A FEASIBILITY STUDY OF MULTIFAMILY AND ASSISTED LIVING FACILITY
DEVELOPMENT ON SLEEP TRAIN ARENA SITE
A Project
Presented to the faculty of the College of Business Administration
California State University, Sacramento
Submitted in partial satisfaction of
the requirements for the degree of
MASTER OF BUSINESS ADMINISTRATION
in
(Finance)
by
Xingnan Liu
SPRING
2013
© 2013
Xingnan Liu
ALL RIGHTS RESERVED
ii
A FEASIBILITY STUDY OF MULTIFAMILY AND ASSISTED LIVING FACILITY
DEVELOPMENT ON SLEEP TRAIN ARENA SITE
A Project
by
Xingnan Liu
Approved by:
__________________________________, Committee Chair
Nuriddin Ikromov, Ph.D.
____________________________
Date
iii
Student: Xingnan Liu
I certify that this student has met the requirements for format contained in the University
format manual, and that this project is suitable for shelving in the Library and credit is to
be awarded for the project.
__________________________
Monica Lam, Ph.D.
Associate Dean for Graduate and External Programs
College of Business Administration
iv
___________________
Date
Abstract
of
A FEASIBILITY STUDY OF MULTIFAMILY AND ASSISTED LIVING FACILITY
DEVELOPMENT ON SLEEP TRAIN ARENA SITE
by
Xingnan Liu
On January 22, 2013, the USA TODAY reported that a Seattle-based group (Chris
Hansen and David Ballmer) had reached a purchase agreement with the majority owner
of the Sacramento Kings, the Maloof family, to buy the franchise and move it to Seattle.
A relocation and transfer committee established by the NBA was expected to review the
deal, and then the NBA Board of Governors will decide whether to approve the deal or
not in April 2013. In order to retain the Kings, the city council of Sacramento approved a
term sheet between the City and an investor group (Ron Burkle, Mark Mastrov and Vivek
Ranadive) to develop a new Entertainment and Sports Center (ESC) in downtown
Sacramento. According to the term sheet, the current 84-acre Sleep Train Arena, owned
and operated by the Maloofs, will be subject to a non-compete agreement. In other words,
the old arena will not hold major entertainment events upon the completion of ESC
sometime after September 2016. Built 25 years ago, Sleep Train Arena is the least costly
v
venue in the league. Although it is subject to flooding, the ease of access to Interstate 5
and 80 provide the site a desirable living area for commuters. Given these reasons, as
well as the slow but irreversible recovery of the U.S. economy, the site represents an
opportunity for developers in 3-4 years. Assuming the role of a developer, I am proposing
a multifamily redevelopment plan for the site after September 2016. After collecting
background information, anticipating market trends, transforming an idea into
redevelopment concept that meets the expected future demand, and eventually tested the
concept’s physical and financial feasibility given facts and my own assumptions, I
conclude my redevelopment proposal is a viable opportunity if the economic conditions
are favorable.
_______________________, Committee Chair
Nuriddin Ikromov, Ph.D.
_______________________
Date
vi
ACKNOWLEDGEMENTS
I would like to thank Dr. Nuriddin Ikromov for his guidance, patience, and prompt
comments and suggestions. I would also like to thank my parents for their support. Thank
you for everything, Xenia.
vii
TABLE OF CONTENT
Pages
Acknowledgements ........................................................................................................... vii
List of Tables ..................................................................................................................... xi
List of Figures ................................................................................................................... xii
Chaper
1. INTRODUCTION ...........................................................................................................1
Purpose of the Project ................................................................................................... 2
Real Estate Development Process ................................................................................. 2
Scope of the Project ...................................................................................................... 3
Project Layout ............................................................................................................... 4
2. DEVELOPABILTY ANALYSIS ....................................................................................6
Physical Characteristics of the Site ............................................................................... 6
Existing Condition ..................................................................................................... 6
Shapes & Size ............................................................................................................ 7
Soils & Topography ................................................................................................... 8
Natural Hazards ....................................................................................................... 10
Externalities to the Site ............................................................................................... 12
Access ...................................................................................................................... 12
Infrastructure ............................................................................................................ 13
Legal & Regulatory Consideration ............................................................................. 14
viii
Jurisdiction ............................................................................................................... 14
General Plan ............................................................................................................. 18
Zoning ...................................................................................................................... 21
California Environmental Quality Act (CEQA) ...................................................... 22
3. MARKET ANALYSIS ..................................................................................................23
Delineation of the Market Area .................................................................................. 23
Non-specific Market Analysis .................................................................................... 24
Market Property Type Analysis .................................................................................. 29
Retail Market ........................................................................................................... 30
Office Market ........................................................................................................... 33
Multifamily Market .................................................................................................. 34
Capital Markets ........................................................................................................ 35
Market Analysis Conclusion ....................................................................................... 36
4. REDEVELOPMENT CONCEPT..................................................................................39
Target Market Segment............................................................................................... 39
Concept Design ........................................................................................................... 40
Construction Style .................................................................................................... 41
Unit Mix ................................................................................................................... 43
Amenities ................................................................................................................. 45
Site Plan ................................................................................................................... 45
5. FEASIBILITY ANALYSIS...........................................................................................49
ix
Methodology ............................................................................................................... 49
Physical Feasibility ..................................................................................................... 49
Financial Feasibility .................................................................................................... 55
Total Development Cost .......................................................................................... 56
Land Acquisition Cost ............................................................................................. 57
Projected Net Operating Income .............................................................................. 58
“Build to Last” ......................................................................................................... 59
“Sell” ........................................................................................................................ 61
Scenario Analysis........................................................................................................ 62
6. CONCLUSION ..............................................................................................................67
Conclusions ................................................................................................................. 67
Recommendations ....................................................................................................... 68
References ..........................................................................................................................70
x
LIST OF TABLES
Tables
Pages
1. Five Record Floods in Sacramento Area .................................................................... 10
2. Real Estate Project Approval Process ......................................................................... 15
3. Population Comparison between MSA and Sac, as o 2010 ........................................ 25
4. Projected Population Growth Rate, 2015 - 2025 ........................................................ 26
5. Households Comparison between MSA and Sac by Type, as of 2010 ....................... 27
6. Employment & Education Comparison between MSA and Sac, as of 2010 .............. 28
7. Selected MSA Industry Employment Projections, 2010 – 2020, as of Dec 2012 ...... 29
8. Land Area Available for Development ....................................................................... 52
9. Total Spaces Needed for Parking ................................................................................ 53
10. Total Building Area .................................................................................................... 53
11. Physical Feasibility Analysis for Subject Site ............................................................ 54
12. Lot Coverage Calculation ........................................................................................... 55
13. Information of Mortgage Loan ................................................................................... 58
14. Projected NOI of the Property .................................................................................... 59
15. Internal Rate of Return Calculation ............................................................................ 62
16. Assumptions for Scenario Analysis ............................................................................ 64
17. Comparison of Scenario Analysis Results .................................................................. 65
xi
LIST OF FIGURES
Figures
Pages
1. Bird Eye View of Subject Property .............................................................................. 7
2. Soil Map of Subject Property........................................................................................ 9
3. Accessibility of Subject Site ....................................................................................... 12
4. NLIP Construction Progress Map ............................................................................... 17
5. Land Use & Urban Form Designation for North Natomas Community ..................... 20
6. Current Zoning of the Subject Site ............................................................................. 21
7. MSA Population Projection by Age Group ................................................................ 26
8. MSA Unemployment Rate Comparison ..................................................................... 28
9. MSA Employment vs. Retail Vacancy, as of 4Q 2012............................................... 31
10. Direct Average Asking Rate for Power Center and Community Neighborhood........ 32
11. Rental Rate for Multifamily Market in MSA ............................................................. 35
12. Comparison of Three Major Money Market Index..................................................... 36
13. Illustration of Garden-style Apartment ....................................................................... 42
14. Illustration of Assisted Living Facility ....................................................................... 43
15. Example of Assisted Living Facility Floor Plan ......................................................... 44
16. Conceptual Layout of the Redevelopment Project Site .............................................. 47
17. Comparison of Standards & Calculation of Maximum Dwelling Unit ...................... 51
18. Calculation of Two-stage DCF Model ........................................................................ 60
xii
1
Chapter 1
INTRODUCTION
On January 22, 2013, the USA TODAY reported that a Seattle-based group (Chris
Hansen and David Ballmer) had reached a purchase agreement with the majority owner
of the Sacramento Kings, the Maloof family, to buy the franchise and move it to Seattle.
A relocation and transfer committee established by the NBA was expected to review the
deal, and then the NBA Board of Governors will decide whether to approve the deal or
not in April 2013. In order to retain the Kings, the city council of Sacramento approved a
term sheet between the City and an investor group (Ron Burkle, Mark Mastrov and Vivek
Ranadive) to develop a new Entertainment and Sports Center (ESC) in downtown
Sacramento. According to the term sheet, the current 84-acre Sleep Train Arena, owned
and operated by the Maloofs, will be subject to a non-compete agreement. In other words,
the old arena will not hold major entertainment events upon the completion of ESC
sometime after September 2016. Built 25 years ago, Sleep Train Arena is the least costly
venue in the league. Although it is subject to flooding, the ease of access to Interstate 5
and 80 provide the site a desirable living area for commuters. Given these reasons, as
well as the slow but irreversible recovery of the U.S. economy, the site represents a good
opportunity for developers in 3-4 years. Assuming the role of a developer, I am proposing
a multifamily redevelopment plan for the site after September 2016.
2
Purpose of the Project
The main purposes of my project are the followings. First, as an NBA fan and
Sacramento resident since April 2010, I was interested in the future of Kings and hoping
they can reach their peak era (1998 – 2005) again. Second, given my major and
concentration, I want to challenge myself by applying the real estate development
concept to a unique case like this, since real estate is definitely a part of finance. In
addition, given my lack of previous working experience in the real estate industry, this
project offers me a great opportunity to demonstrate my ability to research, identify,
analyze, and recommend solutions for the issues individually.
Real Estate Development Process
To my knowledge, there is not one unified process for real estate development,
due to the complexity and the number of parties involved in the process, I will use the
eight-stage model presented by Miles et al (2007) as a general guideline for this project.
According to Miles et al (2007), there are eight stages in a real estate development
process: Inception of an Idea; Refinement of the Idea; Feasibility; Contract Negotiation;
Formal Commitment; Construction; Completion and Formal Opening; and Property,
Asset, and Portfolio Management.
A developer would first need extensive information and knowledge base for
idea(s) to be born, because that is the proven way to recognize unfulfilled needs (stage
one: inception of an idea). In this case, with the help of my project advisor, I identified
3
this redevelopment opportunity. Once an idea has been generated, a developer needs to
refine the idea to make it more realistic (stage two: refinement of the idea). The
refinement process usually requires fewer resources (time, labor, and money), compared
to what would be invested in stage three, and may include different types of analyses,
such as developability analysis, market analysis, value analysis, and investment/financial
analysis (Seldin, 1990). All the work done in this stage is considered inputs to the later
formal feasibility study (Seldin, 1990). In other words, these studies are more theoretical
and less practical. As Miles et al (2007) mentioned in their book, stage three involves
substantial interactions with and involvement of many parties, including local
government, utility company, electricity companies, etc. Thus, it is more costly than stage
two. If the idea passes the formal feasibility study, developer will move forward to the
remaining stages of the model (contract negotiation and signage, actually construction,
completion and formal opening, and property management).
Scope of the Project
The primary focus of this project will be the first two stages (inception and
refinement of the idea) of redevelopment model provided by Miles et al (2007). The main
reason for this is that the subject site will not be available for redevelopment until
sometime after September 2016. Moreover, if the effort to keep Kings fails, the future of
the site will be unknown (meaning either redevelops prior to 2016 or no redevelopment at
all). Here, I am assuming the Sleep Train Arena will be available for redevelopment upon
the completion of ESC sometime after September 2016.
4
Since all analyses before stage three involves forecasting of the data, therefore
they are more theoretical-based and subject to change over time. As a result, assumptions
I made will be subject to change as well as my own biases. Therefore, my final proposal
can only be considered as one of many possible solutions.
Project Layout
This project consists of five remaining chapters: developability analysis, market
analysis, redevelopment concept, feasibility analysis, conclusion and final
recommendation. Below are brief descriptions of each chapter.
In the developability analysis chapter, I will first gather current information of the
subject site, and then identify any constraints to the future redevelopment. Topics covered
in this chapter include some physical characteristics of site, some externalities to service
the site, and legal considerations (Seldin, 1990).
In the market analysis chapter, I will first perform a general market study. I will
use the findings as inputs to a site-specific market study. In an attempt to identify the
highest and best use for the land, I will gather and analyze population and employment
data on region and local submarket and will also compare analyze data on different types
of property in local submarket.
In the redevelopment concept chapter, I will choose a target market and then
propose an optimal use of the site (redevelopment concept) given its identified target
market. Some details of concept design will be introduced there.
5
In the financial feasibility analysis chapter, I will first provide a description of
methodology. Then I will consider all the findings from previous chapters while
performing the feasibility analysis. I will consider both physical and financial feasibility.
Finally, I will perform a scenario analysis to show different possible outcomes given
unforeseeable events in the future.
The conclusion and recommendation chapter will summarize the findings of all
previous analysis and discuss the possibilities of other redevelopment concept if certain
conditions are favorable in the future.
6
Chapter 2
DEVELOPABILTY ANALYSIS
In order to generate an idea with a potential to succeed, a developer must have
extensive background information about the site. In this chapter, I will provide and
analyze current information of the Sleep Train Arena, including physical characteristics
of the site, externalities to service the site, and legal considerations. Physical
characteristics include the existing condition, shape & size, soils and topography, and
natural hazards. Externalities include access and infrastructure. Legal considerations will
cover topics like jurisdiction, general plan, zoning, and CEQA. All the findings from this
chapter will contribute to the redevelopment concept as well as the feasibility study.
Physical Characteristics of the Site
Existing Condition
The subject property, which located at One Sports Parkway, Sacramento,
California, consists of two subareas and two roads: the approximately 13-acres center
subarea includes the Sleep Train Arena and its surrounding landscapes. The arena has
been the home to the NBA team Sacramento Kings since 1988. Outside the center area,
there are approximately 61-acres (or 5200 in total) of parking spaces. Two entrance roads
are on the southwest and south side of the parking spaces, respectively. Figure 1 is the
bird eye view of the subject property.
7
Figure 1- Bird Eye View of Subject Property
Shapes & Size
Looking at the lower portion of Figure 1, the subject site shows an imperfect
triangle shape, making the future redevelopment into any major types of property
(residential, retail, industrial, and office use) possible. By considering its current
surrounding residential properties alone, I expect the same residential use will be more
socially acceptable. In reality, however, the developer will have to interact with outside
8
consultants, such as professionals in land design, architecture, and engineering, while
working through site design, to determine which types of property could be
accomplished.
Soils & Topography
According to Seldin, “to have a usable site, the soil must have a load-bearing
capacity capable of supporting an intended structure.” The Natural Resources
Conservation Service (NRCS) assigned different unit symbol to different land to identify
the characteristics of the soil. Figure 2 is the screenshot of Soil Map from NRCS. An
ellipse indicates part of subject site and round rectangle indicates existing residential
property. Same unit symbol is represented by same color (red or blue). Although soil’s
load-bearing capacity is beyond the scope of this project, by using this simple
comparison, we can see some possible uses for the subject site, which is residential
property.
9
Figure 2- Soil Map of Subject Property
In terms of topography (surface features), those 5200 parking spaces indicates a
flat surface on subject site. Thus, this feature will lower the cost of construction in future
by making it less complicated.
10
Natural Hazards
Table 1- Five Record Floods in Sacramento Area
Year
1861
Descriptions
American River Levee failed east of 30th street, flooding
what is now known as River Park.
1951
Record Flood: Just after ground is broken on Folsom Dam,
the American River watershed experiences the first of five
record storms.
1956
Record Flood: Though engineers had been predicting it
would take a year to fill the nearly completed Folsom Dam,
the second record storm filled the dam in a week and
Sacramento is saved from flooding.
1964
Record Flood: The third record flood in less than 15 years
causes engineers to re-evaluate storm frequency. They
conclude the storm Folsom is designed to handle is a 120year storm not a 500-year storm.
1986
Record Flood: The February 1986 storm dumps 10 inches of
rain on Sacramento in 11 days. The American River dumps
more water into Folsom than it is designed to handle.
Folsom performance downgraded to about a 60-year storm.
1997
Record Flood: The fifth record flood in 46 years occurs over
the New Year's holiday. Unprecedented flows from rain and
melted snow surge into the Feather and the San Joaquin.
Sacramento is spared when the fury of the storm hits 40
miles north in the Feather River. Levee failures flood
Olivehurst, Arboga, Wilton, Manteca, and Modesto.
Sources: Sacramento Regional Flood Control Agency
11
As shown in Table 1, the Sacramento area experienced five record floods over the
last 50 years. According to Sacramento Regional Flood Control Agency (SAFCA), City
of Sacramento is subject to “unacceptably high risk of flooding” due to two reasons:
unreliable levees and increasing quantity of water from Sierra Nevada Mountains. In
addition, data from U.S. Geological Survey (2013) show the elevation of Natomas is
about 5 feet lower than the city as a whole, making this community an even more risky
place to stay. From the developer’s point of view, this nature hazard represents a great
obstacle for any future real estate developments.
12
Externalities to the Site
Access
Figure 3- Accessibility of Subject Site
As Figure 3 shows, the site has great access to many facilities within a radius of 3
miles, except the Sacramento International Airport (a radius of 5 miles), including
healthcare, recreational park, shopping, and highway system (Interstate 5 & 80). These
facilities help to increase the value of the subject site regardless of property types. For
13
instance, the subject site enjoys great visibility by being close to the Interstate 5, making
its future marketing efforts relatively more effective.
Infrastructure
Infrastructure is “the basic structures and facilities needed for the operation of a
society or enterprise” (Oxford Dictionaries, 2013). From a real estate developer’s
standpoint, here infrastructure refers to power/energy, water, sewer, and gas, as well as
the condition and capacity of surrounding roads.
As a sports and entertainment arena, the subject site consumes a large amount energy
whenever there is an event. However, the data from U.S. Energy Information
Administration (EIA) shows that the commercial sector has the lowest energy
consumption (in general) over the last 50 years. Although the use for the subject site has
not been decided yet, I anticipate the increase in energy capacity would drive up the
costs. In general, I do not expect the power/energy would be a big concern. Instead, I do
have some concerns over the water, sewer, and gas. Given single building and large
parking spaces, I expect more complicated construction works (for the pipeline) will be
needed during the redevelopment, which could results an increase in capital needs. But
the existing pipeline networks for surrounding residential communities should prevent the
costs from rising significantly.
In terms of roads, the existing four entrance (on west, east, south, and southwest
sides of the arena) roads were designed for heavy and slow traffic in case of events. In
14
other words, they have longer duration and large capacity. In case of redevelopment, the
developer would benefit from keeping them.
Legal & Regulatory Consideration
Jurisdiction
In California, different entities will get involved in the process for a real estate
project to get approved. In our case, which the subject project is located within the City
of Sacramento, the City Council is the legislative body, City Planning Commission is the
planning agency, and the city’s Community Development Department (CDD) is a part of
the process. Table 2 below illustrates a simple version of approval process for a new real
estate project.
15
Table 2- Real Estate Project Approval Process
Real Estate Project Approval Process
Launched by
Real Estate Developer
↓
Community
Development
Department (CDD)
Review by
↓
Recommendation (by
CDD) presented to
City Council & City
Planning Commission
↓
Final decision made by
Source: Dylan Herrick
City Council
16
As Dylan Herrick mentioned in his project, “nearsighted” City Council and shortterm (four years) membership in both organizations might promote an unfriendly
business environment and make the City of Sacramento to take a snaky route towards the
future. It is a double-edged sword, in terms of business development and real estate
development. As long as the lobbying is permitted in California, “nearsighted” City
Council members are valuable assets to any real estate development that can benefit the
local residents. Changing members in both organizations post both concerns and chances
to developer, since the site is subject to redevelopment in 3-4 years. The good news is
CDD has a project in place, called Natomas Joint Vision, to guide the future urban
growth for the community (CDD).
Because of the flooding risk in the subject property’s community, Federal
Emergency Management Agency (FEMA), Sacramento Area Flood Control Agency
(SAFCA), and U.S. Army Corps of Engineers (USACE) are regulatory agencies that
cannot be neglected. After Hurricane Katrina in 2005, USACE upgraded the standards of
levee safety measurements. Despite major improvements to the levees were made
between 1990 and 1997, the existing 42 miles of Natomas levee failed to meet the latest
standards and a building moratorium was placed by FEMA in December 2008 in the
Natomas community. In mid 2008, Natomas Levee Improvement Program (NLIP) was
initiated by SAFCA with the purpose to ensure the safety and future growth in Natomas
(U.S. Army, 2011). As Figure 4 shows, both SAFCA and USACE are responsible for the
construction.
17
Figure 4- NLIP Construction Progress Map
18
The program is expected to be completed in 2019, but the funding problem has
made it highly unlikely to be on time. While half of the projected $1.1 billion total costs
have been collected from non-federal sources, the other half that comes from federal
government cannot be granted, due to an “earmark” situation. “Earmarks are funds that
benefit a single congress member’s district” (Corker, 2011). As long as the moratorium is
in place, there will not be redevelopment in the subject site. Here, I assuming the current
moratorium will be lifted in the future.
In addition, the local Natomas communities will likely have tremendous influence
over any redevelopment of the subject property. Those community groups include North
Natomas Community Association (NCA), Environmental Council of Sacramento
(ECOS), and Mother Lode Chapter of Sierra Club. These nonprofit grass root
organizations have served the local Natomas community for as many as 30 years and thus
have great influential power over the community planning. Two articles from Sacramento
Business Journal (McCarthy 2005 & Gonzales 2004) showed that these community
groups will stand up against any real estate projects that they consider would have
negative impacts on local economy and environment. Therefore, it is critical for
developer to collaborate with these community groups in the early stage of the project,
otherwise the opportunity costs might increase significantly.
General Plan
General Plan is a long-term governmental plan to regulate the future land
development in a jurisdiction such as city or county. The City of Sacramento’s 2030
19
General Plan was adopted by the City Council in March 2009 and “set a new direction for
the future of Sacramento” with a set of six themes that “thread throughout the General
Plan” (City of Sacramento, 2013). The General Plan includes citywide goals and policies
as well as individual plans for each community. While topics/elements included in
citywide goals and policies apply to the whole city, individual community plans may also
include specific topics/elements that apply to that particularly community. However, all
topics/elements must be consistent with those “six themes”. Although, in practice, a real
estate development project may not be relevant to all themes, it must not go in the
opposite direction. The subject site is located within the North Natomas Community Plan
area, with an Urban Center High land designation (as shown in Figure 5). The 2030
General Plan states that Urban Center High should provide “thriving areas with
concentrations of uses similar to downtown” and mixed-use development is
recommended. However, given its high risk of flooding and significant amount of capital
needed, a mixed-use development project might not be feasible unless the local economy
has fully recovered.
20
Figure 5- Land Use & Urban Form Designation for North Natomas Community
21
Zoning
The Zoning Ordinance is used by city to regulate the land development in three
dimensions: use, bulk, and impact (Fulton & Shigley, 2005). Here, use refers to what
types of building can be built on this site; bulk refers to the size and shape of the
building; impact refers to whether the building is compatible with neighboring land uses.
Figure 6 shows the current zoning code for the subject site, which is SPX-Sports
Complex Zone.
Figure 6- Current Zoning of the Subject Site
22
Before redevelopment of the subject site, the developer must file application for
zone change, which is required by both City Planning Commission and City Council.
Upon receipt of the application, City Planning Commission will prepare a report for City
Council to make final decision. It is important that the new zoning code is consistent with
the 2030 General Plan.
California Environmental Quality Act (CEQA)
According to Office of the Attorney General, CEQA requires “state and local
agencies disclose and evaluate the significant environmental impacts of proposed projects
and adopt all feasible mitigation measures to reduce or eliminate those impacts.” In case
of foreseeable impacts on environment, an Environmental Impact Report (EIR) will be
required by the state/local agencies from the developer. Based on this report, those
agencies will then make their final recommendation or decision. In compliance with the
CEQA, the City Council also adopted a Master EIR for the latest 2030 General Plan in
2009. From developer’s standpoint, failure to comply the CEQA during early stage of
project planning could significantly drive up the costs and put the entire project at risk.
23
Chapter 3
MARKET ANALYSIS
In real estate development, the main purpose of market analysis is to analyze the
historical demand and supply, usually within a specific area and for a pre-determined
land uses (such as housing or retail), and then forecast what the future demand and supply
might be. In the end, the developer’s conclusions about market needs must be based on
the combination of opinions (forecasts) and facts (data). Since it is mostly an art (rather
than a science) to balance the two, there will not be right or wrong answers (and only
time will tell.) Since the conclusion from this chapter will then be used to build the
foundation of both redevelopment concept and feasibility analysis, it is critical that only
appropriate sets of relevant data from reliable sources will be selected and analyzed. In
this chapter, I will gather and analyze the data1 for the Greater Sacramento Region,
competitive submarket, different types of real estate property market, and capital market
before the conclusion.
Delineation of the Market Area
In United States, the U.S. Office of Management and Budget (OMB) is
responsible for defining Metropolitan Statistical Areas (MSA) for other government or
private entities’ statistical purposes. Considering the City of Sacramento, in which the
1
All data, except projection data, were gathered from U.S. Census Bureau. Population projection data for
MSA were gathered from Woods & Poole. Employment projection data for MSA were gathered from
California Employment Development Department.
24
subject site is located, belongs to the Sacramento-Arden-Arcade-Roseville, CA MSA, I
assume this MSA as the Greater Sacramento Region. As one of the fastest growing
regions in the country over the last decade, the Greater Sacramento Region has become a
distinct metropolitan center as well as housing center for commuters from and to the
nearby, more expensive, San Francisco Bay Area.
For some major real estate data providers, such as CoStar Group and STDB, three
layers of radius (1-, 3-, 5- miles radius) are used for competitive submarket analysis. Due
to the limited access to the proper data, however, the City of Sacramento will be treated
as proxy to subject site’s competitive submarket. In addition, countless pleasures that
were brought by the subject site to the region over long period have made many people
emotionally attached to the site. The redevelopment of the subject site will definitely
attract great attention from the public. Thus, it would make sense to use City of
Sacramento for competitive submarket.
Non-specific Market Analysis
According to the U.S. Census Bureau, the Greater Sacramento Region has
experienced a nearly 20% growth in the total population from 1,796,857 in 2000 to
2,154,391 in 2010. Table 3 shows the population, as of 2010, comparison between the
Greater Sacramento Region and the City of Sacramento. Because the City of Sacramento
is the largest city by total population (counts 22% of the total region population) among
all cities in this region, the percentage of each age group is almost the same.
25
Table 3- Population Comparison between MSA and Sac, as o 2010
Population Comparison Between MSA and Sac1, as of 2010
Age Group
Total Population
0 - 25
25 - 34
35 - 44
45 - 54
55 - 64
65 +
1
MSA
Sac1
Numerical Percent Numerical Percent
2,154,391
100%
466,488
100%
759,306
35%
168559
36%
291,009
14%
77,608
17%
284,317
13%
61,458
13%
310,353
14%
59,546
13%
132,571
6%
27,444
6%
259,264
12%
49,420
11%
Sac = City of Sacramento
Source: U.S. Census Bureau
However, based on the projection from California Department of Finance, the
peak of population distribution is skewing towards the right side of the chart (as shown in
Figure 7). Thus, the population of seniors in this region is expected to increase
substantially over the next 10 years. Table 4 shows the projected growth rate from 2015
to 2025. Compared with younger groups, the elder groups have much higher projected
growth, which indicates great potential for senior housing market.
26
Figure 7- MSA Population Projection by Age Group
Table 4- Projected Population Growth Rate, 2015 - 2025
Projected Population Growth Rate, 2015-2025
Age
Group
0 - 64
65 - 74
75 - 84
85 +
2010
2015
2020
2025
1,893,363 1,930,516 1,984,199 2,034,325
139,254
182,209
227,652
262,808
83,829
89,236
106,175
143,254
36,494
40,447
43,930
49,521
Annualized
Growth Rate
2%
23%
16%
11%
Source: California Department of Finance
According to U.S. Census Bureau, among all households in this region, 33.2% of
which are nonfamily households, and 23.9% of which are households are with seniors (65
years and over). In terms of the mobility, about 81% of the people who lived in this MSA
stay in the same residence. As many people who prefer to stay in this region and live
alone or with elder families, it is reasonable to believe they tend to rent their houses
27
instead of purchasing. Table 5 shows the household data comparison between the region
and the city.
Table 5- Households Comparison between MSA and Sac by Type, as of 2010
Households Comparison between MSA and Sac1 by Type, as of 2010
Total households
Family households (families)
Nonfamily households
MSA
Numerical
Percent
787,667
100.0%
526,337
66.8%
261,330
33.2%
Sac1
Numerical Percent
174,624
100.0%
103,730
59.4%
70,894
40.6%
Householder living alone
195,673
24.8%
53,342
30.5%
Households with individuals 65 years
and over
188,448
23.9%
37,725
21.6%
1
Sac = City of Sacramento
Sources: U.S. Census Bureau,
The less pleasing news is the purchasing power of those potential renters. By
looking at Table 6, I assume the slightly lower education attainment contributed, at least
partially, to the comparatively higher unemployment rate for the City of Sacramento.
However, the more recent data shows the unemployment rate has declined since 2010 (as
shown in Figure 9). Along with the recovery of overall economy, I expect the
unemployment rate will continue to decline. After the completion of my project, I expect
potential renters to have more or steady income to afford new apartments like this.
28
Table 6- Employment & Education Comparison between MSA and Sac, as of 2010
Employment & Education Comparison between MSA and Sac1, as of 2010
Civilian labor force
Employed
Unemployed
MSA
Numerical Percent
100%
1,059,447
86%
912,753
14%
146,694
Sac1
Numerical Percent
231,854 100.0%
84%
194,812
16%
37,042
Population 25 years and over
Lower than high school degree
Some college or Associate's degree
Bachelor's degree or higher
MSA
Numerical Percent
1,395,085
100%
479,199
34%
505,425
36%
410,461
29%
Sac1
Numerical Percent
300,055
100%
117,115
39%
98,533
33%
84,407
28%
1 Sac = City of Sacramento
Sources: U.S. Census Bureau
Figure 8- MSA Unemployment Rate Comparison
29
A closer look (Table 8) at the employment projection by industry from 2010 to
2020 would also support my assumptions above. Although it is subject to individual’s
capability, private sectors tend to pay their employees more than the heavily regulated
government sector. As local employment improves in the future, a developer can for sure
be benefited from the raising rental without many concerns about the renter’s ability to
pay.
Table 7- Selected MSA Industry Employment Projections, 2010 – 2020, as of Dec 2012
Selected MSA Industry Employment Projections, 2010 - 2020, as of Dec 2012
Growth
Industry Title
20101
20201
Rate
Government
230,300
240,700
4.5%
Trade, Transportation, and Utilities
132,500
160,600
21.2%
Business and Professional Service
102,200
127,100
24.4%
Educational Services, Health Care, and Social
99,400
124,500
25.3%
Assistance
Leisure and Hospitality
80,200
100,700
25.6%
1
Numbers are annual average employment
Sources: California Employment Development Department
Market Property Type Analysis
After studying the regional market and competitive submarket (City of
Sacramento) of the subject site, this section will gather market insights on different types
of property market (Retail, Office, and Multi-family) in the region from different real
30
estate companies2. These insights will help me, along with previous market data, to
conclude this chapter.
Retail Market
As of the third quarter of 2010, the overall retail market in the region has
continued its recovery from the 2008 crisis. Two indications are three consecutive years
of positive net absorptions and lowest vacancy rate over the last two years (CBRE Group,
2013). The overall vacancy rate calculated by CBRE was 11%, as same as for North
Natomas submarket. Recent employment announcements of Sutter and Dignity Health
provided confidence in steady recovery of the regional retail market due to its consumer
driven nature. Figure 9 shows the relationship between employment and retail vacancy
rate.
2
Companies include Colliers International, CBRE Group Inc, CoStar Group Inc, and Rocklin, CA-based
Seevers Jordan Ziegenmeyer.
31
Figure 9- MSA Employment vs. Retail Vacancy, as of 4Q 2012
The leasing rate for retail centers is positively correlated with leasing activities
among different classes (or types) of property: Class A properties had the highest rate,
whereas Class C properties had the lowest due to weak activities (CBRE, 2013); Hightraffic Power Centers asked 25% higher leasing rate than Community Neighborhood and
Strip Centers (Colliers, 2013). Figure 10 shows the comparison of direct average asking
rate between Power Centers and Community Neighborhoods.
32
Figure 10- Direct Average Asking Rate for Power Center and Community Neighborhood
33
Allowances, such as free rent, have been given by landlords to tenants in the hope
of boosting the leasing activities, yet the recovery for local tenants is expected to be at a
slower pace. Both CBRE and Colliers expect limited new construction activities in the
near future, unless great opportunities presented themselves.
Office Market
According to CBRE, the office market recorded positive net absorption in all four
quarters of 2012, making it the first time since 2006. Sutter Health was involved in
several significant lease transactions, which contributed to this record as well as the
decreases in the vacancy rate of overall office market. The vacancy rate calculated by
CBRE ranging from as low as 10% for East Sacramento submarket to as high as 33% for
South Natomas submarket. The overall vacancy rate was around 22%. Besides Sutter
Health’s effort to bring employees outside the region in, estimated growth in other
sectors, such as construction, financial, and education would also further ensure the
steady decrease in vacancy rate. (Colliers, 2013)
Similar to the retail market, Class A office properties charged the highest lease
rate among other two classes in the region. But compare to last year, the lease rates
continued to drop this year. However, as market anticipates further improvements in both
employment and vacancy rate, the lease rate is expected to increase in the future. Despite
this expectation, concessions will be continuously offered by property owners to attract
tenants.
34
Multifamily Market
Not surprisingly, the multifamily market in the region had the highest occupancy
rate in the 94% - 95%, compared with retail and office market (CBRE, 2013). Several
reasons include 1) weak economy had forced homeowner to become renter, 2) past poor
employment performance lowered the demand for residential property, especially the
demand for single housing property; 3) construction activities measured, by new
construction permits, remained low, leaving renters with limited options. (Colliers, 2012)
Given its strong rental fundamentals, the rental rate for multifamily market
increased about 7% from Q1 2011 to Q1 2012, and it is expected to grow over the next 57 years. In addition, private investor groups continuously expand their presences in this
region with the hopes to take advantage of low interest rate and the “bounce-back” of
multifamily market will further boost the multifamily market of the region. Figure 11
shows the rental rates over the last 6 years.
35
Figure 11- Rental Rate for Multifamily Market in MSA
Capital Markets
Typically, a series of financing arrangements will be involved in a real estate
development, depending on the stage of the development process. In this case, the 85acres subject site will require some combination of financing arrangements. Therefore, a
study in capital markets is necessary for the forecast of total costs in financial feasibility
chapter.
In essence, interest rate is the most important factor in influencing the cost of
financing. Although the Federal Reserve Board has been trying to keep interest rate at
extremely low level since late 2008, the interest rate used for real estate financing is
comparatively higher (in order to compensate the lenders for taking risks) and is typically
tied to one or more money market indexes. Figure 14 illustrates three primary money
36
market index rates that lenders typically use as a base for their risk premium. Interest
rates started to drop even before each time of the recession (as indicated in the figure x by
shaded area) and appear to take about five years to reach back to its pre-recession level.
However, as the last recession has lasted longer, real estate investors and developers
would be able to take advantage of the low interest rates when dealing with financing.
Figure 12- Comparison of Three Major Money Market Index
Market Analysis Conclusion
Based on the above market information, I conclude the following:

It appears for both the region and the city, over 40% of the population falls
between 25 and 64. From the human lifecycle’s standpoint, it ranges from recent
college graduates, who are more likely to become renters, to married-with-children
families, who are more likely to become homeowners. As for the City of Sacramento,
37
3% more of the population falls between 25 and 34 than the region. These indications
could be seen as future demands for multifamily property regardless renting or
owning. Meanwhile, the projection of future population clearly spots the prolonged
aging problem of the Greater Sacramento Region. The increasing population for age
65 and over represents a huge potential demand for senior housing.

The housing data shows that a larger segment of population in the City of
Sacramento opts to rental housing as opposed to home ownership. As one of the
hardest-hit real estate market in the country, people in this region have become more
vigilant about the housing and started to recognize the importance of mobility and
flexibility, As Florida (2010) suggested, these two mentalities have become the key
principles of the modern economy. In addition, I expect the employment
announcements by local healthcare companies would increase the demand for
multifamily properties in the near future.

Despite the high unemployment rate and low median household income in the
City of Sacramento, compared to the region, projections about the industry
employment clearly send some positive signals. With over 20% growth in
employment in non-government industries, it represents potential demands for both
multifamily property and retail property.

It appears the current supplies for both multifamily property and retail property
are limited. The current high occupancy rate of multifamily property makes the shortof-supply situation highly possible once the demand rises in the future. In addition,
38
there are not many senior housing residential properties close to the subject site,
which makes senior housing property, such as assisted living facility, also one of the
options available to developers. As anticipated by real estate professionals, few retailused construction activities will be launched in the near future, it is reasonable to
anticipate the shopping experiences in current shopping centers will be negatively
correlated to the employment that is expected to increase.

As the overall economy improves in the future, the interest rate will eventually go
back up, which in turn increase the financing costs of a real estate project like this.
Thus, both real estate investors and developers should start to take advantage of
current low interest rate, as the time of rise in interest rate is still a question to the
market.
39
Chapter 4
REDEVELOPMENT CONCEPT
Based on the information and data gathered in chapters 2 and 3, I will introduce
my redevelopment concept for the subject site in this chapter. The first section will be
focused on the target market segment of the redevelopment project. The second section of
this chapter will move on to the specific concept design, in which comparable properties
will be used.
Target Market Segment
Apparently, multifamily market has the best prospects, given its high occupancy
rate and potential waves of demand, among all three markets mentioned in chapter 3.
However, as large as the subject site (84-arces), it is not realistic to transform the entire
site into multifamily property, especially when many similar products have already been
built in the neighborhood. Meanwhile, as the region population keeps aging, senior
housing property becomes more attractive (and perhaps profitable) than before. As a
result, my redevelopment concept is to divide the subject site into two subareas with each
targeting specific market segments. Approximately 75% of the subject site will be
transformed into multifamily properties and approximately 25% of the subject site will be
transformed into senior housing. For the multifamily portion, the property will be
primarily targeting white-collar workers who were born between early 60s and mid 80s.
Some characteristics of my target market that vary in age from late 20s to early 50s are 1)
40
comparatively large population base, 2) overall higher education level, 3) considerable
disposable income, and 4) preference for healthy and diverse lifestyle. Given subject
site’s ease access to highway, they can easily commute to any major employment center
without worrying about the traffic.
For senior housing portion, the primary target segment will be individuals whose
age is 65 or more. The increasing senior population represents significant demand in the
future. According to Brecht (2002), many adult children live close to their elder parents,
and they become the most influential person in parents’ decision to move to senior
housing. The combination of multifamily and senior property could successfully satisfy
both needs.
Concept Design
Good design has never been more important than today, largely due to the
changing preferences of the consumer; the competitive real estate market regardless of
the type; and the environmental concerns of the community. Thus, the development team
must take into account all three when designing the concept.
Design consists of different interrelated elements. The four elements I will focus
on are construction style, amenities, unit mix, and site plan. Here, comparable property
will be used for illustration example of the design and guide the development cost.
41
Construction Style
Given the size and the surrounding communities of the subject site, I propose a
garden-style apartment project for the larger multifamily portion, and an assisted living
facility for senior housing portion.
Garden-style refers to the style of construction characterized by multiple-unit,
low-rise buildings, with no internal hallways but common stairwell for residents to enter.
In addition, it is usually surrounded by landscaping, parking, and open space. Reasons for
choosing garden-style are 1) given the size of the subject site, there is simply no need to
build a high-density community on it. 2) garden-style apartment will match the
surrounding single-family communities in terms of height and density; 3) the
construction costs of garden-style apartment will be much lower than others. An example
of garden-style apartment is shown in Figure 13.
42
Figure 13- Illustration of Garden-style Apartment
Assisted living facility (ALF) is low-rise building that consists of an internal
hallway to private apartments. Similar to a college residence hall, there will be rooms for
different uses, such as laundry, private dining, kitchen, etc. Usually a large common
space will be provided at the center of each floor for residents’ social and entertainment
needs. Reasons for choosing ALF instead of other types of facilities include 1) lower
construction and operating costs; 2) compared to nursing home, ALF is more attractive
due to fewer fees. Figure 14 illustrate an example of assisted living facility.
43
Figure 14- Illustration of Assisted Living Facility
Unit Mix
The mix of units by size and type should be based on the market study, or more
specifically, the target market of the project. Typically, unit types include studios, one-,
two-, and three-bedroom units. Given the wide range of my target market’s preferences,
the concept for 75% multifamily portion will be comprised of a mix of mostly two- and
three-bedroom floor plans, with few one-bedroom floor plans. Reasons for offering three
types of floor plans include 1) according to the U.S. Census, the average age at
individual’s first marriage in U.S. is 28.9 for men and 26.9 for women. () Given my
target markets’ age group (28 – 53), I assume my target market will more likely to be
unmarried couples, newlywed couples, couples with children, and empty nesters. Twoand three-bedroom floor plan can meet their different living preferences. At the same
44
time, the one bedroom floor plan will also attract young single professionals who like a
better living environment (compared with apartments in the city) and do not mind to a bit
of a drive to their workplace. In addition, when they decide to move on to the next stage
of their lives, their emotional attachment to this property will further secure the value of
the property. 2) A property with multiple choices and price levels allows the management
to quickly adjust the rental rate. The number of floor plans for each type will reply on a
more detailed consumer preference study, which will be carried out by the developer in
the future. For ALF portion, it will be comprised of a mix of studios and one-bedroom
floor plans. Figure 17 illustrate an example of ALF floor plan.
Figure 15- Example of Assisted Living Facility Floor Plan
45
Amenities
Amenities describe the common area features of a community. Some standard
amenities include guest rooms, Wi-Fi in the reception center, and laundry room. A
community with various amenities helps the business to thrive, yet a developer also needs
to consider if these amenities can well represent the tastes and financial status of the
future tenant. In this case, all amenities will be available to the entire community (tenants
live in multifamily property and seniors living in the assisted living facility). Given the
size of the site as well as my target market’s characteristics, premium quality amenities
should well satisfy tenant’s various needs while still keeping it at an affordable price
level. Therefore, besides the standard amenities mentioned above, three pet-friendly
playgrounds, three competition swimming pools, three recreational pools, nine outdoor
Jacuzzis, six tennis courts, and a clubhouse will be included in my project as well. The
clubhouse will feature a dining room, recreation room, reading room, billiards lounge,
conference room, and fully equipped fitness room.
Site Plan
A site plan describes the physical layout of the buildings, roadways, and
landscaping. Based on the information gathered in previous chapters, there are obviously
many factors that would affect the layout of the project, such as different public policies,
local influential groups, preferences of target markets, and the surrounding communities.
For this project’s purpose, instead of providing an actual detailed site plan done by
46
professional architects, I will offer some conceptual ideas on what I think the layout
should be.
47
Figure 16- Conceptual Layout of the Redevelopment Project Site
Figure 16 illustrates the conceptual idea of my project’s layout. As it shows, the
subject site will be divided into five subareas: clubhouse at the center, assisted living
facility at the southeast corner, while three apartment clusters fill the rest. The major
function of a clubhouse is to hold social gatherings and entertainment activities, its
“service radar” should cover the whole community. Since the shape of the subject site
appears to be triangle-like, the preferred clubhouse location should be at the center (core
area) of the site. The assisted living facility will be located at the southeast corner of the
subject site because the location is 1) closer to the existing shopping area, which makes it
convenient for seniors to shop occasionally, and 2) closer to the entrances of the
community and the planned light rail station (Regional Transit, 2010). The rest remaining
apartment building clusters will be at the northwest, northeast, and southwest corners of
the site, respectively. Amenities will be at the center of each cluster in a way that each
amenity location will serve each angle of the triangle-like site. Each amenity area will
include one competition swimming pool, one recreational pool, three to four outdoor
48
Jacuzzis, one pet-friendly playground, and two tennis courts. Landscapes and parking
spaces will fill the empty space between each subarea so the visual prominence of
vehicles will be minimized. Yet, by doing this the walkability of this community might
be interfered by car traffic. Within each apartment cluster, however, the walkability can
be realized by adding features like balconies and internal streets to provide residents with
a sense of safety and convenience.
49
Chapter 5
FEASIBILITY ANALYSIS
Methodology
In this chapter, I will be transforming the information gathered, market trends
identified, and ideas emerged in previous chapters into a framework to test viability of
my proposal: a multifamily redevelopment project. There will be two feasibility tests in
this chapter: physical feasibility and financial feasibility. For financial feasibility section,
two circumstances will be considered: first phrase is “build to last” and second phrase is
“sell”. While my proposal’s characteristics in chapter 4 will be reflected throughout this
chapter, the information from chapter 2 will be the foundation of physical feasibility
analysis, and the financial feasibility will primarily reply on information from chapter 3.
Physical Feasibility
The purpose of this section is to determine whether my proposal is physically
feasible given regulatory requirements. Recall information mentioned in chapter 2, there
are several actions needed to be done before the actual construction. Primarily, the
existing building moratorium prohibits any new real estate development in the Natomas
Community, including the subject site. The moratorium would be lifted upon the
completion of Natomas Levee Improvement Program (NLIP). However, the lack of
funding from federal level makes the completion date unpredictable. As a result, there is
50
a chance that the developer will need to provide some funding to help the completion of
NLIP, which in turn will require developer to ask higher rate of return from this project.
Second, the 2030 General Plan assigned “Urban Center High” land use designation to the
subject site. Once FEMA lifts the moratorium, a General Plan Amendment is required to
change the current land use designation to “Suburban Neighborhood High”, a designation
that allows multifamily apartments to be built on the site. According to the General Plan,
any designation should reflect development standards for building density. For new
designation, standards include 1) the range of dwelling units per net acre is from 15 units
to 30 units per net acre, 2) the lot coverage should be less than 60%, 3) building height
ranging from 1 to 3 stories, etc.
Along with the change of land use designation, the zoning code also needs to be
changed from SPX – Sports Complex to R-2B – Multi-Family Zone. The new zone offers
broader density flexibility as a transition from the garden apartment setting to a more
traditional apartment setting. Zone R-2B allows for 1) a maximum of 21 dwelling per net
acre or 2) a minimum of 2000 square feet in terms of land area per unit, and 3) maximum
lot coverage less than 50%. Figure 17 shows the comparison of the two standards and the
calculation of maximum dwelling unit.
51
Figure 17- Comparison of Standards & Calculation of Maximum Dwelling Unit
The maximum number of dwelling units for the subject site is 1764 units, based
on the combined final standard requirements. In practice, however, I assume some
“buffers” will be necessary to prevent the high density. Thus, there will be a 15%
decrease in maximum dwelling units, making the total unit number down to 1500 units.
Besides, the standards mentioned above, there are some other specific
requirements for parking, building setback, pedestrian circulation, and open space. Since
an actual site plan is required while the city officials review the developer’s proposal,
here I will assume a percentage to these three items: 18% percent for building setback,
18% for pedestrian circulation, and 5 acres for open space. Table 8 shows the calculation
of land area available for development.
52
Table 8- Land Area Available for Development
Land Area Available for Development
Total Land Area (sq ft)
Less
Parking
Building Setback
Open Space (Acres)
Available for Development
3,659,040
18%
18%
5
(658,627)
(658,627)
(217,800)
2,123,986
Source: Xingnan Liu
In terms of parking, R-2B zone requires 1.5 spaces per dwelling unit and 1 guest
space for every 10 dwelling units. Each parking space requires approximately 340 square
feet of land. Table 9 shows the total spaces needed for parking based on the tota1 of 500
units.
53
Table 9- Total Spaces Needed for Parking
Total Spaces Needed for Parking
Number of Space
Requirements
Required
1.5 Parking Space per Dwelling Unit
1 Guest Space per 10 Dwelling Units
Total
Total Square Feet
Required
3000
150
3150
1,020,000
51,000
1,071,000
Source: Xingnan Liu
As stated in the previous chapter, my redevelopment project consists of two
portions: properties for regular multifamily (75%) and properties for seniors (25%). Thus,
1125 out of 1500 units will become multifamily properties, and 375 out of 1500 units will
become properties that target seniors. For average unit size, I assume 1100 square feet per
unit for multifamily portion and 600 square feet per unit for senior portion. In addition, I
assume 2-story apartment building for the multifamily portion and 1-story building for
senior portion. Table 10 shows details of the building area calculation, given two
different portions involved in this project.
Table 10- Total Building Area
Total Building Area
Multifamily
Units
1125
Avg. Unit Size
1100
Story
2
Building Area
Total Building Area
Source: Xingnan Liu
618,750
Senior
375
600
1
225,000
843,750
54
After allowing for areas for a clubhouse and amenities, table 11 illustrates the
physical feasibility of my proposal for subject site.
Table 11- Physical Feasibility Analysis for Subject Site
Physical Feasibility Analysis for Subject Site
Land Area Available for Development
2,123,986
Less
Total Parking Spaces
(1,071,000)
Total Building Areas
(843,750)
Areas for Clubhouse and Amenities
Clubhouse (18,000 Square Feet)
(18,000)
Amenities (78,000 Square Feet)
(78,000)
Excess (Deficiency) Over Zoning Requirements
113,236
Source: Xingnan Liu
Finally, the development has to meet the maximum lot coverage requirement
which is the smaller number among the two standards. As shown in table 13, the
maximum lot coverage requirement for the subject site is 50%. Since the lot requirement
also taken into consideration any covered parking, I assume one covered parking space
per unit. Table 12 shows the calculation for lot coverage requirement.
55
Table 12- Lot Coverage Calculation
Lot Coverage Calculation
Total Land Area
Maximum Lot Coverage of 50%
Less
Total Building Area
Total Covered Parking Spaces1
Clubhouse & Amenities
Excess (Deficiency) Over Zoning Requirements
1
3,659,040
1,829,520
(843,750)
(216,000)
(96,000)
673,770
Number of Covered Lot times Space per Lot, 1500 x 144
Source: Xingnan Liu
As both numbers from table 11 and 12 are positive, my redevelopment project is
physically feasible. Now we turn to financial feasibility for the developer.
Financial Feasibility
According to Weitzman (1990), the purpose of financial feasibility analysis is to
discover “whether a development project can be carried out with a sufficient return on
capital to attract the investors.” In other words, the developer has to decide whether the
future gains can outweigh the total costs, which include the upfront development costs,
continuous operating costs and mortgage payments after completion. There are three
basic approaches to evaluate a property. The first approach is the sales comparison
approach is to estimate the value by comparing subject property with other properties that
are similar in the sense of income generation ability or target market. The second
approach is the cost approach, which considers the value of a property should merely
56
exceed the sum of construction costs minus depreciation and the land acquisition costs.
The third approach is the income approach, which consists of three categories (direct
capitalization, discounted cash flow, and gross income multiplier). I will be using these
three approaches to estimate the gains and costs of this project and eventually test the
financial feasibility of my proposal.
Total Development Cost
Total development cost is the sum of all costs incurred from initiation to
completion of a project, which in this case includes land acquisition costs, construction
costs, financing, etc. Given the difficulty of estimating total development cost at early
stage of a project, I will use the construction costs as proxy of total development costs
(exclude land acquisition costs). I will use comparison approach to gather information on
construction costs (costs per sq ft) in order to estimate the construction costs. Then other
costs, such as financing and architect, will be added as certain percentage of construction
costs. Note that one of the major drawbacks for this approach is not two properties are
considered exactly the same, therefore an experienced developer should re-do the
estimation as the project progresses. According to Reed Construction Data (2013), the
cost per square foot for multifamily apartment in Sacramento is ranging from $105 to
$125 per square foot. Based on the total building areas I calculated earlier, my estimation
of the construction costs plus other costs is $200 million, or approximately $119 per
square foot.
57
Land Acquisition Cost
As a part of total development costs, land acquisition cost is the funding
developer spent to purchase the site. As shown in Figure 20, there is a city-owned land
(with an unfinished baseball stadium on it) directly north of the subject site. As one of the
properties in the deal between City of Sacramento and Sacramento investor group, this
100-acres land was valued at $19.99 million. Considering this city-owned land the most
fitted comparable property for valuing the subject site, I estimate the land acquisition
costs at $15 million. Since two sites are nearly identical in terms of location, designed
land use, and zoning, I assume the value-to-area ratio would be the same. Based on this
assumption, the land value of subject site is nearly $17 million. The primary reason for
the $2 million write-off is because after acquiring the subject site, the developer would
need to pay extra costs for demolition, which in fact increase the total costs to acquire the
land. No developers will accept the deal if subject site is valued more than $19.99
million. If the Kings leave the current arena, I anticipate the value of the arena will be
decrease substantially due to less-than-before income generation ability. The owner of the
property should bet selling the property and the land at a discounted price would be a
better choice. Since the value of the subject site is very competitive in the market, I do
not expect the owner to offer any kinds of financing. Therefore, the $15 million land
acquisition costs will be provided in form of developer equity.
Given the scale of my project, I assume the developer can obtain a construction
loan with 75% loan-to-value of the total development costs. Thus, approximate $69.5
58
million will be come from the developer’s equity. The loan amount will be given to the
developer all at once prior to construction. I also assume the construction loan will be
retired by a permanent loan after two years’ construction. Table 13 shows the information
of my mortgage assumptions.
Table 13- Information of Mortgage Loan
Information of Mortgage Loan
Construction Loan Permanent Loan
LTV Ratio
75%
70%
Loan Amount
$
150,000,000 $
169,073,966
Interest
6.0%
5.0%
Term (in year)
2
15
Fees
3%
0%
Effective Loan Amount $
145,500,000 $
169,073,966
Source: Xingnan Liu
Projected Net Operating Income
As I mentioned earlier, there will be two circumstances in the financial feasibility
section: “build to last” and “sell”. I define “build to last” as the developer will continue to
operate the property after its completion until the 15-years permanent loan is paid off. I
define “sell” as the developer will sell the property before pay off the permanent loan .
For both circumstances, I will have to estimate the Net Operating Income (NOI) of the
property in order to value the property. NOI equals Effective Gross Income (EGI) minus
operating income, and estimating EGI is essentially estimating the rental rate of the
property. Based on the information in chapter 3, I have the following projections: 1) the
monthly rental rate is $1500 per unit for multifamily portion; $2400 per unit for senior
59
housing portion; 2) 6% for the overall vacancy rate and 2% for the concessions; 3) annual
operating expense accounts for 40% of the EGI. Table 14 shows the first year projected
net operating income of the property.
Table 14- Projected NOI of the Property
Projected NOI of the Property
Multifamily
Rental Rate Per Unit Per Month $
1,500 $
Number of Units
1,125
Number of Payments Per Year
12
Projected Gross Income (PGI)
$ 20,250,000 $
Total PGI
$
Senior
2,400
375
12
10,800,000
31,050,000
Vacancy @ 6%
Concessions @ 2%
Effective Gross Income (EGI)
Operating Expenses @ 40%
Net Operating Income (NOI)
(1,863,000)
(621,000)
28,566,000
(11,426,400)
17,139,600
$
$
$
$
$
Source: Xingnan Liu
“Build to Last”
As I previously defined, “Build to Last” assumes the developer will not consider
selling the property before the 15-years mortgage is being paid off. Here, I will introduce
one of the three major asset valuation models, Discounted Cash Flow (DCF) model, for
the valuation of the property. The DCF model is based on the present value rule, “where
the value of any asset is the present value of expected future cash flows on it”
(Damodaran, 2012). Essentially the DCF model replies on the discount rate, future cash
flow, and the growth rate of that cash flow to calculate the value of an asset. Since the
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effective annual NOI within the first 15 year is actually less than it should have been after
taking into account the mortgage payment as well as newly built, high quality property
would be very attractive to the potential tenant, I will be using the two-stage DCF model
for the valuation. I define the first stage is from Year 1-15 and second stage is Year 16
and on. Below are my assumptions.
For this case, I assume a 15% discount rate, which is much higher than the 5%
permanent loan rate, for the first stage of growth period. Due to the scale of my project,
the developer is subject to great amount of risks, such as General Plan Amendment,
rezoning, etc. Therefore, I expect a 10% risk premium on top of 5% permanent loan rate.
Then the discount rate would decrease to 10%. Future cash flow equals estimated current
cash flow times estimated growth rate of the cash flow. Thus, the key is the growth rate. I
anticipate the rent will grow at a higher growth rate of 6% on average for the 15-year
period, and become stable at 4% thereafter. Figure 18 illustrates the calculation of twostage DCF model.
Figure 18- Calculation of Two-stage DCF Model
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Based to my assumptions and calculation, the present value of this property if it is
“Build to Last” is $202,245,198. Note that, however, effective NOI is considered as the
Free Cash Flow to the Firm (FCFF) in DCF Model and is subject to deductions like
depreciations and taxes. Since estimating the depreciation and taxes is difficult at this
stage, the value shown in Figure 18 will provide the deal about the profitability of this
project.
“Sell”
The “Sell” is defined as the developer will consider selling the property within 15
years. First, based on the information provided in chapter 3, I assume the capitalization
rate will stay at 6.5%. Keeping previous assumptions on discount rate, growth rate, and
rental rate unchanged, Table 15 illustrates the Internal Rate of Return (IRR) for selling
the property. Internal Rate of Return is one of the primary indicators used to measure the
profitability of a real estate project or property.
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Table 15- Internal Rate of Return Calculation
Year Loan Life
IRR
2032
15
16.23%
2031
14
16.12%
2030
13
15.97%
2029
12
15.75%
2028
11
15.44%
2027
10
14.99%
2026
9
14.34%
2025
8
13.38%
2024
7
11.93%
2023
6
9.70%
2022
5
6.07%
2021
4
-0.13%
2020
3
-11.60%
2019
2
-34.89%
2018
1
#NUM!
Source: Xingnan Liu
Based on the assumptions I made, the developer will receive a positive IRR 4
years after property’s completion.
Scenario Analysis
Scenario analysis is used to further test the feasibility of a project when
uncertainties are expected in the future. My scenario analysis will attempt to predict the
pessimistic and optimistic outcome of my redevelopment concept, and the assumption for
most likely outcome will be provided for comparison. Table 16 summarizes the
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corresponded assumptions I am using for the varying outcomes of my development
concept to be tested in this section.
64
Table 16- Assumptions for Scenario Analysis
Assumptions for Scenario Analysis
Most Likely Pessimistic
2018 Rental Rate Per Unit Per Month ($)
Multifamily
$
1,500 $
1,200
Senior
$
2,400 $
2,100
Vacancy Rate (%)
6.0%
8.0%
Concessions (%)
2.0%
4.0%
Construction Loan Rate
6.0%
8.0%
Permanent Loan Rate
5.0%
6.0%
Discount Rate
Stage One
15.0%
18.0%
Stage Two
10.0%
12.0%
Rental Growth
Stage One
6.0%
5.0%
Stage Two
4.0%
4.0%
Operating Expenses (%)
40.0%
42.0%
Cap Rate
6.5%
7.0%
Optimistic
$
$
1,600
2,600
5.0%
2.0%
6.0%
4.5%
15.0%
8.0%
6.0%
5.0%
40.0%
6.0%
Source: Xingnan Liu
Table 17 summarizes the results for both Pessimistic and Optimistic scenarios in
two circumstances.
65
Table 17- Comparison of Scenario Analysis Results
2018 Projected NOI
Annual Loan Payment
PV of Property
Year
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
"Build to Last"
Most Likely
Pessimistic
Optimistic
$ 17,139,600 $ 13,091,761 $
18,581,401
$ 16,288,973 $ 18,114,567 $
15,743,121
$ 202,245,198 $ 52,101,857 $ 520,336,626
Most Likely
16.23%
16.12%
15.97%
15.75%
15.44%
14.99%
14.34%
13.38%
11.93%
9.70%
6.07%
-0.13%
-11.60%
-34.89%
#NUM!
"Sell"
Pessimistic
2.97%
1.62%
-0.13%
-2.46%
-5.67%
#NUM!
#NUM!
#NUM!
#NUM!
#NUM!
#NUM!
#NUM!
#NUM!
#NUM!
#NUM!
Optimistic
19.28%
19.38%
19.48%
19.56%
19.63%
19.66%
19.64%
19.50%
19.20%
18.58%
17.39%
15.09%
10.35%
-0.57%
-31.94%
Source: Xingnan Liu
It is clear that given the scale of my project, the overall economy plays an
important role in this project. In “most likely” scenario, the developer can either keep the
property or consider selling it on the 5th year of operation. A developer should abandon
this project if the economy does not grow at the expected rate. It is interesting to find that
66
even if the economy is doing well, the best time for the developer to sell the property in
2027. Of course, keeping it in good economy will transfer this project into a “cash cow”.
67
Chapter 6
CONCLUSION
Assuming the role of developer, I collected background information, anticipated
market trends, transformed an idea into redevelopment concept to meet the expected
future demand, and eventually tested the concept’s physical and financial feasibility
given facts and my own assumptions. After 2008 financial crisis, the world’s economy
has become more sensitive and fragile than before. Flexibility and adaptability have
become crucial to the survival of many industries, including real estate. Therefore, a
successful developer will carefully select, rigorously analyze, and quickly adjust any
projects that have a chance to succeed. Here, I present my conclusions on this
redevelopment concept, along with recommendations on how the subject site can be
developed otherwise.
Conclusions
In terms of physical feasibility, the current building moratorium is crucial to the
success of my redevelopment concept. As mentioned before, the lack of funding
postpones the completion of Natomas Levee Improvement Program (NLIP). Without the
new levee system, the moratorium will be in place forever, and no buildings can ever be
built within Natomas community. However, the capital problem can be solved relatively
easily. Once the moratorium is lifted by FEMA, the success of this project depends on the
City of Sacramento’s approval of a General Plan Amendment and a new zoning code.
68
Since my redevelopment concept complies with all the political requirements, I am
confident that the concept will grant its approval.
In terms of financial feasibility, the destiny of this concept lies upon the condition
of general economy. Those assumptions I made were simply the reflections of the
condition of ongoing economy. Due to the scale and riskiness of this project, the
developer will need to hold the property for 4 years in the “most likely” scenario, or 2
year in “optimistic” scenario to gain a positive return. In the “most likely” scenario, the
long the developer owns the property, the better the IRR. In other words, the developer
should “hold” this property in the “most likely” scenario. In the “optimistic” scenario, the
IRR will reach its peak after 10 years of operation, which indicates an opportunity to sell
the property. On the other hand, owning the property will bring developer even more
return. Unfortunately, the developer should abandon this concept under either
circumstances (hold or sell) if the economic condition are not favorable.
Recommendations
During the development of my concept, I have come to recognize other
alternative uses for the subject site. The first alternative is a hospital. While gathering
market information, I recognize the absence of local hospital in Natomas community.
Given many existing residential properties surrounding the subject site and its great
access to highway, hospital could well serve the people who live in North Sacramento.
The second alternative is science park. Again, during the market research, I came to
recognize the Greater Sacramento Region is becoming a hub for green energy
69
technology. The land provides one of the best locations to improve the region’s economy
through new employment. In addition, the current land use designation and zoning code
allows developer to build such a park without any amendments.
70
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