After some time the owner, the architect, and the engineer met again. claire was very because tony’s design exceeded her expectations. during this meeting angie told claire that it was time for claire get in contact with a contractor in order to get a good estimate of project costs before talking with the banks. claire appreciated the design engineer’s advice, because without additional funding there would be no mall. angie recommended that claire talk to cornelius "corny" cornell, the owner of corny construction & co., with whom she had good experiences.

claire gave corny a call and they set an appointment for the next day at corny's office, where their conversation went like this:

corny: nice to see you. i hear you have a property you want to develop. what can i do for you?

claire: i hope you can me with some cost estimates, because soon i have to go to the bank to get funding for the project. i brought you the preliminary drawings from my architect and engineer. what do you think the project will cost?

corny: let's have a look. that is a well-designed mall. well, corny construction has done some malls before; we will be able to provide you with an estimate. however, first i need to check out the property and what is needed from the site work, utilities, and landscaping points of view. i see you have some estimates on the site development. whom did you get those from?

claire: the numbers are from "big builders." corny: oh, good. i know bob. i'll give him a call. in addition, i will talk to your architect and your engineer. i'll be done with the estimate in two days, okay?

claire: great. which bank do you do business with?

corny: i work with betsy benefit from "best banking." she is very reasonable when it comes to lending money.

two days later claire was back in the office of corny construction. while she was waiting for corny in his office-room, she took a look at his bookshelf. there were some interesting book titles, such as construction scheduling, estimating, means and methods, contract administration, and financing construction projects. "this is an interesting subject," she thought. her thoughts were disturbed when corny walked in and gave her the list of estimates (see table 3.1).

based on the information corny had provided, claire realized that she would need a loan of $25,330,000 to complete construction of the project, after the use of the $6.5 million inheritance. she estimated the interest on the loan would be 7.5 percent, compounded annually over a 20-year period. claire also estimated that she could expect $30 per square foot of rental space (150,000 sf) and that her maintenance and operating costs would be approximately 2 percent of total cost of the project. she began to wonder exactly how much profit (if any) she could expect to make from the project while she was paying off such a substantial loan over the next twenty years. it would be necessary to convey this to the bank to receive funding. after she returned to her office, claire set about developing a profit picture for the mount hope shopping facility to determine if the project was economically feasible.

table 3.1: parameter estimate of costs for the mount hope market

item

description

estimated cost $

1

land

2,945,000

2

bob builder consulting fee

50,000

3

corny cornell consulting fee

34,000

4

architect fee

105,000

5

permitting cost

25,000

6

design & consulting engineer fee

165,000

7

grading and site work sub

2,487,000

8

construction of shopping facility

17,573,000

9

construction of parking lot

2,027,000

10

installation of utilities by sub

1,435,000

11

installation of electrical reticulation by sub

248,000

12

landscaping sub

304,000

13

allowance for fees of loans and interests

4,436,000

total

31,834,000

assume you are claire and are trying to determine if the mount hope shopping mall is a good investment of your $6.5 million inheritance, using a 20-year period. assume operation of the facility begins in year 2 and the equity is utilized in year 1.

determine the:

gross annual revenue
annual maintenance costs
net annual revenue
estimated annual debt service
estimated annual profit
net present value of claire’s investment, if the discount rate = 9%
internal rate of return for the project investment
is this a good investment?