Question
Cap Company would also like to explore another option to redevelop the J mall into an office building. Currently, the book value of this J
Cap Company would also like to explore another option to redevelop the J mall into an office building. Currently, the book value of this J mall with the land is S$ 1.7 billion and it will transfer to a project company for redevelopment. Stamp duty and legal fees are assumed for internal transfer.
Under the URA master plan, the land has a plot ratio of 4.2. The architect proposes a green office building and Net Lettable Area (NLA) can achieve 90% of Gross Floor Area (GFA) through efficient space planning. Market research indicates that net rent after the holding period of 24 months is estimated to be S$ 120/m2 per month for comparable office buildings in that area.
A bank has agreed to provide a short-term financing scheme at an interest rate of 8% p.a. The project team has also advised the construction cost to be S$ 3,500 per m2 on GFA. The development schedule for the design and construction stages is six months and 36 months respectively. Based on the market, the capitalization rate of a commercial building is 5%.
(a) Analyze the data and apply the Profit Evaluation Analysis (risk/return) to determine the profit margin of the project. (You are to use Appendix 1 for the computation)
(b) Identify with explanation the potential issues of overestimating the profit while using this method to compute the project return.
Appendix 1 | |||
Cap Company - Project Evaluation of Profit(risk/return) Analysis | |||
A | Net Development Value | ||
1 | Estimated Rental Value (ERV) | ||
Net lettable area x rental rate per annum | ________ | ||
2 | Capitalised @____% YP in perpetuity | ||
________ | |||
3 | Less disposal cos t@ 2% | ________ | |
Net Development Value (NDV) | ________ | ||
B | Land Costs | ||
1 | Land Price | ________ | |
2 | Stamp duty@3% | ________ | |
3 | Legal fees on acquisition @0.75% | ________ | |
________ | |||
C | Building Cost | ||
1 | Construction cost | ________ | |
D | Professional Fees | ||
1 | All in fees @ 10% | ________ | |
E | Other Costs | ||
1 | Site investigation | 10,000.00 | |
2 | Authorities fees | 20,000.00 | |
30,000.00 | |||
F | Funding Fees | ||
1 | Bank's arrangement fees | 10,000.00 | |
2 | Developer's legal fees | 10,000.00 | |
20,000.00 | |||
G | Finance Costs | ||
1 | Interest on Land Costs over the whole period @ ___%p.a. | ________ | |
2 | Interest on Building Costs, Professional fees, Other costs and funding fees over half (design+construction) period @ ___ %p.a. | ________ | |
3 | Interest on Building Costs, Professional fees, Other costs and funding fees over holding period @ ____ %p.a. | ________ | |
________ | |||
H | Letting and Sale costs | ||
Developer's sale f..s@1.5% of NDV | ________ | ||
________ | |||
I | Total Development Cost (TDC) | ________ | |
J | Developer's Profit | ||
Net Development Value | ________ | ||
Less Total Development Costs | ________ | ||
________ | |||
Developer profit as % of TDC | ________ |
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