This is a paper that is focusing on the development of a neighborhood shopping center in Grand Prairie. The paper also provides additional information to use in writing of the assignment.
Development of a neighborhood shopping center in Grand Prairie
You have been approached by an investor/developer who wants to develop a neighborhood shopping center project in Grand Prairie, Texas a suburb of Dallas that has a fairly strong market
with significant growth potential.
The center would be anchored by a grocery store and would be 150,000 SF of leasable area. The price for the land he is looking at is $450,000 per acre but he is willing to pay more if it’s a prime location. Along Interstate 30 close to the Grand Prairie Entertainment District, there is 15.21 acres of land available, but the developer does not want to buy any more land than necessary for the proposed shopping center. The zoning would allow retail uses and the site must have open space (not counting parking area). The number of parking spaces required will be based on the City of Grand Prairie zoning ordinance. Assume that each parking space will require 300 SF of land including drive aisles and also turning areas.
You are a consultant hired by the developer to evaluate the potential for this project. Calculate how many acres the developer has to purchase for the site to meet the requirements for this proposed 150,000 SF shopping center? Show how you calculated the site area. Construction costs will be $150 per SF of building and Soft Costs or Indirect Costs will be $12.00 per SF of building. Site Costs will be $8.50 per SF of the total site area.
Rents will be as follows and will all be triple net (NNN):
Anchor Tenant: 70,000 SF at $18 per SF
2 end cap tenants: 7,000 SF each at $33 per SF
Out Parcel: 5,000 SF at $35 per SF
Balance of leasable area average rent of $25.50 per SF
Itemize these rents in the Pro Forma.
Rents will escalate annually at a rate of 3%. Assume an overall vacancy rate in the first year of 25% and 5% for years 2 thru 10. The Operating Costs (property taxes, insurance, management, maintenance, utilities, advertising, and also leasing commissions, etc.) covered by the developer will be $2.50 per SF of building which will escalate annually at a rate of 2%.
For the construction and permanent financing, assume, the lender is requiring a Loan to Cost of no more than 60% and a Debt Coverage Ratio of at least 1.8. The loan will be for 30 years with an annual interest rate of 7%. Calculate the amount of the mortgage the lender will provide for this project. How much equity will the developer have to contribute to the project? Be sure to calculate the monthly loan payment and multiply by 12 when calculating the mortgage in your pro forma.
Create a pro forma for this project that includes a baseline or income statement and a 10-year before taxes cash flow analysis. Add a below the line row in the 10-year spread sheet for a deduction for depreciation. This shopping center will go into service on July 1. You must show the Cash Flow After Financing (CFAF) and the ROE for this project. This is a simplified pro forma so there will be some line items in the model pro forma that you will not have to include in your pro forma. This assignment includes all of the inputs you will need for your pro forma. The question to you is whether a proposed development of the property would make physical and economic sense. Your analysis should provide answers to the following questions:
1. Firstly, would you recommend the developer invest in this project? Why or why not?
2. Secondly, would you recommend purchasing the entire parcel if the seller is unwilling to sell a partial tract?
3. Thirdly, would you sale outparcel to offset the cost of the land? Also, if you were to recommend selling outparcels/padsites, which type of uses would you recommend? For example, use the typical site requirements/layout from the hotel in your highest and best use
exercise as a test to determine feasibility.