Three considerations are important and unique about applying the
to evaluating investment in deve
lopment projects as compared to
investments in stabilized operating properties:
”:Investment cash outflow occurs
, not all at
once up front, due to the
Debt financing for the construction phase is
(even when the project will ulti
mately be financed entirely
Phased risk regimes:
Investment risk is very different (greater)
between the construction phase (the
and the stabilized operational pha
se. (Sometimes an intermediate
”, is also distinguishable.)The benefits and costs must be measured in an
manner. That is, in dollars:
As of the
That have been adjusted to
account for risk..
As with all DCF analyses, time and risk can be accounted for by
adjusted discounting. .
Key is to identify:
opportunity cost of capital
Reflects amount of
in the cash flows
Can be applied to either
back in time, or
forward in time
e.g., to the projected time of completion of the construction
• Twin buildings, $75,000/mo net rent perpetuity
• OCC = 9%/yr (
– 1 = 9.38% EAR)
= $10,000,000 – $10,000,000 = 0
• Across the street from Hereandnow.
• Will be same asset as Hereandnow, complete in 12 mos
• Constr cost $1,500,000 X 4 payable @ mos 3, 6, 9, 12.
• First building complete in 6 mos.
• This is definitely HBU of site; irreversible commitment to
develop now is appropriate
Typical investment deal for this stablized...