Question

BIC also likes the idea of a development project and is considering the purchase of some raw land. A lot that is currently undergoing a change in zoning can support either an office building or a retail complex. Based upon market data, BIC has made the following estimates:

	Office	Retail
Rentable square feet	100,000	80,000
Rents per square feet	$24.00	$30.00
Operating expense ratio	40%	45%
Average growth in NOI per annum	1.5%	1.5%
Required total return	11%	12%
Total construction cost per square foot	$100	$86

A) Which is the best investment option and why?

B) Should they purchase the land if the negotiated purchase price is $5,500,000?

Answer 1

PARTICULARS OFFICE RETAIL

cost of construction 1000000 6880000

rents 2400000 2400000

operating expense 960000 1080000

net income 1440000 1320000

return in percentage 14.4% 19.18%

required return 11% 12%

difference 3.4% 7.18%

thus, its better to invest in retail compared to office

NOTE

1. HERE THE GROWTH GIVEM AS 1.5% ITHOUT SPECIFYING THE YEARS OF USING THE ASSET. THUS GROWTH REMAINED SAME FOR BOTH THE PROJECTS IT DOES NOT MAKE ANY IMPACT

2. IF THE NEGOTIATION MAKES AT 5500,000 IT IS BETTER NOT TO PURCHASE BECAUSE YOU WILL LESS RETURN THAN YOU EXPECTS BECAUSE COST OF INVESTMENT INCREASES TO (15500000 FOR RETAIL AND 12380000)

THANK YOU.

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