Feasibility Studies
Feasibility Studies (Analyses) are most often uniquely client specific in nature. “The Dictionary of Real Estate Appraisal published by the Appraisal Institute” defines Feasibility Analysis as follows:
- “A study of the cost-benefit relationship of an economic endeavor. (USPAP, 2010 – 2011 ed.)
- An analysis undertaken to investigate whether a project will fulfill the objectives of the investor. The profitability of a specific real estate project is analyzed in terms of the criteria of a specific market or investor.
- Often interchangeable with investment analysis. Both studies forecast property revenues and expenses. Feasibility analysis is more often undertaken as part of a highest and best use study for a proposed property use. Also called a highest and best use study; economic feasibility study; or financial projection study.”
When undertaking such an assignment the appraiser is most often testing the economic feasibility of a proposed project that can be based solely on market driven forces, client imposed criteria, or as is most often the case client imposed investment criteria as based on market expectations of the specific project. Again referring to, “The Dictionary of Real Estate Appraisal published by the Appraisal Institute” it defines Economic Feasibility as follows:
“The ability of a project or an enterprise to meet defined investment objectives; an investment’s ability to produce sufficient revenue to pay all expenses and charges and to provide a reasonable return on and recapture of the money invested. In reference to a service or residential property where revenue is not a fundamental consideration, economic soundness is based on the need for and desirability of the property for a particular purpose. An investment property is economically feasible if its prospective earning power is sufficient to pay a fair rate of return on its complete cost (including indirect costs), i.e., the estimated value at completion equals or exceeds the estimated cost.”
A Real Estate Market Feasibility Study typically involves testing a specific geographic location for a specific real estate development project, and usually involves all of the typical components of production including land, labor, capital, and entrepreneurial incentive. Developers often conduct feasibility studies to determine the best location within a given geographic area for a certain project and to test the alternative land uses for specific parcels of land. Feasibility Studies will take into account the importance of the business and the proposed development in the selected areas under consideration.
While a Feasibility Analysis is an integral test of reasonableness for a clients decision making purposes on whether to proceed with a proposed project, it can also be utilized in conjunction with a sensitivity analysis. Referring to, “The Dictionary of Real Estate Appraisal published by the Appraisal Institute” it defines Sensitivity Analysis as follows:
“A method for isolating how change in one or more variables may affect investment risk.”
In other words it is a:
“A technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions. This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in the type or amount of improvements constructed will have on the expected rent income per unit or ultimate sales price per unit. Sensitivity is a way to predict the outcome of a decision if a situation turns out to be different compared to the key predictors employed. It thereby creates a given set of scenarios, the analyst can determine how changes in one variable(s) will impact the target variable.”
If your looking for research and advice about real estate development in this area let our firm put our consultation services to work for you. We not only bring nearly two decades of real estate experience in the far Western North Carolina region to the table but also the background in the overall broader economic environment that can provide the sound analysis you seek when attempting to make informed real estate investment decisions in this area.
