Hogan Building -- Financial Analysis

     Financial Analysis:  Regardless of the feasibility of all other metrics, if the financial analysis does not solidly support a project's completion then the project is a no go.  The following summarizes and presents key financial inputs and outputs for the analysis of this project. 

     Construction Costs: There is a significant variance in the construction costs by floor for this project.  Information used to estimate floor by floor estimated construction costs came from a variety of sources including RS Means, CityFeet.com, and the Fort Worth Chamber of Commerce.  The following summarizes what needs to be completed on each floor and estimated costs:

      Basement: To create six 1,000 sf offices in the basement will require improved lighting, the addition of toilets and the erection of partition walls.  The estimate construction cost to achieve this level of basic upgrades in this size space is $100,000.  Estimating construction costs of $14/sf in the basement provides a 3% cushion.

      First Floor: The first floor is retail ready.  Estimate $5/sf in TIs and the space should be ready to rent.  This equates to $18,755.

      Second Floor: Thge second floor is already office space, but is only tailored to a single tenant use.  The installation of partition walls and a $5/sf TI allowance for finish out will total $53,568 in construction costs.

      Third Floor: The third floor will convert office space to apartment / condo space.  The cost of construction a 1-3 story apartment complex in the DFW area is about $125/sf.  Because this is remedial and not new construction and is limited to one level, the third floor construction costs are estimated at $100/sf.  This is approximately $669,600

     Total Construction Cost: The total estimated construction cost for the entire building is $844,991.  The following displays a feasibility analysis for the project that incorporates these construction estimates with acquisition costs, costs of capital and other key metrics:

Financial Feasibility Analysis

+ Construction Costs (PSF)	$                     34.48
x Total Square Feet	24,505
= Total Construction Cost	$            844,932.40
+ Acquisition Costs	$            865,000.00
= Total Development Costs	$         1,709,932.40
- Governmental Rebates for Energy/Sustainability	$                          -
= Revised Development Costs	$         1,709,932.40
Project Financing Details
Maximum LTV Ratio	75.00%
Loan Term in Months	180
Loan Interest Rate	7.00%
Equity Required	$            427,483.10
Debt (Loan Amount)	$         1,282,449.30
Before Tax Cash Flow (BTCF)	$55,329.68
Annual Debt Service	$138,324.20
Minimum DSC Ratio	1.40
Required Minimum Net Operating Income (NOI)	$193,653.88
Total Operating Expenses as % of EGI	30.00%
Total Operating Expenses	$82,994.52
Effective Gross Income (EGI)	$276,648.40
Vacancy and Collection Loss % of PGI	15.00%
Vacancy and Collection Loss (VCL)	$              48,820.31
Potential Gross Income (PGI)	$            325,468.71
Required Gross Rental Rate PSF	$                     13.28
Required Net Rental Rate PSF	$                       7.90
BTCF/EQUITY INVESTED (BTROE)	12.94%

Analysis: Given the above assumptions and estimates, this project needs attain an average gross rental rate psf of $13.28.  This equates to a minimum Potential Gross Income of $325,468.71.

     Office Space:  According to Grubb & Ellis & CBRE -- Office & Industrial Trends Report, 4th Quarter 2011, average annual rates for Class B Office Space in Fort Worth's Central Business District were $19.15/sf.  Offices in the basement will not enjoy the visibility and notarity of spae above ground.  Accoringly, annual basement rents are estimated at $10 sf or $60,000.  To be conservative, the office annual rents will be discounted 5.2% from the $19.15.  Estimating second floor office space rents at $18/sf/yr yields $108,000 in revenue.

     Retail Space:  Information from Loop.net indicates that retail rents in and around the central business district range from $20 - $22/sf/yr.  The first floor retail space in the Hogan Building is highly visible and on a busy corner of a busy street.  Therefore, $20/sf/yr is estimated for the retail rent on the six 600 sf spaces.  This yields $72,000 in revenue.

      Residentail Space: Rates per sf in and around the central business district varied greatly.  The sf rates even varied significantly within the same building.  For instance, at the Houston Street Lofts, which is a few buildings down the block at 910 Houston Street, the annual sf rates varied from $1.69 sf/mo. to $2.68 sf/mo.  This variance probably correlates to quality of finish out and amenities.  Expecting that the third floor apartments/condos in the Hogan Building will be "above average" in these areas, but not luxurious, residential rates for our project will be stimated at $1.90 sf/mo.  This equates to $136,800 in revenue.

     Conclusion:  Total Potential Annual Gross Revenue is $376,800.  This exceeds the minimum Potential Gross Income of $325,468.71.  Therefore, the project is financially feasible.  The cushion of $51,331.29 is a 15.77% margin of safety vis-a-via the minimum requirement for project feasibility.     

Hogan Building -- The Plan

     To this point in the feasibility analysis, the purchase of the Hogan Building looks promising.  After discussions with the client, the question has been raised as to the financial feasibility of turning the building into a multi-use complex with 6--1,000 sf office spaces in the basement; 6--600 sf retail spaces on the first floor; 6--1,000 sf office spaces on the second floor; and 6--1,000 sf condos on the third floor.  The financial feasibility analysis will be conducted with this configured use for the building.  Ideally, the second floor offices would be leased to professionals who would also lease a condo on the third floor directly above their office.

Hogan Building -- Regulatory Analysis

      Are Contemplated Uses Acceptable to Local Authorities?:   Regulatory issues are important to evaluate when planning a development or redevelopment deal.  Permitted uses, or zoning, for the proposed property must be understood to determine if the desired use for a property is legally acceptable to local authorities.  Deed restrictions, floor area ratios, eminent domain and othe considerations can also be important to the regulatory analysis component of a feasibility study.  The only regulatory concern of note for the Hogan Building is whether or not it is zoned to allow for retail, restaurants/bars, office and or office use.

     Zoning of 901 Houston Street:  According to the GIS Interactive Zoning Map from the City of Fort Worth,  the Hogan Building is zoned "H."  This is a tremendously flexible designation that falls in the category of "high intensity commercial."

Given zoning of "H," the acceptable uses for the site are varied and diverse.  The City of Fort Worth's Planning and Development Department has produced a document entitled "Summary of Zoning Districts of the City of Fort Worth."  According to that document, the following uses of the space at the Hogan Building would be expressly permitted: beauty/barber shop, bookstores, drugstores, studios and offices, public and civic uses, nursing homes, health care facilities, retails sales, banks, restaurants, bakeries, theatres, hotels,commercial and business clubs, nightclubs and pool halls, taverns, , multi-family residential, prinitng and publishing, and wholesale offices.

     Conclusion: Current zoning for the property allows for all contemplated uses.  There is no zoning imediment to overcome in this process.  No other regulatory issues are expected to prevent contemplated uses.  All contemplated uses are therefore feasible vis-a-via the regulatory analysis. 

Hogan Building -- Market Analysis

     Market forces and demographic information in and around the block where the Hogan Building is located are crucially important metrics to evaluate as part of the market analysis.  The following discusses some of those key metrics.  The information provided below is courtesy of Cityfeet.com and providers it deems reliable.

     Traffic in Area of Building: Traffic in the area of the building is an indicator of potential success for tenants who may locate in the building.  As such, it is an important analysis metric in determining the support for rent levels that will be necessary to ensure the success of a real estate project in this area.  Daytime and night populations can vary.

 

     Daytime Population: The total daytime population within one mile of 901 Houston Street is 49,961.  Of that, 46,228 people are considered "daytime work population."  This indicates that during the day, most people within one mile of this building are in the area for work or work-related purposes.  Work populations have been steadily growing in the area the past couple of years and appear to be outpacing the creation of new office facilities.  This may bode well for the prospect of leasing the basement, second and/or third floors as office space or retail space.  

Night Population: The Hogan Building is located just across the street from the Houston Street Bar & Patio, which features a rooftop patio.  Rick O'Shea's Pub is also across the street and on the corner is Bar 9, which features three separate floors of danceclub, nightclub and upstairs clubrooms. 

     The Hogan Building is also within easy walking distance of the Omni Hotel, Fort Worth Convention Center, dozens of restaurants, a variety of high-quality entertainment and attraction venues, and a myriad of shopping opportunities. 

     Conclusion: There is significant daytime and night traffic in the immediate vicinity of the Hogan Building.  It could serve as the right location for retail establishments or the certain ecclectic restaurant / bar tenants.  Such tenants would face stiff competition from surrounding, established businesses.  Boutique or specialized retail may be the best fit for the first floor of building as it would be highly visible and distinct from the more routine retail options in the surrounding area.

     This is a vibrant area just outside of Fort Worth's Central Business District.  The basement, second and third floors may perfect for a Home--Office Building set up for young and middle aged professionals who desire an urban lifestyle and wish to free from daily communtes. 

Hogan Building -- Site Analysis

    History of the Building:  The Hogan Building is located at 901 Houston Street in donwtown Fort Worth, Texas.  The building was named for Royal Hogan, the brother of legendary golfer, Ben Hogan.  Royal Hogan purchased the building in 1964 and operated The Hogan Office Supply Company there until early 1997.    The building is three stories above ground and has a basement.  The following summarizes certain key site analysis metrics.

     Site Visibility:  Visibility for this site is very good as the building is located on the corner of 9th and Houston Street.  This is in the heart of downtown Fort Worth's Soho District and is only three blocks from the Fort Worth Convention center.  The location is also only one block from the very popular Del Frisco's Double Eagle Restaurant.

 

     Site Accessibility & Parking:  Being in downtown near the Convention Center, the site is easily accessible.  The site is mere minutes from Interstate-30 can be reached by multiple routes once in the downtown area.  There is plenty of street and surface parking in the area immediatey surrounding the site.


     Size & Configuration: The building is approximately 30,000 sqaure feet.  The entire basement is available and contains 7,362 square feet.  Being below street level, tenants in the basement will not enjoy the full benefits of the building's visibility.  Accordingly, basement rents will need to be discounted. 

     First Floor: On the first floor, 3,751 square feet would be available to lease.  The remainder of the first floor is occupied by long-term tenant, FedEx Kinkos.  The available spaceis flexible and could be a good fit for a restaurant / bar, retail or office tenants.


     Second Floor: The second floor has traditionally been utilized as office space and contains 6,696 square feet, which is cuurently vacant.  This space would be suitable for office tenants or conversion to residential living space. 



     Third Floor:  The third floor also contains 6,696 square feet of vacant space that has been traditionally used for office space.  Like the second floor. this space would be suitable for use as office or residential space.

     Conclusion: This site has a good location, visibility, accessibility and allows flexibiliy for use of its vacant space.  Therefore, the site analysis conlsuion is that this location is feasibile for development of a mixed use building that will include retial, office and / or residential tenants. 

Project Selection & Description

     Selection Process:  Given the client's project parameters, several properties were examined in search of a relativley small scale development / redevelopment project.  Properties that were considered included, but are not limited to the following: 1) an abandoned warehouse building just to the northwest of downtown Dallas; 2) an abandoned car wash in Dallas; 3) a three-story office building in Hurst;  

4) an approximately 5,000 square foot building in East Dallas that was described as "flexible space;" and,

5) the Hogan Building in downtown Fort Worth.  Some of the examined properties were "no go properties" from the start because of location, the need for significant up front remediation, or the character ofthe surrounding area.

     Property Selected for Feasibility Analysis: Based on its location, other redevelopment projects in the immediate area, the surrounding market's momentum, and perceived flexibility in space utilization, Blue Development, LLC has selected the Hogan Building located at 901 Houston Street in donwtown Fort Worth for a full feasibility analysis.  The subject property to be analyzedis pictured below:

    

Development Feasibility Analysis

     The Process for Evaluating a Potential Project: There are four primary phases of analysis required to evaluate the feasibility of potential development projects.  They are site analysis, regulatory analysis, market analysis and financial analysis.

      Site Analysis: The site analysis for a project requires evaluation of several important factors including: 1) visibility and accessibility of the site; 2) size, configuaration and topography of the site; 3) traffic count; 4) exisiting and pre-existing site uses; 5) tenant mix; and, 6) site utilities and infrastructure.

     Regulatory Analysis: Factors to be considered in the regulatory analysis phase of a feasibility study can include: 1) Allowed uses, entitlements, and zoning; 2) height and density restrictions; 3) set back requirements; 4) water detention requirements; 5) floor area ratios; 6) tree ordinances; 7) deed restrictions; 8) eminent domain concerns; and, 9) the risk of changing regulations.

     Market Analysis:  Demographics is a key consideration in the market analysis of a project. The age, income, education levels and population trends of an area are significant drivers of project success.  Other factors worthy of consideration include pre-existing or planned competition to the contemplated project; employment trends; psycho-graphics analysis; market momentum; and, where a the project site is the current market cycle.

     Financial Analysis: The financial analysis is where the proverbial rubber meets the road.  Each of the above factors figure into the financial analysis, directly or indirectly. 

    

     Specific factors to be evaluated in the financial analysis of a proeject include: 1) local rent and occupancy rates; 2) projected operating expenses for the project; 3) construction costs; 4) cost of capital; 5) land cost; 6) projected holding period; 7) DSCRs; 8) LTVs; and, 9) soft costs for project, such as design fees, attorney fees, lobbying fees, etc.

The Search For a Project

     The Client: Blue Development, LLC has been retained by real estate mogul and acclaimed investor, Fred Forgey, to identify possible project sites for development.

     Project Parameters: Forgey desires a project site in the DFW Metroplex.  He is interested in a relatively small, but unique project.

     He has no desire to deal in traditional apartment complexes, office buildings, retail or industrial properties. Some sort of hybrid property, mixed use property or special use property appears to be in order. Flexibility in the use of project space is important to this client.

Project Selection: An Overview

     First Things First:  For generations people have considered the riddle of which came first -- the chicken or the egg.  Often in real estate development a similar riddle arises.  The first two questions often posed are: Do you have a site in search of use?  Or a use in search of site?

Blue Development Philosophy: Flexibility is the key component of Blue Development, LLC's development philosophy.  Although sometimes unavoidable, being locked into a site or a use is not always the best way to approach a project.  Instead, we chose to listen to the market.  Key growth, demand, demographic and other metrics will identify sites in and around areas that are likely to become future "hot spots."  Likewise, the highest and best use of the site will be dictated by taste preferences and desired lifestyles, which are frequently communicated by the market.

      Project Selection:  With these guiding principles in mind -- the search for Blue Development, LLC's next development project begins.  Loopnet.com, CoStar and NNN1.com will be the starting point for identifying development prospects.