You are considering buying a site in Brooklyn for development. It is listed at $10M. Your as-of-right development options and the respective construction costs/sf are as follows:

Type                      Developable SF                               Constr. Costs/devel. SF

Office                        100,000                                                    $400

Boutique hotel          100,000                                                    $500

Multifamily                 120,000 (note housing bonus)              $350

You research the markets for each of the allowable property types and get the following metrics:

Type                            NOI/devel. SF                Return Hurdle                              Expected Growth Rate

Office                                  $30                                8%                                                          2%

Boutique hotel                   $40                                10%                                                         3%

Multifamily                          $20                                7%                                                           3%

a. Which choice of property type will give you the highest risk-adjusted investment return?

b.  If you get into a bidding war for the site, what is the maximum amount you would be willing to pay for it and still make your return hurdle?

c.  If you pay the listed price for the land, what will be the yield on your project?

d.  Is there another property type which might also be satisfactory to you at the listed land price and what would its yield be?

e.  How does this compare with your choice in (a) and explain your choice.

Answer rating: 100% (QA)

Solution a To determine the riskadjusted investment return for each property type we need to calculate the levered IRR Internal Rate of Return for each option assuming a 70 LTV LoantoValue ratio and a ... View the full answer