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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  
ANet Development Value  
1Estimated Rental Value (ERV)  
 Net lettable area x rental rate per annum________ 
2Capitalised @____% YP in perpetuity  
  ________ 
3Less disposal cos t@ 2%________ 
 Net Development Value (NDV) ________
    
BLand Costs  
1Land Price________ 
2Stamp duty@3%________ 
3Legal fees on acquisition @0.75%________ 
   ________
    
CBuilding Cost  
1Construction cost ________
    
DProfessional Fees  
1All in fees @ 10% ________
    
EOther Costs  
1Site investigation10,000.00 
2Authorities fees20,000.00 
   30,000.00
    
FFunding Fees  
1Bank's arrangement fees10,000.00 
2Developer's legal fees10,000.00 
   20,000.00
    
GFinance Costs  
1Interest on Land Costs over the whole period @ ___%p.a.________ 
2Interest on Building Costs, Professional fees, Other costs and funding fees over half (design+construction) period @ ___ %p.a.________ 
3Interest on Building Costs, Professional fees, Other costs and funding fees over holding period @ ____ %p.a.________ 
   ________
    
HLetting and Sale costs  
 Developer's sale f..s@1.5% of NDV________ 
   ________
    
ITotal Development Cost (TDC) ________
    
JDeveloper's Profit  
 Net Development Value________ 
 Less Total Development Costs________ 
   ________
    
 Developer profit as % of TDC ________

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