means the income that property generates is not enough to cover the mortgage payments and its operating expenses. Therefore, ERD of more than 1 is a minimum requirement for an income-producing property. Most commercial banks require the ratio of 1.15 to 1.35 to ensure cash flow sufficient to cover loans payment. Since our subject's DCR is 1.35, its capacity of debt coverage is good.

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NPV/ IRR Analysis

SALE PRICE AT THE END OF THE HOLDING PERIOD

6th year NOI/ Capitalization Rate

6th Year NOI $1,858,805Capitalization Rate 7.8%

Sale Price $23,839,981

BEFORE-TAX EQUITY REVERSION (BTER)

Sale Price(SP)$23,839,98

1Selling Expense $1,430,399

Net Sale Proceeds (NSP)$22,409,58

2Remaining Mortgage Balance (RMB) $13,627,670

Before-tax equity reversion (BTER) $8,781,912

NPV/IRR

Year Annual BTCF BTER Total CF PV @ 15%0 ($4,119,580) ($4,119,580) ($4,119,580) 1 $440,855 $440,855 $383,352 2 $473,000 $473,000 $357,656 3 $505,756 $505,756 $332,542

4 $539,134 $539,134 $308,252

5 $573,147 $8,781,912 $9,355,059 $4,651,118 Total Present Value of

Levered Cash Flows   $6,032,920

NPV $1,913,340

IRR 26%

The project generates a positive NPV, which means it is a profitable investment, and it has a high internal rate of return of 26%. In general, although the project does not have a highly attractive cap rate in the first year, after the 5-year holding period, it is projected to generate a high return on the investment.

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CONCLUSION

In conclusion, we have decided that converting the land into a complex of income-producing multi-family apartments. The 9 three-story buildings which consist of 5 one-bedroom units and 3 two-bedroom units on each floor would be enough to generate a return as high as 26% after 5 years. The underlying reasons for our proposal are based on market research and financial feasibility research.

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APPENDIX

Exhibit A -Rental rates trend for apartments located within 1 mile radius from the subject in 5 years

Exhibit B - Land Value Assessment

VALUE OF THE LAND

Sale Comparables Location Total Land

(Acre) Price/AcrePlus/Minus

AcreAcre

Adjustment PriceFlood Zone

Flood Zone Adjustment Final Value

Comp 1 FM 1585 Indiana Ave 14.14 $115,417 $4 $382,400 $1,539,846 no $80,105 $1,237,551

Comp 2 1715 90th St 7.5 $53,333 $3 $278,833 $400,000 no $80,105 $758,938

Comp 3 3402 114th St 5 $130,000 $5 $527,791 $650,000 yes $0 $1,177,791

Subject 10

Estimate Value of Subject $1,058,094

Average Price/Acre $99,583

Exhibit C -Average construction costs (source: Marshall Value Service)

CLASS CONDITION COST ($/SF) APPLIANCE COSTEARTH FILL

COST PARKING COST

C Excellent $134.17 $4,425 $0.53 / CF $1,080 / space

C Good $99.61 $2,825 $0.53 / CF $1,080 / space

C Average $73.64 $1,740 $0.53 / CF $1,080 / space

C Fair $63.98 $1,030 $0.53 / CF $1,080 / space

C Low cost $54.44 N/A $0.53 / CF $1,080 / space

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