Developers are always looking for their next deal. Elevated Properties–the fictional developer featured in Thesis Driven’s Fundamentals of Commercial Real Estate course–is no exception. Upon completing and selling Harbor Yards, their attention now turns to the parking garage next door, a high-potential redevelopment opportunity.

Elevated Properties originally purchased the garage for $100 per square foot several years ago. The current use is a 50,000 square foot, 125-space parking garage. The garage brings in some cash flow, with the garage generating an average of $300 per month per space. A third-party parking operator covers all costs (other than property taxes) in exchange for a fee equal to 30% of revenue.

Despite this cash flow, The Elevated Properties team believes that there’s a higher and better use for the site. So Michelle–Elevated’s CEO–assigns Adam, her asset manager, to underwrite several scenarios and make a recommendation as to the site’s highest and best use.

As we covered in Chapter 2, underwriting requires making a number of assumptions, including:

• Revenue, including projected square footage / unit counts and rents
• Expenses such as utilities, insurance, taxes, and more
• Development costs including hard costs (construction materials and labor) and soft costs (architectural fees, permitting expenses, consultants, etc.)

Since this is a development project, underwriting revenue requires understanding the site’s zoning and any limitations that the local government is placing on development.  In this case, the site has a zoned FAR of 6.0. This means that Elevated Properties can build up to six times the lot area in square footage. In this case, the lot size is 50,000 square feet, so the site has 300,000 buildable square feet.

The site is in a commercial zone that allows a wide variety of non-industrial uses by-right. Multifamily, office, and hospitality are all acceptable, and the ground floor can be used for retail.

In the course, students are asked to work in groups to produce a business plan and underwriting for the parking garage site, specifically:

• Proposed use(s), with square footage dedicated to each;
• Projected revenue, operating expenses, and NOI;
• Targeted tenants and marketing strategy;
• Estimated exit cap rate and price;
• Projected Unlevered Yield-on-Cost and IRR.

After this exercise, students will have completed their first underwriting and real estate business plan!

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