Evaluate the potential of this area (real estate)

You have been approached by an investor/developer who wants to develop a neighborhood
shopping center project in Grand Prairie, Texas a suburb of Dallas that has a fairly strong market
with significant growth potential. The center would be anchored by a grocery store and would be
150,000 SF of leasable area. The price for the land he is looking at is $450,000 per acre but he is
willing to pay more if it’s a prime location. Along Interstate 30 close to the Grand Prairie
Entertainment District, there is 15.21 acres of land available, but the developer does not want to
buy any more land than necessary for the proposed shopping center. The zoning would allow
retail uses and the site must have open space (not counting parking area). The number of parking
spaces required will be based on the City of Grand Prairie zoning ordinance. Assume that each
parking space will require 300 SF of land including drive aisles and turning areas.
You are a consultant hired by the developer to evaluate the potential for this project. Calculate
how many acres the developer has to purchase for the site to meet the requirements for this
proposed 150,000 SF shopping center? Show how you calculated the site area. Construction
costs will be $150 per SF of building and Soft Costs or Indirect Costs will be $12.00 per SF of
building. Site Costs will be $8.50 per SF of the total site area.
Rents will be as follows and will all be triple net (NNN):
Anchor Tenant: 70,000 SF at $18 per SF
2 end cap tenants: 7,000 SF each at $33 per SF
Out Parcel: 5,000 SF at $35 per SF
Balance of leasable area average rent of $25.50 per SF
Itemize these rents in the Pro Forma.
Rents will escalate annually at a rate of 3%. Assume an overall vacancy rate in the first year of
25% and 5% for years 2 thru 10. The Operating Costs (property taxes, insurance, management,
maintenance, utilities, advertising, leasing commissions, etc.) covered by the developer will be
$2.50 per SF of building which will escalate annually at a rate of 2%.
For the construction and permanent financing, assume, the lender is requiring a Loan to Cost of
no more than 60% and a Debt Coverage Ratio of at least 1.8. The loan will be for 30 years with
an annual interest rate of 7%. Calculate the amount of the mortgage the lender will provide for
this project. How much equity will the developer have to contribute to the project? Be sure to
calculate the monthly loan payment and multiply by 12 when calculating the mortgage in your
pro forma.
Create a pro forma for this project that includes a baseline or income statement and a 10-year
before taxes cash flow analysis. Add a below the line row in the 10-year spread sheet for a
deduction for depreciation. This shopping center will go into service on July 1. You must show
the Cash Flow After Financing (CFAF) and the ROE for this project. This is a simplified pro
forma so there will be some line items in the model pro forma that you will not have to include in
your pro forma. This assignment includes all of the inputs you will need for your pro forma. The
question to you is whether a proposed development of the property would make physical and
economic sense. Your analysis should provide answers to the following questions:
1. Would you recommend the developer invest in this project? Why or why not?
2. Would you recommend purchasing the entire parcel if the seller is unwilling to sell a
partial tract?
3. Would you sale outparcel to offset the cost of the land? If you were to recommend
selling outparcels/padsites, which type of uses would you recommend? For example,
use the typical site requirements/layout from the hotel in your highest and best use
exercise as a test to determine feasibility.

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