Market and Project Assessment

Here at Tranquilium, one of our premier services is our Market & Project Assessment.

With our expertise in commercial real estate financial analysis, we can review potential investments in specific projects and/or markets and provide a go-or no-go conclusion.

Looking at one example, our rent & construction feasibility and capital stack analysis can give an initial back of the envelope evaluation in determining how viable a certain deal may be. The analysis looks at reconciling a deal’s potential sources of capital with rent and construction cost assumptions.

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Feasibility

Assumptions and Inputs

For example, if looking at the feasibility of a multifamily property here are some of the important inputs we utilize:

• Return on Cost (Yield): vital to determine maximum construction cost and minimum feasible rent. We input based upon a market average investor defined rate.
• Stabilized Vacancy: To derive stabilized EBITDAR
• Soft/Hard/Land Cost: Indirect and direct costs to purchase the property, and cost to buy the land itself; typically, in per square foot (PSF) terms.
• Number of Units
• Average Unit Size (PSF)
• Operating Expenses Per Unit: Per unit costs to operate the building
• Building Efficiency: Percent of the total building area that is rentable
• Then if Affordable considering the affordable rent.
• AMI: Area Median Income, used to determine affordable rent and based on households of 3 members, ie. rent for 3 member households making 60% of AMI assuming 40% of income can be applied to rent can not exceed .

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Feasibility

Rent & Construction Cost

In the simplest terms, the rent & construction cost feasibility analysis takes two approaches to determine the viability of a project.

• The first approach is determining feasibility rent from project costs
• In this scenario, rents need to be $3,405 to be feasible based on estimated $303 PSF of assumed total construction costs
• The second is determining the maximum construction costs given a certain rent
• In this scenario average affordable rent, 60% of Ann Arbor AMI for 3 member households, allocating 40% of income to rent equates to implies that total construction cost cannot exceed $128 PSF

In this example, if we used market rate construction costs and affordable rent, the project would be unfeasible by approximately $50.8MM

Capital Stack Analysis

• To begin the capital stack analysis, we start with the calculated costs from the previous analysis. In this case starting with maximum construction cost based upon the affordable rent analysis.
• Based on the current cost of financing, projected return on equity, LTC, return on cost from the feasibility analysis, etc., we calculate if such a capital stack can support the project numbers determined in the rent & construction feasibility analysis.
• The calculated implied construction cost based on the required return of the capital stack and the feasibility analysis return on cost is then compared to the calculated construction cost from either of the two approaches of the feasibility analysis used as the basis for the capital stack to see if the stack can support such a project.
• The Feasibility is negative because the blended cost of capital is greater than the estimated return on cost. This would be the annual negative shortfall until the cost of capital is reduced equal to the return on cost projection. Or the Return on Cost would need to be increased as an assumption, thereby increasing the minimum Feasible rent and or reducing the maximum construction cost.

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Conclusion

Tranquilum can work with you to calculate the impacts of key assumptions. Calculating a variety of scenarios to determine where and or how a project can be developed feasibly and meet target affordable housing goals.