Slide presentation from Embedded Workshop #12 at the Canadian Institute of Planning's INFUSE 2013 conference in Vancouver. The workshop discussed the market and financial basis of planning and urban design.
Namrata 7 Plumeria Drive Pimpri Chinchwad Pune Brochure.pdf
Embedded workshop 12 follow the money infuse 2013
1. Follow the Money
The Key to Developing Effective Policy
David Bell – Colliers International Consulting
Justin Barer – GP Rollo & Associates
David Fitzpatrick - DIALOG
8. 1.2 Similar Goals, Different Language
Introduction1
Insert Word Bubble from David Bell
Multidisciplinary TOD language is as
complex as the development type.
9. 1.2 Similar Goals, Different Language – Multi-Disciplinary TOD Language
Introduction1
Insert Word Bubble from David Bell
Real Estate Developers Policy Planners
10.
11. Market Analysis Overview2
How Can An Understanding of Market Analysis Inform Better Planning Policies
and Yield Better Development Results?
11
12. 2.1 What is Market Analysis?
2.2 Why Do Market Analysis?
2.3 Who Uses Market Analysis?
2.4 How can Market Analysis Inform the Development Process?
2.5 How can Market Analysis Inform the Planning Process?
2.6 Key Drivers of Effective Market Analysis
2.7 Market Analysis in Practice – Canadian Examples & Takeaway Lessons
12
Market Analysis Overview2
13. 2.1 What is Market Analysis? (Real Estate / Land Use)
− “Market” has many meanings:
• Marketing: Sellers = Client, Buyers = Market
• Business: Various ways of grouping customers (i.e.Geographic, Demographic,
Product type)
• Economics: Supply and Demand, Buyers & Sellers
− Our Focus: Planning – Analysis of Markets for Land Use & related
Product Type (Office, Industrial, Residential, Retail)
13
Market Analysis Overview2
14. 2.1 What is Market Analysis? (Real Estate / Land Use)
− Market Intelligence, not just Sharing of Collected Data!
14
Market Analysis Overview2
15. 2.1 What is Market Analysis? (Real Estate / Land Use)
− Market Analysis should be an Ongoing Process, Not a One-Time
Snapshot!: Market is a moving target, constantly evolving and shifting. Market
analysis can provide public and private sector decision makers with vital
information at all stages of the planning and development process.
?!
15
Stable!
Growth!
Market Analysis Overview2
16. 2.2 Why do Market Analysis?
− Objectives of Market Analysis:
• Preliminary project planning – e.g. a developer’s go/no go decision!
• Input for public sector planning and economic development initiatives.
• Build community support for private development proposals.
• Funding: equity investors, debt financing, or government grants
• Fine-tune proposed land use mix and product type
• Market Analysis Outputs = Financial Analysis Assumptions
− Our Focus: Planning Policy– Markets for Major Land Uses & Related
Product Types
16
Market Analysis Overview2
17. 2.2 Why do Market Analysis? (Real Estate / Land Use)
− Need to assess depth of market (demand) for each major land use under
consideration
− Can not discuss optimal land use mix without understanding support for each.
− A reversal of Ursus Wehrli’s approach to “Tidying Up Art” (TEDTalk)
17
Market Analysis Overview2
18. 2.2 Why Do Market Analysis?
Unlike (BC) voter participation rates, market
reviews can also be inspiring & invigorating.
Cue Urban Land Institute’s latest 2013 Survey
of Views on Housing, Transportation, and
Community:
− Generation Y (1979 to 1995) - 30% of survey
total – 80 million in U.S. population
− Generation X (1966 to 1978) – 23% of survey,
population of 50 million
− Baby Boomers (1947 to 1965) – 31% of survey,
75 million US population
− War Babies (1932 to 1946) – 12% of survey
− Silent Generation (1931 or earlier) – 3% of
survey, numbering 35 million with War Babies
18
Market Analysis Overview2
19. 2.2 Why Do Market Analysis?
Fun Highlights of ULI’s America in 2013 Survey:
− Gen Y: expected to have the most profound
impact on land use.
• 59% prefer diversity in housing choices; 62%
prefer developments that mix shopping, dining
and office space; 76% place high value on
community walkability
− Baby Boomers trending toward a clear break
from the past:
• 72% would choose a shorter commute and
smaller home over a longer commute/larger
home; 49% want to live near developments
offering shopping/dining/offices
− Generation X most likely to favour single-family
neighbourhoods:
• 92% commute by car; only 45% want public
transportation options, 54% willing to forego
larger home for shorter commute
19
Market Analysis Overview2
20. 2.2 Why Do Market Analysis?
Encouraging Facts – Shifts in Household Travel to Work Mode Share
− Metro Vancouver - 2001 Census: 72% of population chose “Car as driver” as
primary mode of travel to work. 2013 estimate: 68%.
− Over the same period, “Public transit” choice: 11% 16%.
20
Canada Line Growth
• Sep. 2009: 2.33 million
(28% of system-wide
volume)
• Dec. 2009: 2.87 million
(33% of system-wide)
• 2010 Olympics spike to
5.46 million/38%
• Dec. 2010: 3.06 million
(32% of system)
• Dec. 2011: 3.31 million
(34% of system)
Market Analysis Overview2
21. 2.2 Why Do Market Analysis?
− Tracking Progress Against established local & regional Benchmarks/Goals
− Eg. Metro Vancouver’s Regional Growth Strategy
• Population density targets by defined growth node
• Employment density targets
• Related land use/floor area targets
• Measuring gaps (actual vs target timing, and growth)
21
METRO VANCOUVER'S REGIONAL GROWTH STRATEGY
Dwelling Unit Growth Targets
Area / Hierarchy 2006 2041 2006-41 AAGR (#)
Metropolitan Core 88,000 119,000 31,000 886
Surrey Metro Centre 8,300 43,000 34,700 991
Regional City Centres 71,000 162,000 91,000 2,600
Municipal Town Centres 49,000 123,000 74,000 2,114
Urban Centres Total 216,300 447,000 230,700 6,591
Frequent Transit Development Areas 217,000 378,000 161,000 4,600
General Urban Area 382,000 561,000 179,000 5,114
Rural, Agricultural, Conservation., Rec. 33,000 36,000 3,000 86
Metro Vancouver Total (nearest 1,000) 848,000 1,422,000 574,000 16,400
Source: Metro Vancouver 2040 Shaping Our Future. Regional Growth Strategy Bylaw No. 1136, 2010
Colliers AAGR (Average Annual Growth Rate) Increase calculations.
METRO VANCOUVER'S REGIONAL GROWTH STRATEGY
Employment Growth Targets
Area / Hierarchy 2006 2041 2006-41 AAGR (#)
Metropolitan Core 256,000 313,000 57,000 1,629
Surrey Metro Centre 18,000 49,000 31,000 886
Regional City Centres 124,000 237,000 113,000 3,229
Municipal Town Centres 69,000 163,000 94,000 2,686
Urban Centres Total 467,000 762,000 295,000 8,429
Frequent Transit Development Areas 254,000 412,000 158,000 4,514
All Other Areas 437,000 579,000 142,000 4,057
Metro Vancouver Total (nearest 1,000) 1,158,000 1,753,000 595,000 17,000
Source: Metro Vancouver 2040 Shaping Our Future. Regional Growth Strategy Bylaw No. 1136, 2010
Colliers AAGR (Average Annual Growth Rate) Increase calculations.
Market Analysis Overview2
22. 2.3 Who Uses Market Analysis?
− The core user groups of real estate market analysis are:
1. Real Estate Developers
2. Government Officials (including municipal/regional planners)
3. Investors and Lenders
For CIP InFuse 2013 we are especially interested in the goals and interactions
of planners and developers. Why?
As David mentioned, there is immense, relatively untapped potential to
improve the quality of conversation between planners and developers.
Without healthy discussion of common goals, high likelihood of:
• Undue time delays
• Roadblocks/setbacks
• Compromised vision/results
22
Market Analysis Overview2
23. 2.3 Who Uses Market Analysis?
David already introduced the language used by Real Estate Developers and Policy
Planners in describing Transit-Oriented Development opportunities:
Real Estate Developers Policy Planners
23
Market Analysis Overview2
24. 2.3 Who Uses Market Analysis?
TOD language of:
Architects & Urban Designers Engineers
24
Market Analysis Overview2
25. 2.3 Who Uses Market Analysis?
TOD language/measures and goals of Transportation Authorities:
25
Market Analysis Overview2
26. 2.4 How Can Market Analysis Inform the Development Process?
− Critical step in predevelopment process; helps the developer:
• Determine suitability for development
• Nature and depth of demand by land use
• Existing & future potential competitive nodes + potential impacts
(e.g. retail impact analysis)
• Initial development concepts
• Market positioning (product pricing, sizing)
• Optimal project phasing – # of units or floor area per year
• Inputs for proforma cash flow analysis
26
Market Analysis Overview2
27. 2.5 How Can Market Analysis Inform the Planning Process?
− Municipal/regional housing demand and implications for growth
− Research for large scale redevelopment plans
− What is market supportable?
− Review rezoning applications
− Quantify demand for new TOD when new lines/stations are being planned
− Evaluate fiscal impacts to assist in the consideration of proposed major
projects or land use planning decisions
− Impacts of proposed major retail facilities
− Linking planning efforts to economic development objectives
27
Planning
Policy
Economic
Development
Market Analysis Overview2
28. 2.5 How Can Market Analysis Inform the Planning Process?
− Planning of Public space has a market story.
− Provision of quality public realm positive impact on rents, prices, demand
The most basic rationale for public space is an economic
one…According to this new paradigm for economic development,
value is attributed to quality of life and place as much or more
than land, labour and capital costs…
Cities and regions that compete with each other primarily on cost
are engaged in a losing game, since “beggar thy neighbour”
policies inevitably lead to a race to the bottom and
impoverishment of the very public realm and public services that
generate wealth.
- Ken Greenberg, “Walking Home”
28
Market Analysis Overview2
29. 2.6 Key Drivers of Effective Land Use Market Analysis
We will look briefly at the key factors and issues needed for consideration of each
of the following major land use markets.
Residential Office/Industrial Retail
− Special Mixed-Use Case Transit-Oriented Development (TOD)
− Case Study “Take-Aways”
29
Market Analysis Overview2
30. 2.6 Key Drivers of Effective Land Use Market Analysis
KEYS TO RESIDENTIAL MARKET ANALYSIS
− Demographic shifts and implications for housing demand by product type
− Employment opportunities & shifting travel preferences
− Competitive market areas widely spread across a given region
− Planning area/site specific level, need to understand:
• Historical market activity by product type
• Competitive areas/subdivisions/projects on prospective buyers’
“radar””
• Annual demand & servicing implications
• Fiscal implications of residential growth
30
Market Analysis Overview2
31. 2.6 Key Drivers of Effective Land Use Market Analysis
31
FISCAL IMPACT BY LAND USE TYPE
Land Use Municipality School District
Office parks + +
Industrial + +
High-rise/studio-1BR apts. + +
Garden condos (1-2 BR) + +
Open space + +
Retail facilities - +
Townhomes (2-3BR) - +
Expensive Single Family - +
Townhomes (2-3BR) - -
Inexpensive Single Family - -
Garden condos (3-4 BR) - -
Mobile homes - -Fiscally
Draining
Fiscally Positive
Market Analysis Overview2
32. 2.6 Key Drivers of Effective Land Use Market Analysis
KEYS TO OFFICE/INDUSTRIAL (i.e. EMPLOYMENT) MARKET ANALYSIS
− Market Area Definition more focused, less subjective than for Residential
− Geographic extent of market area depends on:
• Location of existing/emerging business clusters
• Access to regional transportation network
• Commuting distances from residential concentrations
• Proximity to supporting uses (i.e. educational institutions/training
facilities
• Jurisdictional boundaries
• Quality/appeal of commercial/recreational amenities
32
Market Analysis Overview2
33. 2.6 Key Drivers of Effective Land Use Market Analysis
KEYS TO OFFICE/INDUSTRIAL (i.e. EMPLOYMENT) MARKET ANALYSIS (Continued)
− Historical market supply and demand trends (e.g. market cycles mean
straight-line projections usually unreliable)
− Competitive cluster review (quality, user types, remaining capacity)
− Proposed site/area vs. competitive clusters – over time
− Demand a function of growth by industry sector
− Different sectors require more office floor area/land than others
− Per sq. ft. employee ratios decreasing over time
− Industrial demand more driven by corporate level changes in logistics and
industry-wide demand (regional, national, international)
− Surveys of major employers in region offer best possible information on
expansion/contraction and associated space needs but $$$
33
Market Analysis Overview2
34. 2.6 Key Drivers of Effective Land Use Market Analysis
KEYS TO RETAIL MARKET ANALYSIS
− Retail follows rooftops. (Residential #1 driver, with additional support from
employment uses, visitors, tourism)
− Accurate trade area delineation – What is the geographic area of influence,
from within which the majority of support (spending) will be drawn?
− Retail floor area needs for a given planning site/plan area a function of:
• Trade area population growth
• Annual spending by retail sector
• Trade area employment growth – mainly lunch/dinner/service impact
• Industry-specific sales productivity rates ($ per sq. ft. per year)
• Market + Physical Context is key – existing travel and shopping
patterns, ease of site access from residential concentrations
• Site Users not necessarily shoppers! (e.g. TOD – ridership does not
equal patronage, modest contribution)
34
Market Analysis Overview2
35. 35
There’s gold in the linking of modes
An alchemical brew for mixed nodes
Give people a choice
And they will rejoice
As it cleans up the build-up on roads
2.6 Key Drivers of Effective Market Analysis
Transit Oriented Development offers a
particularly potent mix of challenges
− Challenges of Mixed-Use + Functional Transit
Integration
− Growing body of knowledge and experience
in terms of:
• Time to implement
• Land use mix – land uses relating to
rapid transit stations?
• Parking needs – what is needed?
• Degree of optimal integration of
commercial uses
Market Analysis Overview2
36. 36
2.7 Market Analysis in Practice (TOD example)
The Plaza at New Westminster Station – Expo/Millenium Line (Metro
Vancouver)
− Transit-Oriented Development in New Westminster, BC:
Market Analysis Overview2
37. 37
2.7 Market Analysis in Practice (TOD example)
The Plaza at New Westminster Station
Market Analysis Overview2
38. 38
2.7 Market Analysis in Practice (TOD example)
The Plaza at New Westminster Station
Market Analysis Overview2
39. 39
2.7 Market Analysis in Practice (TOD example)
The Plaza at New Westminster Station
Market Analysis Overview2
40. 40
2.7 Market Analysis in Practice (TOD best illustrated by example)
The Plaza at New Westminster Station
− Major Project Takeaways (Architect/Developer perspective):
• Is fully integrated TOD – worth the time and effort? Perhaps Transit-
Adjacent/Related Development offer better cost-benefit ratio?
• Shared parking strategies to reduce parking need
• TODs still require parking as not all visitors will use transit!
• Leverage office vs. residential vs. retail patterns of use
• Parking maximums, not minimums – in mixed-use, urban, transit-
friendly locations, more appropriate
• E.g. City of Vancouver’s Transportation 2040’s policies on parking –
eliminate parking mins., explore district parking strategies
• Suggested reading: “The High Cost of Free Parking”
Market Analysis Overview2
41. 41
2.7 Market Analysis in Practice (TOD best illustrated by example)
The Plaza at New Westminster Station
− Major Project Takeaways (Architect/Developer perspective):
• Be flexible about intent vs. letter of the law.
• Less rigidity and more focus on people’s needs – POD
• Review antiquated bylaws
• Impact of time: market needs are always evolving, developer costs.
• Iterative aspect to design on longer term projects leasing
opportunities must be measured against vision impact physical design
Market Analysis Overview2
42. 42
2.7 Market Analysis in Practice
Anderson Station TOD – (City of Calgary)
− Existing station on Calgary’s South LRT line - subject of a TOD planning initiative
Market Analysis Overview2
43. 43
2.7 Market Analysis in Practice
Anderson Station TOD – (City of Calgary)
Downtown Calgary
Anderson
Station
Market Analysis Overview2
44. 44
2.7 Market Analysis in Practice
Anderson Station TOD – (City of Calgary)
− In evaluating retail potential, need to understand adjacencies + market
support implications
Market Analysis Overview2
45. 45
2.7 Market Analysis in Practice
Anderson Station TOD – (City of Calgary)
− Major Project Takeaways:
• Supply context: retail opportunity based on gaps in existing supply
• Primary drivers of need for additional on-site retail-commercial will be future
on-site residents and office workers
• Market demand insufficient to support a commercialized double-loaded
“high street” streetscape, but sufficient for a small node (50-100K sf)
with future expansion potential
• Must keep in mind future retail anchor need (i.e. supermarket site needs)
Market Analysis Overview2
46. 46
2.7 Market Analysis in Practice
New-Format Retail Design Feasibility Assessment
− Market Drivers: 10M + sf of retail projects in planning/development pipeline
− City’s Larger Planning Objective: Encourage better (more sustainable and
aesthetically pleasing) retail redevelopment forms throughout the city.
− Project Objective: Investigate feasibility of incorporating a range of
desirable urban design characteristics into all suburban retail developments:
• Higher ratio of structured vs. surface parking to enhance urban form
• Double-loaded Main Street orientation with street-fronting retail uses
• Urban street grid to facilitate future redevelopment potential
• Multi-level buildings with complementary uses above at-grade retail
Tools to be used:
1. Market Opportunity Analysis
2. Financial (Developer Proforma) Analysis
Market Analysis Overview2
47. 47
2.7 Market Analysis in Practice
New-Format Retail Design Feasibility Assessment (City of Calgary)
− Major Project Take-Aways:
• Anchor Go/No-Go Decision – without anchor(s), no project!
• Phasing Essential - match new supply to growing market demand
• Structured Parking Kills the Proforma!
• Planning for future redevelopment/intensification is a worthy goal -
supported by integration of a grid of streets
• Second level commercial space must have market support - most
suitable for professional service/office uses
Best Approach to Major/Regional-Serving Retail in Suburbs:
Hybrid Shopping Centre Model
Market Analysis Overview2
48. 48
2.7 Market Analysis in Practice
New-Format Retail Design Feasibility Assessment (City of Calgary)
− The Shops at Don Mills (formerly Don Mills Shopping Centre)
Market Analysis Overview2
As it was in 1983 2009
49. 3.1 What is Real Estate Economic Analysis?
A means of assessing financial characteristics of development or investment
• DEVELOPMENT:
• Buy, build, sell
• Residential subdivision, multi-family, condo project, some mixed-use (strata
commercial + residential), some pure commercial.
• INVESTMENT:
• Buy, build, hold
• Rental apartments, most commercial buildings, retail developments, multi-tenant
industrial buildings, marinas…
• Land Value (“residual land value analysis”)
Financial Analysis Overview3
50. 3.1 What is Real Estate Economic Analysis?
Financial Analysis Overview3
51. 3.2 What does this have to do with Planning?
• Developing land use policy that motivates private sector to create quality communities
• Engaging with developers on even playing field
• What motivates them? Marketability and profitability.
• Understanding highest and best use, weighing against other considerations
Financial Analysis Overview3
52. 3.2 What does this have to do with Planning?
EXAMPLE #1 – Type, Density, Location of Land Uses
Financial Analysis Overview3
53. 3.2 What does this have to do with Planning?
EXAMPLE #1 – Type, Density, Location of Land Uses
Financial Analysis Overview3
54. 3.2 What does this have to do with Planning?
EXAMPLE #1 – Type, Density, Location of Land Uses
Financial Analysis Overview3
Given likely revenues, costs, financing and profit
requirements, are these uses & densities feasible?
55. 3.2 What does this have to do with Planning?
EXAMPLE #2 – Establishing Density Bonusing & Amenity Contribution Rates: How
Much can Developers Afford?
Financial Analysis Overview3
• Change in use or density can affect financial performance of a development.
Sample Density Bonus Calculation for Low-Rise Apartment
Scenario 1 Scenario 2
Development @ Base Density Development with bonus density
Site Size 43,560 sq.ft. 43,560 sq.ft.
FSR 1.3 1.3+0.1 bonus = 1.4
Gross Floorspace 56,628 60,984
Units (1,000 sq.ft. net) 48 52
Sales Revenue* $16,800,000 $18,200,000
Total Development Costs** $12,000,000 $13,000,000
Amenity Contribution $0 $250,000
Land Cost $3,000,000 $3,000,000
Developer Profit $1,800,000 $1,950,000
*Assume $350,000 per unit
**including marketing, DCCs, all hard and soft costs, interim financing, excluding land cost, total $250,000/unit
56. 3.2 What does this have to do with Planning?
EXAMPLE #2 – Establishing Density Bonusing & Amenity Contribution Rates: How
Much can Developers Afford?
Financial Analysis Overview3
• Change in use or density can affect financial performance of a development.
Pinpoint incremental value being created
Not left to guess what developer can afford.
57. 3.2 What does this have to do with Planning?
EXAMPLE #3 – What is Impact of Municipality Charges/Process on Development
Viability and End-User Affordability?
Financial Analysis Overview3
How are unit prices affected by changes in:
Planning and approvals times
Taxes during construction
Permit fees
DCCs
Parking Requirements
58. 3.2 What does this have to do with Planning?
EXAMPLE #3 – What is Impact of Municipality Charges/Process on Development
Viability and End-User Affordability?
Financial Analysis Overview3
A 50% reduction in… Results in…
Planning/approvals times 1% saving per townhouse &
apartment unit
Property taxes Negligible savings
Permits/Fees 0.3%+ saving per unit
DCCs 1% savings per unit
A 25% reduction in… Results in…
Parking requirements 0.6% savings for townhouse
w/surface parking
4.9% per unit savings for
apartment with UG parking
59. 3.2 What does this have to do with Planning?
EXAMPLE #3 – What is Impact of Municipality Charges/Process on Development
Viability and End-User Affordability?
Financial Analysis Overview3
• Taken together, savings can be significant.
• We can use tools of financial analysis to understand how our fees impact
development viability and income requirements.
o Also understand impacts on affordability from:
Amenity contributions
Secondary suite rental income
Increased density
Green building codes
LEED certification
Unified Building Code
60. 3.2 What does this have to do with Planning?
Other Examples –
Financial Analysis Overview3
• Distributing fees associated with new neighbourhood
development (e.g. green space levy)
• Municipal land disposition
61. 3.2 What does this have to do with Planning?
Other Examples –
Financial Analysis Overview3
Cost of Greenspace Levy by Dwelling Type per Unit
5 Different Methodologies Compared
Per Acre
Buildable Square
Feet
Per Unit
Population Based
(DCC method)
Manual Option
Single Family 1/4 acre lot $31,309 $22,848 $10,538 $14,641 $20,000
Single Family 375 sq. metre lot $12,523 $16,056 $10,538 $15,008 $20,000
Low Density Cluster Homes $15,654 $14,203 $10,538 $12,235 $16,000
Cluster Homes $11,385 $11,115 $10,538 $12,235 $16,000
Townhomes Low Density $9,277 $11,115 $10,538 $10,196 $9,900
Townhomes Medium Density $5,566 $9,263 $10,538 $10,196 $8,250
Apartment Low Density $3,296 $6,175 $10,538 $8,564 $7,500
Mixed-Use (Apartment, Commercial) $3,578 $6,175 $10,538 $8,564 $7,500
Source: GPRA
62. 3.2 What does this have to do with Planning?
Other Examples –
Financial Analysis Overview3
• Distributing fees associated with new neighbourhood
development (e.g. green space levy)
• Municipal land disposition
63. 3.2 What does this have to do with Planning?
Other Examples –
Financial Analysis Overview3
Will a developer do this?
NW Corner 100 St. & 100 Ave, Fort St. John BC
64. 3.3 Commonly Used Terms
Financial Analysis Overview3
• Hurdle Rate – minimum profit or yield that is needed to proceed with
development or property acquisition
• Present value – amount in today’s $$$
• Future Value – Total amount in the future
• Discount Rate – like a reverse interest rate
• Net Present Value (NPV) – PV revenues less PV costs
• Internal Rate of Return – rate of return at which NPV is zero. It is rate of
interest that makes sum of all cash flows zero. Useful to compare one
investment to another.
• Hard Costs – materials, excavation, construction
• Soft Costs – architects, lawyers, engineers, municipal fees
65. 3.4 Present Value Example
Financial Analysis Overview3
REVENUES RECEIVED
Year 0 Year 1 Year 2 Year 3
$0 $100 $200 $300
Convert to PV @ 8% Discount Rate
Year 0 Year 1 Year 2 Year 3
$100/1.08^1 $200/1.08^2 $300/1.08^3
Discounted Revenues
Year 0 Year 1 Year 2 Year 3
93$ 171$ 238$
We can sum discounted revenues to provide present value
$93
$171
$238
$502
$502 is the Present Value of $100 received in year 1
$200 received in year 2 and $300 received in year 3
66. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
Analysis Tools:
• Back of the Envelope or “Quick” Analysis
• Static Pro Forma Analysis
• Dynamic Analysis (discounted and non-discounted cash flow)
67. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
Back of Envelope for Townhouse Development
1.0 Assumptions
Site Area 43,560 sq.ft.
Units 18 per acre
Avg. Unit Size 1,450 sq.ft.
Land Cost $50,000 per unit
Construction Cost $175,000 per unit
Soft Cost 25% of land and hard costs
Unit sales prices $230 per sq.ft.
2.1 Project Costs
Land Cost $900,000
Construction Cost per unit $175,000
Total land & construction cost $3,150,000
Soft Cost $1,012,500
Total Project Cost $4,162,500
2.2 Sales Revenue
Price/sq.ft. $230
Avg. Unit Size 1,450
Price (per unit / total) $333,500 / $6,003,000
2.3 Profit
Profit $ (revenue less cost) $1,840,500
Profit % (of total costs) 44%
68. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
Analysis Tools:
• Back of the Envelope or “Quick” Analysis
• Static Pro Forma Analysis
• Dynamic Analysis (discounted and non-discounted cash flow)
69. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
Analysis Tools:
• Back of the Envelope or “Quick” Analysis
• Static Pro Forma Analysis
• Dynamic Analysis (discounted & non-discounted cash flow)
70. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
When to Use Which Tools?
Static Analysis
Short-term build and sell developments
Varying levels of complexity (back of envelope pro forma)
Measures viability by PROFIT
71. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
Static Analysis
Profit on total project cost (land + construction + soft costs)
$ profit = Net sale revenue less project cost
%profit = $ profit / total project cost
72. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
Static Analysis
Profit on Cost
Project Cost
Items
Amount
Land $100
Building $900
Total Cost $1,000
Net Income:
$100
Return to Cost:
Net Income / Cost
100/1,000
10%
73. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
Static Analysis
Profit on equity investment (project cost – financing)
$ profit = net sales revenue less total project cost
% profit = $ profit / equity investment
74. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
Static Analysis
Profit on Equity
Financing Amount
Equity $250
Mortgage $750
Total Cost $1,000
Mortgage Payment (25 yrs, 7%)
$63
Return to Equity
Cash flow / equity
$37 / $250
14.8%
Cash Flow Items Amount
Net Op. Income
(NOI)
$100
Less Mortgage $63
Cash Flow $37
75. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
Static Analysis
Profit on Cost vs. Profit on Equity
10% 14.8%
76. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
Measures viability by calculating NPV and IRR
Discounted and undiscounted cash flow analyses
Either can be done with constant dollars or current dollars
Constant $ - no accounting for inflation
Current $ - inflates revenues and costs over time
Dynamic Analysis
Long-term build and hold (phased developments) and build
and sell developments
Undiscounted cash flows can produce results
that overstate project viability
77. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
Dynamic Analysis
Income Producing Property (e.g. office)
78. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
Dynamic Analysis
Income Producing Property (e.g. office)
79. 3.5 Tools of Real Estate Financial Analysis
Financial Analysis Overview3
Dynamic Analysis
Income Producing Property (e.g. office)
80. 3.6 Take-Away Points
Financial Analysis Overview3
• Developers need to make a profit, but municipality can and should share in value
it creates through discretionary powers. Need to do financial analysis to know
what “fair share” is!
• Every planning decision has economic consequences and implications
• Densities & uses
• Ground floor commercial
• Second floor office space
• Underground parking requirements & parking ratios
• How fees are levied
• Economic analysis can help us develop well targeted and implementable policies,
and engage with development community more effectively
• Allows us to make highly informed trade-off choices
81. 4.1 Project Example: Tecumseh Hamlet Secondary Plan
− How does market and financial analysis get applied by planners?
− How do these issues connect with land use planning and design?
Market and Financial Analysis in Action4
Detroit
Windsor
Tecumseh
82. 1. Complete Community
2. Pedestrian Oriented Commercial Node
3. A Greater Mix of Housing Typologies
4. Positive Impact on Tecumseh and Windsor Region
Objectives:
Market Reality: Windsor’s economy is weak
Implication: a “buyers” market
a large development will have
external impacts
4.2 Balancing Objectives with Market, Financial, and Political Realities
Market and Financial Analysis in Action4
83. Objectives:
1. Complete Community
2. Pedestrian Oriented Commercial Node
3. A Greater Mix of Housing Typologies
4. Positive Impact on Tecumseh and Windsor Region
Financial Reality: Low rent and land values
Implication: Expensive designs will fail
4.2 Balancing Objectives with Market, Financial, and Political Realities
Market and Financial Analysis in Action4
84. 4.2 Balancing Objectives with Market, Financial, and Political Realities
Objectives:
1. Complete Community
2. Pedestrian Oriented Commercial Node
3. A Greater Mix of Housing Typologies
4. Positive Impact on Tecumseh and Windsor Region
Political Reality: Planning control is
geographically limited
Implication: Recognize that developers
have alternatives
Market and Financial Analysis in Action4
85. 4.3 Planning in Progress
Market and Financial Analysis in Action4
86. 4.4 Market Analysis
− How much commercial space will be supported
by new residential growth?
− At what size would the development begin to
have negative impacts on other areas of
Tecumseh?
Market and Financial Analysis in Action4
19,500 m2
Supportable
Retail Space
÷ by Sales
Performance
$69 Million
New Retail
Spending
6,875
Residents
x
=
$10,000
Retail Spending
per Resident
=
87. 4.4 Market Analysis – Tenant Identification
Market and Financial Analysis in Action4
grocery stores
3,500 m2
grocery
store
88. 4.4 Market Analysis – Tenant Identification
Market and Financial Analysis in Action4
pharmacies
1,800 m2
pharmacy
3,500 m2
grocery
store
89. 4.5 Site Programming
Market and Financial Analysis in Action4
3,500 m2
grocery
store
1,800 m2
pharmacy
5,000 m2
community centre
AnchorTenants
90. Market and Financial Analysis in Action4
4.5 Site Programming
−Anchors matter. Any retail development
over 3,000 m2 needs to be anchored.
−Anchors are beneficial in that they draw
visitors to a destination.
−Anchors pay little rent and often exert a
lot of influence over a development.
−The market and financial viability of a
project is dependent on having the right
type of anchors, and the right amount of
anchors.
101. CAC – What Happened?
Case Study Exercise5
• University determined that revenues from future LOC would allow Centre to
support bank loan: $12.2 million
• Fundraising + Capital Contributions + Loan = $34.2 million
• Total Cost w/interest: $65-70 million.
• Funding Gap: between $30-40 million
102. CAC – What Happened?
Case Study Exercise5
• Try to fill funding gap with residential
• Determined that could fit between 124,000 and 200,000 sq.ft. of residential
• Revenue potential of residential depends on strategy:
1. University Development Corporation
2. Hire Project Manager
3. “sell” land on prepaid lease to developer
Residential Revenue Potential
Develops Hires Project Prepaid Land
Amount of Residential On Own Manager Lease $'s Only
Low (124,000 sq.ft.) 19,057,372 15,760,106 8,388,600
Medium (162,000 sq.ft.) 25,339,108 20,852,012 11,153,670
High (200,000 sq.ft.) 31,934,931 26,198,513 14,056,994
103. CAC – What Happened?
Case Study Exercise5
• Recommendation: Development Corporation
• Even at highest density, still a funding gap.
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
Develop on Own Hire P. Manager Prepaid Land Lease
Low (124,000 sf)
Medium (162,000 sf)
High (200,000 sf)