You are considering developing a new apartment building with 300 units of 1,000 rentable square feet each. The expected rent is $2.00 per rented sf. per month with a vacancy of 5% and 0.5% bad debt allowance. (Hint: Build a spreadsheet to answer these questions.)

1. What is the expected potential gross income (or gross potential revenue)?
2. What is the expected effective gross income?
3. The operating expenses are projected to be 30% of the effective gross income. In apartment buildings, the landlords are responsible for operating expenses. What is the expected NOI?
4. The going-out cap rate is 4%. For how much you expected to sell this building?
5. The design of your apartment building implies an efficiency of 80%. What is the estimated gross square footage (gsf) of your building?
6. The construction hard cost is $175/gsf (including a garage). What is the estimated hard construction cost?
7. You estimate that soft cost is 10% of hard construction cost and that development contingency is 3% of hard construction cost. What are the estimated soft cost and development contingency?
8. Assume that the land cost $10,000,000. What is the total project cost (land+hard cost+ soft cost + development contingency)?
9. You obtain a construction loan. You borrow 60% of the total project cost at 6% annual interest rate. Assume that your construction loan will have a two-year term and average draw during these two years equal to 65%. What is the estimated construction loan interest?
10. Using your previous answers, what is the overall cap rate (or yield on cost) of your project?
11. Assuming that your feasibility criteria is that the spread between the yield on cost and the going-out cap rate is greater than 150 basis points. Is this project economically feasible?