You have become aware of a 1 acre outparcel, located adjacent to a major strip shopping center,

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Question:

You have become aware of a 1 acre outparcel, located adjacent to a major strip shopping center, which you have placed under contract. During your feasibility period, you have entered into a letter of intent with a major bank, who will lease the entire 10,000 square foot building (along with the surface parking and drive- through), which you have designed for the site. The key assumptions for your deal are as follows:

Assumptions:

Land Purchase Price: $1,000,000
Estimated Building Cost: $2,500,000
Estimated Project Soft Cost: $1,500,000
Annual Triple Net (tenant pays all annual operating expenses) Rent: $400,000 Cap Rates for these types of buildings are typically 7%.

You have invested $75,000 to-date in preliminary plans, negotiating the LOI, obtaining approval for a drive- through, etc. and are approaching the end of the feasibility period, at which point you will need to post an additional $100,000 as a non-refundable deposit with the land seller. You will then need to spend an additional $250,000 to complete your lease with the bank, complete the plans and bid the construction work, obtain permits and construction financing, etc.

Scenario 1:

You are the project manager for a mid-sized developer who would typically sell this type of asset upon completion (a merchant builder). The construction estimate was developed by your in-house construction group and the bank has done 3 previous lease deals with your firm.

Questions:

What are the risks and opportunities presented by the proposed development?

One of your company owners makes you aware of a potential condemnation by the municipality of a portion of the site (where the drive-through is located) for the widening of the street. You check it out and find that the potential (not defined or detailed) street expansion is tied to a bond deal, which is subject to a voter referendum during the next election. How does this impact your recommendation to proceed?