This is the brief for the third and final exercise for this project. Your group has been appointed as Project Manager by The Proprietary Very Limited Corporation (PVLC) to carry out development and feasibility analyses of re-development options for the 10-12 Lindsay Street Brighton, Victoria, and to provide a commercial justification to PVLC for the development of this property.

The Project Brief issued at the commencement of this unit describes the development requirements of PVLC, and the specific elements of the required Financial Feasibility Study. PVLC subscribes to a development and investment strategy which aims to maximise returns and minimise risk to its shareholders - a strategy that the Project Manager is required to understand and embrace in the provision of advice to PVLC regarding the future use of the property.

An outline of your recommended development concept and appropriate feasibility analyses, together with your recommendation to PVLC's future development of the site, are now required to complete the commission. This all comprises Exercise 3.

The feasibility analyses of your proposed development will consider and test the key variables of your recommended development option, and the impact that changes in, for example, rentals, costs, delays, financial structuring, will have on the objectives of your proposed development.

It is very important that you prepare written justification for your development decisions and the reasons why you are prepared to recommend your proposal to your client. You should thoroughly address the risks (commercial, planning, construction etc) inherent in your development, and advise your client of the steps you propose to minimise or remove the risks should PVLC proceed with your recommendation.

Your data is to be based on the information researched and established within in your Exercise 2 assignment. Your building design drawings from Exercise 2 are no longer relevant. The objective of this Exercise 3 is to determine whether the proposed development site of 10-12 Lindsay Street Brighton, Victoria will, after considering the risks involved, provide the owner with a satisfactory investment return, and improve the value of the owner's assets. Your report is to conclude with a recommendation to the owner on the course of action with the property.

As you undertake the requirements listed below, consider any recommendations that you would make to modify your preferred Exercise 2 development option to enhance the potential returns to PVLC. Carefully and fully explain the justification for, and effect of these changes.

REVENUE CALCULATION DATA

- Gross annual rents and outgoings are to be estimated from the conclusions of the Exercise 2 assignment.
- Sale values for the revenue earning components based on the research found in your Exercise 2 assignment.
Revenue assumptions can be modified from Exercise 2 to Exercise 3 if sufficient justification is provided for the change.

COST ASSUMPTIONS

- Construction costs are to be estimated as per your Exercise 2. You may have to ensure that costs are realistic for this type of development.

- Construction costs should be escalated at 1.5% per annum if not already based upon on the date of commencement

- Development costs which will be incurred over the development period including rates and taxes, leasing costs, legal fees, statutory, valuations, holding costs etc. are to be provided for, and should be calculated at 6.0% of the final construction cost, and paid progressively during construction until practical completion and the date of project sale.

- Selling costs related to the future sale of the revenue-earning elements of your proposed development should be brought to account at the end of your development cash flow, computed on 2%+GST of the sales price(s).

- Your project is to be funded by an initial injection of PVLC equity equal to 30% of the Total Project Cost, and thereafter funded by debt provided by an external financier via debt drawdowns at the end of each month over the development period. Interest at 6% p.a. will be paid by the project to the financier monthly in arrears. Total debt incurred during the development period will be repaid to the financier from sale proceeds following practical completion.

REQUIREMENT 1

Assume that you are the project developer (the developer), and provide a succinct summary of the architects proposed concept design (this summary is found within the new drawings provided), findings that describes the optimum development that can be undertaken on the site (after considering all the constraints on the site), showing the following (where applicable):
- Site area

- Maximum development permitted by the Responsible Authority

- Maximum gross floor area

- Maximum number of car parks permitted by the relevant planning scheme, and the proposed number of car parks within the proposed development

- Gross and Net Sellable Area of useable space classified

- Gross revenue on completion of project

- Outgoings on completion of project

- Net revenue on completion of project

- Total construction cost of all areas

- Design and construction Programme

- Estimate of cost escalation to completion of construction

- Preparation of cash flow schedule.

- Calculation of project finance costs.

- Calculation of Total Project Cost comprising:
. total construction cost
. project finance costs
. development costs

- You are required to calculate the Land Value which supports a commercial rate of return on the development, and report on the implications of such a finding to PVLC.

REQUIREMENT 2

Assume that you are the project developer, and carry out the following:

- Assume that any subdivided land (if any) which you propose to be sold, is sold at the prices nominated in your earlier report.

- For the purposes of this exercise, assume that the development will be sold to an investor on practical completion at a price that will yield the following income earning component percentages to the investor in the investor's first full year of ownership, assuming that the development is fully occupied at practical completion:

Residential 6.0%
Note: The project selling price should be computed on net revenue. Calculate:
a) The total sale price of the development
b) The development profit (if any)
c) Is this a good deal for the developer?
d) Does the development meet the developer's expectations? If not, why not?
e) Recalculate a & b above assuming the project has achieved only 90% of the estimated net revenue as at the date of sale to the investor.
f) What impact, if any, would such an eventuality have on the project selling price to the investor, or on the eventuality of the sale itself?
g) What, if any, adjustment would you make to your proposed development to achieve a "better" result for the developer?
h) What impact does PVLC's site value of $6.0 million have on the development profit of the project, and
i) What are the highest and lowest site values PVLC could apply to the site, and still achieve a commercially acceptable rate of return on the development?

REQUIREMENT 3

Using all of the data calculated in Requirement 1, assume that you are the investor/purchaser of the project at the end of the construction period, and that you have purchased the development for an amount that provides you with the yield percentages provided in Requirement 2 above. Note
- this is an entirely different exercise to Requirement 1 and 2.

You do not pay tax, and you have paid 30% of the purchase cost using your own equity (which does not attract interest from external financing sources) plus a bank loan for the remaining 70%. The bank loan is for 30 years, attracts 5.0% per annum interest, and is payable in equal monthly payments (consisting of both interest and principal).

Assume:

a) All revenue earning space is leased and occupied for the purposes of this requirement.
b) Commencing rents are reviewed every two years, and increased by an amount relating to an estimated CPI increase of fixed 3.5% per annum.
c) Outgoings are payable by the Tenant(s) in addition to the Rent.
d) You make no further investment in the project.
e) You intend to sell the development after owning it for 10 years, assume you will sell to a buyer requiring an 10.0% annual return when you sell it at the end of the tenth year of your ownership.

Calculate (over a 10 year period of ownership)

1) Annual net cash flows
2) Cumulative cash flows
3) Net present value of the cash flows using a 9.0% discount rate
4) DCF rate of return (IRR) calculated over your period of ownership of the property

Comment on your results:

Is this a good investment for you, or would you be better off investing the same amount of equity you would be providing to purchase the property as above in Commonwealth Bonds earning 5.0% per annum, assuming you reinvest the annual interest/yield payments on your Bonds in purchasing more Commonwealth Bonds with the same yield? Provide a full explanation as to whether and why this is a "better" investment than purchasing the above property.

REQUIREMENT 4

1) List all possible risks which may have an influence on these development proposals
2) Identify four (4) key risk areas that need further evaluation from the above list.
3) Carry out sensitivity analysis on the above three key areas which may have greater concern on the project development.

REQUIREMENT 5

Assume all the information given in Requirement 3, and assess the impact on the required calculations 1, 2, 3 and 4 above by changing the debt/equity ratio from 70:30 to 50:50. Fully report on the impact on project performance, and provide reasons why such a financial restructure may be beneficial or disastrous to the owner.

VERBAL PRESENTATION

Fifteen (15) minutes has been allocated for each group to present to the Assessment Panel. A further five (5) minutes has been allocated to each group for questioning. At the conclusion of all presentations, brief comments will be made on the content and quality by the Panel.

To assist in meeting these strict time constraints:

- Only two (2) group members are required to present aspects of your report.
- Those who did not verbally present the Exercise 2 report will be required to be the presenters of this Exercise.

Attachment:- Assignment Brief.rar