Potential Development Site Feasibility Analysis

Running quick analyses allows us to discover whether or not a project would be feasible or profitable enough given the basic zoning rules as well as current market conditions. 

Here's an analytical rundown I did for a friend of mine back in November of 2019. They were curious about a listed property, and wanted to better understand one of the many ways to approach a site like this.

Subject: 

1991 Colony St. Mountain View, Ca 94043. 

- +20,000 SF Lot 

- $4,100,000 for the site (Looking at the property as a site versus that of a home) Highest and Best Use would be the key verbiage that a broker would use.

This would be a Highest and Best Use style Analysis: 

Because the client is a developer, we must do a quick check on the zoning in terms of what we can and cannot send them. If you send them properties that are not underwritten or you do not know the whole story generally, you may lose the client or they'll stop picking up your calls / blacklist you. 

Zoning:

The Zoning states that the property is R3-2 for the address. We can now check what this supports given that the property is a 20,000 SF lot and we're doing a highest and best use analysis. The property is zoned residential so that would make it attractive for a residential developer. 

Upon further research, we can see that 20,000 Square feet can support (You have to scroll but I just took a screenshot unfortunately), 5 units to be developed with a 16,000 SF lot in terms of an R3-2 Zoning code. Each additional unit would require the other highlighted metric of 2,000 SF. 16,000 SF + 2,000 SF + 2,000 SF = ~20,000 SF or a total of 7 Units to be developed to stay within zoning code for our developers.

We then can assess what the current market would be willing to pay for 7 Units:

There are only 29 properties that fit the 7-unit criteria that exist in Mountain View and with a housing crisis, this is good news for us. This would show that we can potentially deliver 7 units and have it be approved. With Multifamily being a popular product type as well as a one of the 4 core commercial real estate classes, there is a demand for more units versus one 5-bed/4-bath Single Family Home 

Diving deeper, we can see that: 

Conclusion:

The average price per door is $624,000 per door. We can then multiply that by the 7-units in our project to get $4,368,000 as the current market value of the property upon delivery. 

With the cost of the project being $4,100,000 and the delivery being worth $4,368,000, there is only a $268,000 spread and we have not included the cost of development as well as calculating the NPV (Net Present Value - what the final project would be worth today), Sensitivity Analysis (to see how the market would react to the delivery of more units as well as potential outcomes in a possible recession), the Projected Hold Period (factoring how much holding period would affect our client's development), and the last basic, Entitlement and Labor Costs (one really needs to be well capitalized for this). 

For many of these reasons that were not factored in, the project is currently overpriced and it would be rather rough to continue going into "what-if" analysis when the spread is only $268,000. 

The other option in terms of analysis would be a checking what compliments the developers' recent projects. Seeing how they have completed multiple transactions in the 100's+ of units in the Bay Area, a project that would only allow them to deliver 7 units would not seem that attractive and with theory of mind in place, we are able to understand that they would want a project that can compliment more density (i.e. 20+ units or so). 

A small plot of land may work if the zoning supports high density, but unfortunately this site does not have that zoning.

Recap:

Running a brief analysis and walking someone else through the process was really helpful to improving my articulation in regards to situations like this. The development group was ideally looking for something with the potential for a high density multifamily development, but unfortunately this site did not make the cut.

Ron E. Cruz