As a development manager for a local real estate firm, you have been selected as a development partner
by a local family who owns a parcel of land. The parcel is detailed on the attached site plan. It is currently
unencumbered by debt and is occupied by an auto dealership and a variety of other uses whose tenancies
are all scheduled to end on January 1st, 2021. The family is willing to “contribute the land” to a development
joint venture but has no capability to incur additional out-of-pocket expenses to pursue the entitlement, financing, development, and stabilization of the potential project. In fact they will require priority payments of
$20,000 per month commencing in January 2021 as part of any venture deal.
Your firm has undertaken the feasibility work, but it is not financially capable of proceeding with the project
without a financial partner. Your assignment is to:
1) Prepare a development program summary, development budget and proforma for the project,
based on facts provided herein.
2) Propose a structure (and rationale) for a joint venture indicating how project ownership will be
shared, capital compensated, and cash flow and residual proceeds split between the land owner,
financial partner, and the developer (you).
3) An estimate of the required equity capital should be included.
4) Prepare a summary which indicates the returns that each partner could anticipate based upon
your proforma and proposed venture structure. You should assume a sale of the project on
January 1, 2031 at the cap rates provided.
Your hard working development analysts have put together a variety of facts associated with the project,
the local market, and the political and community environment (Schedule 1 attached). Based on your experience you can rely on these facts as being certain, therefore you should spend none of your limited
presentation space arguing to support these assumptions or arguing to substitute other assumptions.
You are free to make assumptions associated with any fact about what you have not been provided (Arlington County zoning and land use regulations are considered to be provided facts), so long as those assumptions are clearly identified.
I anticipate no more than 5 pages total including operating proformas.
Please note: The actual site in question has had a site plan approved, and the project
construction has recently been completed. That approved building program is not relevant (or
correct) with regards to this case. Assume the site has not been site planned and that its
condition is as described herein.
Finance 6240: Real Estate Development
Final Project
Land Area: 130,146 sq. ft.
Hard Costs:
Commercial $165 per gross sq.ft.
(includes tenant fit-out allowance but excludes all underground parking)
Residential $155 per gross sq. ft. (excludes all underground parking costs)
Parking The excavation and construction of underground parking will cost $60 per sq. ft. for the first
level, $85 per sq. ft. for the second level, $95 per sq. ft for the third level and is judged to
be non-economically feasible below 3 levels due to rock.
Soft Costs:
Includes all architectural, fees, construction period interest etc. and will be equal to 40% of the
project hard costs.
Environmental Remediation:
It is estimated that premium soil disposal costs will need to be paid in connection with an underground storage tank located on the northwestern portion of the site. The contamination is limited to a 20,000 sq.ft. portion of the site and premium excavation costs will be $300,000 for the first underground level, $500,000 for
the second underground level and $700,000 for the third underground level (in addition to the ordinary
costs of the garage in this area) . The remediation will only need to be undertaken to the extent the area in
question is excavated.
In order to achieve the maximum density permitted by the General Land Use Plan, the County and the
community would like to see a mix of residential and commercial uses on the site. A hotel use will not be
supported. In addition, you should assume that there is no retail required or desired on the ground floor of
the project. The developer must build at least 2 sq. ft. of residential for every sq. ft. of commercial placed on
the site.
Market conditions are expected to be favorable for commercial buildings with office rents averaging $30 per
sq. ft. (NNN) along with parking as required per code at no additional cost to the tenant. Your prospective
tenant (assume a single office tenant) will require 6 months “free rent” after the 18 month construction period in order to complete their build out and move in. The lease rate will escalate annually at 1% per year
over its 10 year term.
Residential rents can be expected to average $2.50 per sq. ft. (commencing 24 months after construction
starts) and operating expenses will be $8,000 per unit per year. You can assume 50% vacancy in the first
operating year to account for the residential lease up period.
Additional Incentives/ Proffers:
The County and community would be favorably inclined to add up to 50,000 sq. ft. of residential density to
any otherwise approvable plan provided ½ of that additional density is committed to affordable housing
(rents of $1.20 per sq. ft.). If you elect either bonus option, you should assume that the imbalance in the
ratio of commercial and residential (2/3 and 1/3) is acceptable. The community would also support up to a
10% increase in commercial density if the commercial building can be made “LEEDS Silver Certified”.
Finance 6240: Real Estate Development
Final Project
Your engineers estimate that obtaining Silver LEEDS certification will add 10% to the hard cost of the office
space and will have no impact on rental rates for the commercial space. Once again, if you choose this option an imbalance of the 2/3-1/3 ratio of residential to office will be permitted.
Due to a previous bad experience, your land owner has no interest whatsoever in being involved in an effort to market the residential component of the project as condominiums.
Values and Interest Rates:
Commercial capitalization rates are expected to be 6% and residential rates 5% over the entire term of the
investment. Consistent with this expe
