Describing the sffa back-door procedure

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Question: You wish to build an office/warehouse project, also known as R&D space or flex space. Market rents seem to be around $15 per square foot per year with a 5% vacancy rate in the local area. All expenses are passed through to tenants except property taxes, insurance, and management, which you estimate at $5 per square foot per year. Mortgage rates are 11% for a 20-year loan with a five-year balloon. Construction costs for your planned 20,000-grossleaseable-square-foot project are estimated at $1,030,075 in total. All 20,000 SF are rentable. The debt service coverage ratio required is 120%, and the maximum LTV ratio is 75%.

a. Use the SFFA back-door procedure to determine what you could pay for the land.

b. Now assume total construction and site acquisition costs (i.e., total development costs) are $1,300,000. Use the front-door SFFA procedure to determine what the required rents would be per square foot. Recalculate the required rent assuming a vacancy rate of 15%.

Reference no: EM131737015

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