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		________