This document provides a market and financial analysis for a proposed redevelopment of a 10.3 acre tract of land in Lubbock, TX. It recommends constructing a 3-story, 216-unit apartment complex with a mix of 1-bedroom and 2-bedroom units. Market research found demand from young professionals in the area. Financial analysis shows the project has an equity dividend rate of 11% and debt coverage ratio of 1.35, indicating feasibility. The net present value and internal rate of return are positive, so the project is recommended.

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Real Estate Project
Fin 5332
Thi Ngo - R11031460
Trey Jameson - R00232399
Fall
2014
Rawls College of Business
Fall 2014

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TABLE OF CONTENTS
EXECUTIVE SUMMARY................................................................................................................3
PROJECT OVERVIEW...................................................................................................................4
ASSUMPTIONS FOR THE SUBJECT............................................................................................ 5
MARKET RESEARCH....................................................................................................................6
SITE AND LOCATION ANALYSIS................................................................................................ 8
RECOMMENDATION....................................................................................................................9
FINANCIAL ANALYSIS................................................................................................................12
CONCLUSION...............................................................................................................................17
APPENDIX ...................................................................................................................................18

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EXECUTIVE SUMMARY
This is a Fundamental Real Estate course and we are assigned to do a project on
whether a proposed redevelopment of a property would make physical, as well as
economic, sense. We are given a 10.3 acre tract of land at 4202 78th Street, Lubbock, TX
79423 for this project. Currently the land is unused, but was previously an unofficial
landfill. This project deals with market and financial analysis for the proposed land to come
up with a solution to whether it will be worth enough to justify redevelopment.
The project includes various data collection, survey and research to conduct the
market analysis and convert the data into inputs to do the financial analysis. Our initial
market analysis suggested that the proposed land has both market demand and needs,
which suggest the land has some economic benefits which might be very attractive in the
market, as the study will depict.
We have determined our target group and have conducted sufficient market
research in order to complete the market analysis. Based on the analysis, we have made the
financial feasibility study by computing the Pro Forma income statement, ratio analysis,
estimated land value, various way of financing/debt services, construction cost using
Marshal and Swift Valuation Service, NPV/IRR computation etc. To compute mathematical
calculations we looked at data from CoStar, RealtyRates.com, Texas A&M Real Estate
Survey, Lubbockcad.org and www.city-data.com/housing.
From the market and financial analysis we have tried to find out the current
position of our proposed land and estimated expected return, and expected net cash flows.
Therefore our main goal is to evaluate a possible economic outcome for the proposed land
through business activity.

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PROJECT OVERVIEW
The subject of the project is a 10.3 acre tract of land located at 4202 78th St,
Lubbock, 79423. It is one of a few undeveloped lands in this part of town because it was
used as an unlicensed landfill, and is considered a Brownfield site, which needs to be
remediated. Also, 30% of the land is in the 100 and 500 year flood zone, which can be
reclaimed using a cut and fill procedure.
Our project's purpose is to decide the highest and best use of this land by using a feasibility
analysis.
The following is the general information about the subject property:
Land Information
Owner ID O0130501
Owner Name: INCE MARK E & SCOTT W
Property Address 4202 78TH Street
Lubbock,TX 79423
Land Area 10.3 Acres
Legal Description BLK E2 SEC 11 AB 11 TR CQ AC: 10.3058
Assessed Value $22,446
Source: lubbockcad.org

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ASSUMPTIONS FOR THE SUBJECT
 Subject's listed price is $250,000
 The estimated cost for remediating the site today is $2,000,000
 A portion of the tract (1.78 acres or 77,395 SF) is within the 100 and 500 year flood
zone
 The buildable area of the land is about 7 acres
 Operating expense (OE) is 30% of the Effective Gross Income in the first year
 Loan-to-value ratio: 80%
 Construction loan: 6% , interest only, 1 year period
 Permanent loan: 4.5%, 20-year term
 The annual property value growth rate: 1%
 The holding period: 1 year
 Required rate of return on the investment: 15%

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MARKET RESEARCH
Potential Renters
The land is located in South Outer Lubbock subdivision. Although the land is within
the 79423 zip code area, it is adjacent to the boundaries of zip code 79424 and zip code
79413. The followings is some important information for the demographic around the
subject:
Age 1 mi 3mi State
Largest age range 20s - 30s
Population 11,786 105,731
Number of Households 5,276 43,623
Average Household size 2.2 2.4
Average Income $62,473 $50,005
% of renters 29% 37% 37%
Source: costar.com and city-data.com
The population density in this area is low (522 people/ square mile). Most people
are employed in the private companies with the five highest areas of employment:
 Architecture and engineering occupations
 Legal occupations
 Law enforcement workers including supervisors
 Health diagnosing and treating practitioners and other technical occupations:
 Management occupations
From the data above, we can see that majority of people in this area are young
working people with above-average incomes. Those people are considered potential
renters of our future investment property.
Supply/Demand
From Costar, we found that there are 19 multi-family apartments within 1 mile
radius around the subject. Most of these apartments categorized in Class C, Garden type
apartments and most of them were built in the 1970s and 1980s. The vacancy rates are
decreasing year over year, which is a positive indicator that the demand for rental
properties is increasing.1
1 See Exhibit A of the appendix

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Rent Levels
From the October 2014 Lubbock Apartment Statistics, we found that the average
rental rates for the apartments built since 2010s is $1.05 and $0.906 for one bedroom and
two bedroom respectively. However, we adjusted these rates with the rental growth rate of
1.9%, which is based on 2012 Market Report for Lubbock.
Average rent/SF Adjusted Rent Vacancy Rates
One Bedroom $1.050/SF $1.13/SF 99.3%
Two Bedroom $0.906/SF $0.98/SF 99.2%
Source: Lubbock Apartment Statistic-October 2014
The table below is a comparison between our asking rents/SF with other
comparables' asking rents/SF
COMPARABLE SUBJECT's AVERAGE ASKING RENT/ SFT
1/1.0 2/2.0 Year Built
Wyndham $1.00 $0.97 1998
Dakota $1.16 $0.98 2004
Tuscany $1.08 $0.87 2012
Subject $1.13 $0.98
Vacancy Rates
According to the 2014 Lubbock Apartments Statistic, general vacancy rate for One
Bedroom Unit is 99.3% and for Two Bedroom Unit is 99.2. However, the average vacancy
rate we researched on Costar for the apartments within 1 mile from the subject is about
5%. Therefore, we think 5% would be an appropriate number to use when estimating the
vacancy level for our proposal of multi-apartment.

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SITE AND LOCATION ANALYSIS
There are attractions around the subject
that we think would make our suggestion
to build an apartment on the land more
appropriate:
o There is a lake located to the east of the
land, which is an attractive factor to
our future residents
o There are many supermarkets within 1
mile from the subject such as
Wal-Mart, United Supermarket, Market
Street Supermarket, Sprout Farmers
Supermarket, etc., which make living
here more convenient
o Located to the south of the land are
shopping centers such as the group of
King Gate Centers, Village Center, Red
Mango, etc...
o The site where the subject is located is
a low population density area. It is
occupied by high-end homes and high-
income single families. Moreover, there are many lakes within 1 mile of the site, which
make a proposal of apartment to be built on this site more desirable

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RECOMMENDATION
We recommend to construct three storied (Class C, Average) multi-family apartment
buildings. There will be 5 one bedroom units and 3 two bedroom units on each floor. The
leasable area consists of 80% gross building area (GBA), leaving the rest of the GBA for
common places such as stairs, offices, and lobbies, etc.
We choose to have 62.5% of our units are 1 bedroom and 37.5% of our units are 2
bedrooms because the average size of households in this area is low, about 2.4%. Also,
most of the apartments nearby the subject are providing mostly 1 and 2 bedrooms units,
with the vacancy rates from these units are 0%.
For the parking, we designed to build 328 spaces for residents parking. It is based
on the general requirement that 1.5 parking spaces per one bedroom unit and 2 parking
spaces per two bedroom unit. However, 328 spaces are expected to be available for 90% of
our residents. The rest of the buildable area will be used for landscaping and building
facilities for leisure and recreation.

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The table below contains estimated costs for constructing and acquiring the project:
2 See Exhibit C in the Appendix.
CONSTRUCTION PROPOSAL2
Multi-Family Apartments
Site Area 10.3 Acres
Construction Type Class C, Average
Number of Stories 3
Number of Buildings 9
Parking 328 spaces
Acres SF
Buildable Area 7.21 304,920 30% of Site
Gross Building Area (GBA) 237,161
Gross Leasable Area (GLA) 4.45 189,729 80% of GBA
Parking/Common Area 2.26 98,400
Unit Mix
Number of
Unit/Floor Total Number SF
One Bedroom/One
Bathroom Unit 5 135 782
Two Bedroom/Two
Bathroom Unit 3 81 1039
Total Units 8 216

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DEVELOPMENT COSTS
CONSTRUCTION COSTS
Class C, Average Building Cost Appliance Cost Site Prep. Parking
$73.64 $1,740/unit $0.24 $1080/space
$17,464,536 $375,840 $73,181 $354,240
Total Costs $18,267,797
Flood Zone Preparation Cost
Cost per cubic foot to fill $0.53
Total cubic foot to fill 116,093 CF
Total fillingcost $61,529
Cost per square foot to prep $0.24
Total square feet to prep 77,395 SF
Total cost to prep $18,575
Total Cost to prep Flood Zone $80,104
TOTAL CONSTRUCTION COSTS $18,347,901
Land Purchase $250,000
Remediation $2,000,000
TOTAL PROJECT COST $20,597,901
Construction Interest
$1,100,874(6%, 1 year)
ACCQUISITION PRICE $21,698,775
DEBT SERVICE
LTV 80%
Term 20 Year
Contract Rate (monthly) 4.50%
Total Project Cost $20,597,901
Net Loan Proceeds $16,478,321
Initial Equity $4,119,580
Monthly payment $104,250
ANNUAL PAYMENT/DEBT SERVICE $1,251,000

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FINANCIAL ANALYSIS
Firstly, we came up with the Potential Gross Income for our project, shown in the
table below:
POTENTIAL GROSS INCOME CASH FLOW (PGI)
1 Bed/1 Bath 2 Beds/2 Bath
Number of Units 135 81
Average SF/unit 782 1039
Average Rent/SF 1.05 0.906
Average Monthly Rent/Unit $902 $1,015
Average Yearly Rent $1,461,443 $986,522
Yearly Cash Flow From Total Units $2,447,965
Also, we estimated other incomes that we expect to have when we open the
apartments, such as: parking fee, deposit, vending machines, and pet fee. The estimated
total amount of these incomes is about $91,368 per year.
ANNUAL MISCELLANEOUS INCOME PER UNIT
Parking $120
Deposit Fee $100
Vending $100
Pet Fee $150
Total Income per unit $470
Total MI Income by 90% units occupied $91,368

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After creating the estimation of all costs and sources of incomes, we generated a Net
Operating Income Analysis and a Pro Forma Before Tax Cash Flow as the following:
NET OPERATING INCOME ANALYSIS (NOI)
PGI $2,447,965
-VC ($122,398) 5% of PGI
+MI $91,368
EGI $2,416,935
-OE ($725,081) 30% of EGI
-CAPX $0
NOI $1,691,855
PRO FORMA BEFORE TAX CASH FLOW
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
NOI $1,691,855 $1,724,000 $1,756,756 $1,790,134 $1,824,147 $1,858,805
Debt Service $1,251,000 $1,251,000 $1,251,000 $1,251,000 $1,251,000 $1,251,000
BTCF $440,855 $473,000 $505,756 $539,134 $573,147 $607,805
The annual growth rate for the rental rate will be 1.9%, thus NOI will increase at the
same rate for the next 6 year period accordingly. In order to evaluate whether this project
is a good investment or not, we will have to look at some main financial ratios such as
profitability ratios, multipliers, financial risk ratios, and NPV& IRR. Please check the
following pages for the financial feasibility analysis's ratios.

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Profitability Ratios
CAPITALIZATION RATE NOI/ Acquisition price
Subject 7.8%
Comparable Properties 8.3%
79423 Market Cap Rate 7.6%
The cap rate of the subject is 7.8%, which is a little lower than its most comparable
properties (Wyndham, Dakota Arms, Tuscany Apartments). It can be explained by the high
acquisition price due to extra costs from land remediation and filling and preparation of
flood zone area. These costs are unfavorable factors to developers, that is why the land's
selling price is only $250,000 while its value estimated from comparable sales is about
$1,058,094.3
However, because the overall market cap rate in the area where the subject located
is 7.6%, its cap rate of 7.8% is still a good indicator regarding the potential return on our
investment in this area. This can be proven by looking at the Equity Dividend Rate (EDR),
which is also known as 'Cash on Cash.' It is one of the most important ratios an investor will
look at because it measures the return on actual cash invested in an income-producing
property. The subject's EDR is 11%, which is an attractive number of returns as we can see
from the table.
EQUITY DIVIDEND RATE (EDR) Before Tax Cash Flow/ Equity Investment
Equity Investment $4,119,580
BTCF $440,855
EDR 11%
Multipliers
EFFECTIVE GROSS INCOME MULTIPLIER (EGIM) Acquisition Price/Effective Gross Income
Acquisition Price $21,698,775
EGI $2,416,935
EGIM 8.98
EGIM of the subject property is 8.98; the acquisition price of this investment is 8.98 times
the gross income produced by this property. We believe 8.98 is a good number.
3 See Exhibit B for Land Value Assessment

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Financial Risk Ratios
OPERATING EXPENSE
RATIO (OER) Operating Expense/Effective Gross Income
OE $725,081
EGI $2,416,935
OER 30%
We assumed Operating Expenses will be 30% of EGI because the apartment is newly built,
thus requires less operating expenses in the first 5 years period.
DEBT YIELD RATIO (EYR) NOI/ Loan Amount
NOI $1,691,855
Loan Amount $16,478,321
DYR 10%
Debt Yield Ratio means the lender would enjoy a 10% cash-on-cash return on its
money if we were foreclosed on the property on day one of the process. A typical lender
would look for a minimum of 8%-10%, thus 10% is a positive number for lenders since it
makes the loan less risky by higher return.
DEBT COVERAGE RATIO (DCR)
Net Operating Income/Debt
Service
1st Year NOI $1,691,855
Debt Service $1,251,000
DCR 1.35
ECR of less than 1 means the income that property generates is not enough to cover
the mortgage payments and its operating expenses. Therefore, ERD of more than 1 is a
minimum requirement for an income-producing property. Most commercial banks require
the ratio of 1.15 to 1.35 to ensure cash flow sufficient to cover loans payment. Since our
subject's DCR is 1.35, its capacity of debt coverage is good.

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NPV/ IRR Analysis
SALE PRICE AT THE END OF THE
HOLDING PERIOD
6th year NOI/ Capitalization
Rate
6th Year NOI $1,858,805
Capitalization Rate 7.8%
Sale Price $23,839,981
BEFORE-TAX EQUITY REVERSION (BTER)
Sale Price(SP) $23,839,981
Selling Expense $1,430,399
Net Sale Proceeds (NSP) $22,409,582
Remaining Mortgage Balance (RMB) $13,627,670
Before-tax equity reversion (BTER) $8,781,912
NPV/IRR
Year Annual BTCF BTER Total CF PV @ 15%
0 ($4,119,580) ($4,119,580) ($4,119,580)
1 $440,855 $440,855 $383,352
2 $473,000 $473,000 $357,656
3 $505,756 $505,756 $332,542
4 $539,134 $539,134 $308,252
5 $573,147 $8,781,912 $9,355,059 $4,651,118
Total Present Value of
Levered Cash Flows $6,032,920
NPV $1,913,340
IRR 26%
The project generates a positive NPV, which means it is a profitable investment, and
it has a high internal rate of return of 26%. In general, although the project does not have a
highly attractive cap rate in the first year, after the 5-year holding period, it is projected to
generate a high return on the investment.

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CONCLUSION
In conclusion, we have decided that converting the land into a complex of income-
producing multi-family apartments. The 9 three-story buildings which consist of 5 one-
bedroom units and 3 two-bedroom units on each floor would be enough to generate a
return as high as 26% after 5 years. The underlying reasons for our proposal are based on
market research and financial feasibility research.

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APPENDIX
Exhibit A -
Rental rates trend for apartments located within 1 mile radius from the subject in 5 years
Exhibit B -
Land Value Assessment
VALUE OF THE LAND
Sale Comparables Location
Total Land
(Acre) Price/Acre
Plus/Minus
Acre
Acre
Adjustment Price
Flood
Zone
Flood Zone
Adjustment Final Value
Comp 1 FM 1585 Indiana Ave 14.14 $115,417 $4 $382,400 $1,539,846 no $80,105 $1,237,551
Comp 2 1715 90th St 7.5 $53,333 $3 $278,833 $400,000 no $80,105 $758,938
Comp 3 3402 114th St 5 $130,000 $5 $527,791 $650,000 yes $0 $1,177,791
Subject 10
Estimate Value of Subject $1,058,094
Average
Price/Acre $99,583
Exhibit C -
Average construction costs (source: Marshall Value Service)
CLASS CONDITION COST ($/SF) APPLIANCE COST
EARTH FILL
COST PARKING COST
C Excellent $134.17 $4,425 $0.53 / CF $1,080 / space
C Good $99.61 $2,825 $0.53 / CF $1,080 / space
C Average $73.64 $1,740 $0.53 / CF $1,080 / space
C Fair $63.98 $1,030 $0.53 / CF $1,080 / space
C Low cost $54.44 N/A $0.53 / CF $1,080 / space

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