Real Estate Development-Memo writing

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WORKING SAMPLE

Xue Wood, Planner

332 W Indiana Ave., St. Joseph, MO

P: 646.401.4320 I E: xuechenberry@gmail.com

Memo To: From: Date: Re:

J. Smith, Director of Planning Xue Wood, Planner November 23, 2011 Recommended Action by the City for the Preservation of the Rainbow Building

Recommended: That the City negotiate with the developer of the Rainbow Building on the basis of rehabilitating the building to a standard that will qualify the project for the use of Historic Rehabilitation Tax Credits. This may require city intervention to ensure that operating losses are covered and recognition that a change in ownership is likely within the first five years of operation.

A developer has proposed to demolish the Rainbow Building and to build 50 units on the site. Objections to the demolition were voiced. As an alternative, the developer proposes to preserve some of the building and to construct 46 units, mixing new construction and rehabilitation. This analysis shows that, if the developer will rehabilitate the building to a standard that will qualify the structure for Historic Rehabilitation Tax Credits, the developer will realize a higher return on investment despite the fact that only 42 units could be accommodated in this alternative. The table below summarizes the investment performance of the different development alternatives.

Investment Performance of the Development under Alternative Scenarios Alternative

Units Equity Required

Maximum IRR-AT

Maximum ROE

Year Sale

New Construction Mixed New/Rehab Historic Rehabilitation

50 46 42

8.3% 7.5% 22.3%

1.0% -0.8% -14.6%

8+ 8+ 4

$1,156,250 $1,150,000 $413,400

Each of the three development alternatives has been analyzed in terms of its investment performances. Only the new construction alternative generates a positive cash flow at any time during the development’s operation. The Historic Rehabilitation alternative fails to generate a positive cash flow, which will necessitate an operating reserve funded by the owners to cover these losses over the years of operation. The mixed-new construction and rehabilitation alternative does not generate a positive cash flow through eight years of operation. Only the new construction alternative generates a sufficient return on equity from operating the property that the developer will be interested in the long-term maintenance of the property. This suggests that the City must stand ready to assist in the maintenance of the property over time. However, the alternative involving the use of Historic Rehabilitation Tax Credits has several advantages, and one problem:

Real Estate Development Planning | Xue Wood

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