B2.

RE Consulting and Investment Analysis

BODY OF KNOWLEDGE

Real Estate Discipline is very broad, which includes the other component parts specifically that fall on
other professionals’ expertise such as legal concepts for lawyers, financial and investment concepts for
finance analyst and or experienced accountants, market concepts for marketers on business
management experts, real estate concepts for brokers, appraisers and consultants. While the assessment
concepts for assessors was combined with the concept of appraisal for appraisers. As with other
disciplines, we can define the real estate discipline or field of study in terms of component parts of its
body of knowledge. While there are many individual components within the real estate discipline, these
concepts can be categorized along the following dimensions:

LEGAL ANALYSIS CONCEPTS

MARKET ANALYSIS CONCEPTS

REAL ESTATE SERVICE CONCEPTS

FINANCIAL AND INVESTMENT ANALYSIS CONCEPTS

The Philippines is the only country in the world that has regulated the practice of real estate consulting
through licensing the practitioners in real estate that has earned years of experience in the practice of
brokerage and appraisal works. The real estate consultant was defined in real estate service act section
(g)(1) as a duly registered and licensed natural person who, for a professional fee, compensation or other
valuable consideration, offers or renders professional advice and judgment on: (i) the acquisition,
enhancement, preservation, utilization or disposition of lands or improvements thereon, and (ii) the
conception, planning, management and development of real estate projects.

The items stated in (i) and (ii) where the real estate consultant could render advise and judgment, must
equipped himself a little background of each discipline while his experience in the field of real estate
service for many years could speak of a consultant’s field of expertise. The body of knowledge identified
in the real estate principles book of Floyd and Allen, was focus on the four-component part where the

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decision of the market participant, which the consumers and investors considers the investment aspect
for the trading of real estate. The acquisition of real estate deals with the concept of market and legal.
Over all it includes the real estate service included in the context of Philippine Real Estate Consultant,
the discipline for technical aspects as in the conception, planning management and development of real
estate projects, therefore the Technical Analysis Concept should be added on the real estate body of
knowledge for the Philippine Real Estate Consultant practice. It is short of saying that the preparation of
project feasibility study is general for the knowledge of a consultant.
6.1 LEGAL ANALYSIS CONCEPTS

Legal analysis concepts in real estate include property rights, restrictions on property

rights, deeds, leases, contracts, and title issues. Real estate market participants (consumers, investors
and real estate professionals) must be familiar with these concepts in order to use them effectively in
their decision-making processes.

It describes several different collections or bundles of rights an owner or tenant can

hold regarding a particular parcel of real estate are legally described to distinguish them from all other
parcels.

It examines private and public restrictions that can be imposed on the property rights held by owners
and tenants. Examples of these restrictions include liens, easements, zoning ordinances and other
land-use control measures.

Under this concept, we consider the role of deeds and leases as legal documents that convey property
rights from one party to another, contracts that are used to bind parties together in the transaction
process, and the procedures used to finalize real estate transactions.

Property Rights and Legal Descriptions

* Real vs. Personal Property

* Fixtures

* Minerals and Air Rights

* Water Rights

* Estate in Land

* Concurrent Estates

* Condominium Ownership

* Cooperative Ownership

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* Time-Shares

* Legal Descriptions

Private Restrictions on Ownership

* Liens
* Easements

* Licenses

* Profit a Pendre

* Adverse Possession

* Encroachments

* Restrictive Covenants

Public Restriction on Ownership

* The Property Tax

* Escheat

* Power of Eminent Domain

* Police Power

* The Comprehensive General Plan

* Comprehensive Zoning

* Innovative Land-Use Control Methods

* The Taking Issue

Deeds and Leases

* Deeds

* Leases

Contracts in Real Estate Transactions

* Necessary Elements of a Contract

* Breach of Contract

* Contract Contingencies

* Real Estate Sales Contracts

* Option-To-Buy Contracts

* Contract for Deed

* Some Basic Negotiation Tips and Strategies

Title Examination and the Closing Process

• Title Examination

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• Title Closings

6.2 MARKET ANALYSIS CONCEPTS

* Market analysis concepts in the real estate body of knowledge focus on the functions and operations
of the real estate space market, the real estate asset market, the development industry, and the forces
that shape urban areas and influence their growth.

The evaluation of market dynamics and several theories that help explain the reasons why urban areas
grow and change the way they do in particular, we distinguish between the real estate "space" and
"assets" markets and show how the development industry ties these markets together.

* Real estate space markets involve transactions for the rights to use land and buildings. On the demand
side of this market are people, firms, and other entities that are willing to pay to use space for
consumption or production purposes. The supply side of this market consists of property owners who
are willing to sell such space to users. The price of use in the space market is often called rent, even if
the user is the owner/occupant of the space.

* Real estate asset markets reflect transactions involving cash-flow rights to real estate. The term cash
flow rights refer to the claims to the future cash flows the building and land are expected to generate.
The participants in this market are concerned with the amount and timing of the cash flows a building is
capable of producing rather than the building's configuration for a particular use.

These market participants make their decisions about buying and selling by comparing real estate assets
with other capital market assets such as stocks and bonds. As such, the real estate asset market must be
regarded as part of the larger capital market, the market for capital assets of all types

Major types of capital asset markets and investment products

1. Public Market - a. Equity Assets (Socks, REITS, Mutual Funds), b. Debt Assets

(Bonds, Money Instruments)

12

2. Private Market - a. Equity Assets (Real Property, Private Firms, Oil and Gas

Partnerships), b. Debt Assets (Bank loans, Wholesale Mortgages, Venture Debts)

* Price Determinants in the Real Estate Assets Market - are determined by three

factors: (1) Opportunity cost of capital, (2) growth expectations, and (3) risk.

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PREPARING A REAL ESTATE MARKET ANALYSIS

By definition, a market analysis is an examination of the supply and demand sided of real estate space
market segment and the balance (equilibrium) between these two sides. The goal of market analysis is to
assist real estate market participants in making effective real estate decisions. Market analysis can be
used to answer such questions as the following

- How much rent should I charge tenants in this building?

- How many new units should I build this year?

- Where should I locate a new branch office for my business?

- What type of building should I build on this site?

- What are the growth prospects for this market segment?

BASIC INPUT TO MARKET ANALYSIS

The typical real estate market analysis focuses on a few carefully chosen variables that are designed to
characterize the supply and demand sides of the market segment as well as the balance between these
two sides. Five of the most common inputs to a real estate market analysis are:

1. Vacancy rate,

2. Rent or price level,

3. Quantity of new construction started,

4. Quantity of new construction completed, and

5. Absorption of new space

USING MARKET ANALYSIS TO LOOK FORWARD

These five indicators of a space market give a good overview of the supply and demand conditions in a
market and the direction of change for both the supply and demand. These five variables can be
combined in some creative ways to develop a forecast for future market conditions. For example, many
real estate market analyses use the concept of "months' supply to look into the future of a real estate
space market. Months' supply is calculated by the following formula:

Months' Supply = (Vacant Space + Space in Construction) / Net Absorption per Month

The months' supply indicator tells how long it will take (in months) for all the vacant space in the market
to be absorbed at the current rate of absorption. A housing

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developer, for example can use this measure along with an estimate of the average time it takes to
complete new units to determine whether the market can support another project. In a market that is
absorbing 30 housing units per month and has 30 currently vacant units and 90 units under construction,
the months' supply is 4. If the developer’s construction time is 2 months, it is likely that a new project
will hit the market at a time when there is excess supply. The months’ supply indicator is a simple
measure for looking forward in a state space market segment.

PROFESSIONAL MARKET ANALYSIS REPORT

Performing a thorough market analysis can be very expensive and time consuming

and may require the skills of a professional market analyst. Numerous market

research firm around the world offer their services to investors and consumers for a

fee. To formulate their market analysis reports, research firm examine the key drivers

for each market segments

Examples of these drivers to various segments are described below:

1. Office: employment in office occupations

2. Lodging: air passenger volume, highway traffic counts, tourism receipts, number of visitors

3. Retail: per capita income, aggregate income, wealth measures

4. Industrial: manufacturing employment, transportation employment, shipping volume

5. Apartments: population, household formation, local housing affordability, employment growth (blue
and white collar)

6. Owner-occupied residential: population, household formation, interest rates, employment growth,

income growth
Combining the information on these key drivers with the previously described indicators allows these
firms to predict future market conditions and identify investment opportunity for their client.

URBAN AND REGIONAL ECONOMICS

The real estate space market is highly segmented because real estate space is "use and location specific."
The discipline of studying real estate markets at the urban and regional level is called urban and regional
economics.

The various theories and concepts from the urban economics discipline, including

1. The concept of comparative advantage,

2. Economic base theory,

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3.The bid-rent curve and the concept of highest and best use,

4. The concentric circle model of urban form,

5. The sector growth model,

6. The axial growth model,

7. The multiple nuclei growth model, and

8. The neighborhood life cycle model.

6.3 REAL ESTATE SERVICE CONCEPT

Real estate service concepts focus on the specialized skills and knowledge provided by real estate
professionals to real estate consumer for professional fee. The following are real estate service
practitioners as defined under RA 9646: Real Estate Service Act of the Philippines (RESA).

"Real estate service practitioners” shall refer to and consist of the following:

* Real estate consultant - a duly registered and licensed natural person who, for a professional fee,
compensation of other valuable consideration, offers or renders professional advice and judgment on: (i)
the acquisition, enhancement, preservation, utilization or disposition of lands or improvements thereon,
and (ii) the conception, planning, management and development of real estate projects.

* Real estate appraisers - a duly registered and licensed natural person who, for a professional fee,
compensation or other valuable consideration, performs or renders, or offers to perform services in
estimating and arriving at an opinion of or acts as an expert on real estate values such services of which
shall be finally rendered by the preparation of the report in acceptable written form.
* Real estate assessor - a duly registered and licensed natural person who works in a local government
unit and performs appraisal and assessment of real properties, including plants, equipment, and
machineries, essentially for taxation purposes.

* Real estate broker - a duly registered and licensed natural person who, for a professional fee,
commission or other valuable consideration, acts as an agent of a party in a real estate transaction to
offer, advertise, solicit, list, promote, mediate, negotiate or effect the meeting of the minds on the sale.
purchase, exchange, mortgage, lease or joint venture, or other similar transactions on real estate or any
interest therein.

* Real estate salesperson - a duly accredited natural person who performs service for, and in behalf of a
real estate broker who is registered and licensed by the Professional Regulatory Board of Real Estate
Service for or in expectation of a share in the commission, professional fee, compensation or other
valuable consideration.

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People who develop expertise in certain aspects of real estate body of knowledge may be able to offer
their services to other real estate market participants for compensation. The most obvious example of a
real estate service professional is a real estate broker. In general sense, a broker serves as an
intermediary between a buyer and seller of an asset and works to facilitate the transfer of ownership of
the asset from the seller to the buyer. Thus, real estate service industry regulated by the government
through the Professional Regulation Commission (PRC) with objective of protecting the public from
incompetent and/or unscrupulous actions.

Real Estate Brokerage

The Real Estate Sales Process

• Real Estate Brokers and Salespersons

• Licensing of Brokers and Accreditation Salespersons

• Real Estate Brokerage Regulation

• Legal Aspects of the Broker-Client Relationship

• The Role of Real Estate Brokers

• The Creation of Agency Relationship

. • Duties and Rights Under Agency Relationships

• Termination of Agency Relationship

• Types of Brokerage
• Broker and Salespersons Compensation

Real Estate Appraisal

• Understanding the Appraisal Profession

• What is Value?

• Some Key Appraisal Principles

•The Appraisal Process

• The Sales Comparison Approach

•The Cost Approach

• The Income Approach

Real Estate Consultancy

• The Practice & Regulation of Real Estate Consulting

• Consulting Tool & Technique for Decision Making

• Real Estate Consulting Analyses

• Engagement of specific Types of Consulting

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Real Estate Other Professionals

• Real Estate Market Analyst

` Investment Advisers

• Financing Specialist

• Real Estate Attorneys

• Property Managers

• Real Estate Developers

• Many other Real Estate Service Specialist

6.4 FINANCIAL AND INVESTMENT ANALYSIS CONCEPTS

A major component of the real estate body of Knowledge concerns the application of financial economic
theories and concepts to real estate decision-making situations. Successful real estate market
participants should be familiar with the procedures and mechanisms used to finance residential and
commercial real estate. The relationship between risk, return, and the time value of money, basic
mortgage mechanics, investment property analysis and development project analysis.

1. Residential and Commercial Property Financing

• Understanding the Mortgage Concept

• Philippines Mortgage Practice

• Understanding the Foreclosure Process

• Structure of the Philippine Housing Finance System

• Mortgage Market Participants

• Understanding the Mortgage Loan Origination Process

• Sources of Capital in Commercial Property Markets

• Commercial Financing Underwriting Criteria

2. Risk, Return and the Time Value of Money

• The Relationship Between Risk and Return

• Time Value of Money Principles

• Financial Decision Rules: NPV and IRR

3. Mortgage Mechanics

• Mortgage Mechanics

• Understanding the Fixed-Rate Mortgage: Prepayment

• Understanding the Fixed-Rate Mortgage: Refinancing

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•Understanding the Fixed-Rate Mortgage: Discount Points and Effective interest Rates

• Alternative to the Fixed-Rate Mortgage

4. Analyzing Income-Producing Properties

• Advantages of Real Estate Investment

• Financial Decision Making

• The Discounted Cash Flow Model

5. Residential Development

• Types of Residential Development

• Market and Feasibility Analysis

• Financial Feasibility Analysis

• The Importance of Market Analysis

6. Commercial and Industrial Development

• Shopping Center Development

• Evolution of the Shopping Center

• The Shopping Center Development Process

• Office Buildings

• Industrial Parks and Distribution Facilities

• Analysis of Industrial Sites

• Hotel, Motel, and Resort Developments

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10.3 REAL ESTATE MARKET ANALYSIS

Definition

A MARKET ANALYSIS is a study of the current supply and demand conditions in a particular area of
specific type of property, used (1) to identify the most likely users of the project, (2) to indicate how well
a particular piece of real estate will be supported by the effective market demand, and (3) to indicate
how well the market is being served by the existing supply of properties. Essentially, the study will show
if there is a need and effective demand for a new project, or if an existing project has a good long-term
investment project.

Caution should be made when investing in an unbalanced market. When supply of a certain type of real
estate is short, rents and prices may be high, but only temporarily. New projects will add to supply and
drive prices down. By contrast, when a market is oversupplied, then it must be low enough to be an
attractive investment.

Market Analysis is part of feasibility study to estimate the trend of rent increase or sales for new
projects. This is called the absorption rate. It may be expressed as an overall absorption rate of market
needs 2,000 new units per year at the price range of P800,000 to 1,500,000) or a specific rate for the
project given current competition, the project should capture 200 new rentals per year). This absorption
rate estimate is important in projecting the revenue production of a property.

ln performing a market analysis, a consultant must observe the following specific guidelines when
applicable:

(a) define and delineate the market area and supply appropriate market segmentation,

(b) define and analyze the current supply and effective demand conditions that make up the specific real
estate market segment,

(c) identify, measure, and forecast the effect of anticipated development or other charges and future
supply,

(d) identify, measure and forecast the effect of anticipated economic or other changes and future
demand (Standard Rule 1-4, USPRCP)

The analysis of economic changes in the market in which the property is located may include the
following determinants of demand:

1. population,

2. employment and income characteristics;

3. interest rates;

4. zoning and other legislations;

5. rents factor sales;

6. new construction planned or underway,

7. vacant sites potential competition to the subject;

8. transportation;

9. taxes and the cost and

10. adequacy of sewer water power, and other utilities.

Forecasting techniques should be relevant, reasonable, practical and supportable. Regardless of the
forecasting models employed, the consultant is expected to provide a clear and concise explanation and
description of the model and methodologies

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The consultant is expected to provide a comprehensive physical and economic description of the existing
supply of space for the specific use within the defined market area, an explanation of the competitive
position of the subject, and forecast of how anticipated changes in the future supply (additions to or
deletions from the inventory) may affect the subject property.

The Nature of Real Estate Markets

REAL ESTATE BUSINESS is affected unpredictably by foreign, national or regional events and by changes in
the local economic, government policy and social pressures. However, real estate failure mostly results
from a misunderstanding of real estate markets and failure to undertake an analysis of the market. While
real estate market analysis does not guarantee a successful decision, it serves as useful information in
real estate highest and best use study and, therefore, minimizes risks in real estate investment.

Knowledge of real estate economics is obviously essential in undertaking market analysis.

Supply and demand relationships. An understanding of the nature of real estate markets, such as those
for housing, commercial, and industrial property, will help explain the supply and demand relationships
in the operation of the real estate market.

In a real estate context, the *principle of supply and demand states that the price of real property varies
inversely, but not necessarily proportionately, with demand, and directly, but not necessarily
proportionately, with supply. The interaction of suppliers and demanders, or sellers and buyers,
constitutes a market.

In real estate, supply is the amount of a type of real estate available for sale or lease at various prices in a
given market at given period of time, assuming production costs remain constant. Typically, more of an
item will be supplied at a higher price and less
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at a lower price. Therefore, the supply of an item at a particular price at a particular time, at a particular
place indicates that item's relative scarcity.

In real estate, demand* is the amount of a type of real estate desired purchase or rent at various prices
in a given market for a given period of time, other factors such as population, income, future prices, and
consumer preferences remaining constant

Demand that is supported by purchasing power results in effective demand, which is the type of demand
considered by the market.

(The supply and demand forces do not operate freely when the market is dominated by the state and
centralized planning is imposed or a command economy.)

A distinction must be made between price equilibrium and short-term price distortion, focusing on the
characteristics of real estate markets, the influence of location and the principle of comparative
advantage.

The inherent features of real estate preclude its diverse markets from being highly efficient. Relate the
following characteristics of an efficient market to the characteristics of real estate market:

1. An efficient market prices are relatively uniform and stable, often the primary consideration in
purchase or sale decisions because quality tends to be uniform at a set price.

2. An efficient market is self-regulating. Open and free competition is subject to few restrictions

3. Supply and demand are never out of balance in an efficient market because the market tends to move
toward balance through the effects of competition.

4. Buyers and sellers in an efficient market are knowledgeable and fully informed about market
conditions. The behavior of others, past market activity, product quality and substitutability. Any
information needed on bids, offers, is readily available

5. Buyers and sellers in an efficient market are brought together by an organized mechanism, such as the
PSE, and it is relatively easy for sellers to enter into or exit from the market in response to market
demand.

6. In efficient market, goods are readily consumed, quickly supplied, and easily transported.

Real estate markets are not efficient and, due to imperfections such as lack of product standardization
and the time required to produce a new supply, it is difficult to predict their behavior accurately. In view
of this, consultants must analyze the significant aspects of market activity that make real estate markets
inefficient, focusing on the motivations, attitudes, and interaction of market participants as they respond
to the

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particular characteristics of real estate and to external influences that affect its value. This focus
underscores the need for objective real estate analysis in a free market economy and the responsibility
of consultants to the community and clientele they serve.

Characteristics of real estate markets. Real estate markets have the following certain unique
characteristics that may cause market distortions:

1. Real estate is durable and fixed in location

2. Legal restrictions prevent orderly market adjustments

3. The project gestation period (the time between project planning and project completion) makes real
estate markets sluggish and slow to respond to changing markets resulting in a varying rate on land
absorption

4. Real estate markets are highly-localized.

5. Supply and demand are slow to adjust to new market conditions

6. Credit availability and its cost affect supply and demand

Factors that Create Demand

Market demand is the main concern of market analysis. People must want to use the property enough to
pay the rents being asked. If the demand to use the property is high, the demand for buying the property
will be high. High demand means top rents, low vacancies and good resale prospects. Poor demand
means rent reductions, high vacancies, and a property that is difficult to sell.

The following are key items that produce demand for real estate:

1. Economic growth. New jobs and resident increase the need for developed properties. Rising income
means better rents and better prices, as well as more retail sales (see Local Economy)

2. Good quality. The property should have all the standard features expected in the market, plus
something extra that the competition doesn't have. Appearance, features, size, and services are valued
in today's market.

3. Good location. Location can make a poor-quality property profitable while good property can suffer if
in the wrong place.

4. Competitive price. If the property is less than ideal, it still may be able to competent on price. It is
important to know what segment of the market the project is intended to serve and price it accordingly.
5. Cost of alternatives. Apartments are more popular when house prices are high. House sells better
when interest rates are low.

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6. Room for more of that type of property in the market. The demand for a specific property is
determined by looking at how it compares to other similar properties in features, location and price.

Analyzing the Housing Market

The national housing market being affected by numerous factors or variables is highly segmented.
Segmentation results from market imperfections, public policy, and more important, it is a local market
classified by types of occupancy (rental or owner), type of design and structure, location and
neighborhood age.

Elements of the national housing market

The forces of supply and demand are partly economic, partly sociological, and partly related to
government housing policies.

Factors of housing demand. Most authorities relate housing demand to a set of five variables:

1 Migration of households

2. Net household formation

3. Family income

4. Housing demolitions

5. Relative price of housing services

A decline in individual and family income postpones household formation, results in more families
sharing space, more single persons living with parents and more married persons living with in-laws. In
periods of increasing income, more individuals demand separate households.

The demand for new housing increases with the increase in the number of single retirees, separated
persons and unmarried singles. While the rate of population growth may be controlled slowly, the
increase growth rate in households increases the demand for housing.

Housing statistics are derived mostly from public records. New construction and the net change in
housing and inventory under construction are derived from local building permit records. The net change
in housing vacancies is taken from real estate companies or from the housing census. Demolitions and
conversions to non-housing

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use would also be determined from building permit records. New public housing construction would be
available from public records.

The increasing urbanization rate, or migration of households from rural areas to urban areas, usually
results in a net increase in the demand for housing.

Factors of housing supply. The more important variables affecting the supply of housing include factors
that affect

1. the flow of saving and investment into housing mortgage markets,

2. Government fiscal and monetary policy,

3. Lender policies on Interest and loans conditions, and

4. cost of construction.

The interaction of supply and cost of variables is highly complex, involving supply factors that affect
single-family housing financed by conventional private mortgages, houses under the government unified
home lending program, houses directly financed by the SSS, GSIS and PAG-IBIG for the members, houses
purchased by multiple-family units, and manufactured homes

As a consequence, the housing supply as of a given time depends on the quantity or volume resulting
from:

1. New construction in the open market.

2. The net change in inventory of finished units and under construction.

3. The net change in housing vacancies.

4. Demolitions and conversion to non-housing use.

5. New public housing construction and new construction of manufactured homes.

Estimating the demand for owner occupancy. The potential market for new housing projects depends
largely on the demand for housing in a given neighborhood, community or locality. National housing
statistics are available but may not be current enough to be useful. Housing consultants may use local
information to measure the demand for local housing.

Market analysis for socialized housing. Local housing demand generally depends on four factors:

1. The rate of growth in the number of households.

2. Income and employment patterns

3. Liquid asset holdings income

4. Space, convenience, and style requirements

The demand for rental occupancy Compared to the owner-occupancy market rental housing is more
responsive to change in demand. Rental occupants as a group, tend

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to be more informed on the housing rental market than the families in the owner- occupancy market.
The rental market satisfies the housing demand of a special group whose housing needs are more nearly
satisfied by rental units than by owner-occupied units. To predict the potential demand for rental
housing, surveys of the potential demand among selected groups must be undertaken.

Rent Control. Moderate rent control in the Philippines only restricts extreme rent increases. Moderate
controls could have little or no impact on new construction, maintenance, or the taxable value of rental
properties.

Rent controls have a different impact on affluent communities and the larger metropolitan areas. In the
more affluent communities, housing is in high demand with limited new construction. Since rent controls
keep rents below the market, rent controls transfer windfall gains from property owners to tenants

The Commercial Real Estate Market

Though there are many types of commercial real estate, office space and retail space dominate. The
demand for retail space is a derived demand - a demand derived from the potential volume of retail
sales. In turn, retail sales are dependent on the buying power of the market area population,

Office space demands are more complex. The demand focuses on space for medical and dental clinics;
local service-oriented business, such as accounting, real estate, and insurance; headquarters and branch
corporate offices.

Central Business districts. Historically, the central business districts (CBD) has played a multiple role: as a
center of city and municipal government and also served as a financial community, and as an office
center for those dependent on financial and government agencies. Originally, it was the main retail
center, allowing for the greatest amount of comparable showing. With high traffic, stores selling
convenience goods found a ready market. In small towns, the CBD was typically the regional marketing
center, and in larger cities, the CBD had a high concentration of cultural, entertainment and recreational
facilities. Observations of downtown Manila

emphasize problems facing most metropolitan centers, such as:

1. Declining sales in the large conventional middle-class oriented stores was caused by a shift in new
office locations and a shift in retailing to lower-income population.

2. Vacant office space was found in older buildings with no immediate reuse.
3. Continuing social problems and physical deterioration of buildings endangered downtown
revitalization of commercial and office buildings.

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4. Unfulfilled housing needs were observed in the downtown areas.

While favorable economic and institutional forces favored revitalization of downtown Manila, most
communities face five main factors that limit the market for the CBD.

1. Diversified property ownership - Central business districts are subdivided into relatively small lots and
blocks to enable each proprietor ta build for a particular purpose. Each property is constructed without
regards to neighboring lots; buildings follow the architectural preferences of the owner. Today, divided
ownership of buildings that follow no common architectural plan makes it difficult to assemble land for
redevelopment,

2. Inadequate parking. The issue is not entirely related to the number of parking spaces. Inadequate
parking encompasses traffic congestion, parking space inconvenient to main traffic generators and
parking that is expensive relative to the parking costs of shopping center. Considered with other
handicaps of the downtown area, this factor contributes to the further decline of the CBD.

3. The change in population. Virtually, every city has lost population in central areas over the last
generation. As middle and upper-income groups have abandoned the city, the disadvantaged, minority
groups, and the unemployed have increasingly concentrated in central space, further lowering the
volume of retail sales.

4. Poor land utilization. Since downtown blocks were largely developed by single proprietors, the land
use pattern follows no integrated planning scheme. While main street frontages are intensively used, the
center block and secondary streets are often poorly utilized.

5. Change in downtown functions. The automobile, with its insatiable demands for space and access, has
led banks and financial institutions to consider abandoning CBD for suburban drive-in facilities.
Professional offices have moved to suburban office parks, and with the transfer of department stores
and shopping centers to the suburbs, less pedestrian traffic has lowered the demand for retail space and
decreased the number of customers for remaining businesses. Thus, the downtown has lost some of its
attraction as a financial center, as an office center, and as a shopping center. Today it is very clear that
the downtown is not serving the same functions as it did before.

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MARKET-DRIVEN STRATEGY: A PRACTICAL TECHNIQUE

PROJECT MARKET CONSULTING

An important approach to gain competitive advantage in real estate marketing and distressed property
management is continuous process in analyzing and strategically responding to changing environmental
opportunities and threats. To do this, consultants must develop skills in effective strategic analysis,
planning, Implementation, and control.

Successful real estate business strategies in general points to the importance of likely to change. A
market-driven orientation is the basis for deciding how, when, and where to complete.

Market-Driven Strategy and Performance

The market-driven approach is customer-oriented in understanding the relationships between strategy

and performance and stresses the ethical marketing behavior. A few important characteristics of
market-driven strategy are:

1. Customer orientation. Market-driven strategy places the customer at the center of planning in the
organization (customer orientation), where strategy decisions start with the marker and the objective
matching of company capabilities with customers who expect value in what the company offers.

The traditional approach in competition is changing. Market-driven companies are increasingly

partnering to deliver more customer value by combining the strengths of two or more organizations. For
example, a developer's notable success in the residential market may be partly achieved by partnering
with the marketing network of Realtors and brokers in the marketing and documentation of its
residential inventory.

The real estate market is becoming more segmented and interrelated in some business aspects, creating
new opportunities and challenges for companies developing market-driven strategies. Moreover, the
interlinked product markets are experiencing rapid changes. For example, markets for properties,
construction materials and home decors, and realty services, are interlinked by digital technology or
information technology.

Strong organizational performance and partnering is essential to survival. Weak performers will be
acquired by their competitors or pursue other avenues to exit from the marketplace. Some
communication companies' failure to recognize changes in

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telecommunications have a drastic impact on these old companies. An encyclopedia publisher

experienced similar problem by discounting the potential impact of CD- ROM technology on the
reference book market.

2. Strategy and Performance. There is persuasive evidence from business practice that superior
strategies lead to superior performance, regardless of the attractiveness of the business environment.
High performance is more difficult to achieve in a demanding environment but organizations with sound
strategies perform well in the market.
Environment clearly affects performance, but companies with effective strategies are competitive and
perform better. For example, Ayala land and a few others have impressive performance even though
many known developers report major losses.

3. Strategy and Competitive Advantage. Competitive advantage results from offering superior real estate
value to consumers through lower prices for equivalent values and/or unique amenities and benefits
that more than offset a higher price. Competitive advantage often occurs within specific segments rather
than covering an entire product market. For example, a building material supplier may quickly obtain a
position in the market by targeting selected institutional buyers and sell via e-commerce at competitive
prices, offering money-back guaranteed warranty, and guaranteed 24-hour on-site service.

These service features will give an important competitive advantage with small and medium-size
business buyers. Other e-commerce marketers may not offer comparable services.

Reducing the time necessary to develop new and customized designs, enter new markets, keep products
in inventory, and sell through specialized networks offer a powerful competitive advantage. Speed* as an
element of strategy is important because:

a. Changing environment imposes pressures to move products quickly into the marketplace.

b. Speed allows the companies to more quickly obtain profits from new products

c. Competitive threats can be avoided or reduced by doing things faster.

Time reduction requires analysis of the activities that make up a process like new development and
construction systems. The objective is to eliminate unnecessary activities and to reduce the time
required to perform essential activities. For example, a developer substantially cut development time for
plans and construction designs by eliminating paper drawings and testing use of a computer-aided
design process.

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A fresh plant/garden soil retailer moves from growers to projects/clients in less than three days
compared to nine or more days via conventional plant distribution. The company receives orders by
phone from catalog displays and the order is transmitted to the grower and picked up the next day by
express delivery.

Marketing Strategy (in general)

The four-step process of designing and managing a marketing strategy are

1. Situation analysis considers market and competitor analysis, market segmentation, and continuous
learning about markets.

2. Designing a marketing strategy entails customer targeting and positioning strategies, marketing
relationship strategies and planning for new products.

3. Marketing program development (product/service, distribution, price, and promotion strategies,

designed and implemented to meet the needs of targeted buyers)

4. Strategy implementation and management look at organizational design and marketing strategy
implementation and control.

A. Marketing Situation Analysis

Marketing management needs the marketing situation analysis to guide the design of a new strategy or
to change an existing strategy. The situation analysis is conducted on a regular basis to guide strategy
changes

a. Analyzing Markets and Competition. Markets need to be defined so that the buyers and competition
can be analyzed as an example, for a residential market to exist, there must be income groups with
particular housing needs and wants and one or more house designs that can readily satisfy these needs.
More importantly, the buyers must be both willing and financially capable to purchase house design in a
specific location that satisfies their needs and wants.

In general, a product market consists of a specific product or service that can satisfy a set of needs and
wants for the people (or organization) willing and able to purchase the product. Analyzing product
markets and forecasting how they will change are vital information for marketing planning.

Decisions to enter new product markets are critical strategic marketing objectives to:

1. Identify and describe the buyers,

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2. Understand their preferences for products,

3. Estimate the size and rate of growth of the market, and

4. Find out which companies and products are competing in the market.

Evaluation of competitors' strategies, strengths, limitations, and plans is also a key aspect of the situation
analysis. Analysis includes evaluating, each competitor, highlighting the competition's important
strengths and weaknesses, and that the competition is likely to do in the future.

Market Segmentation defines the nature and diversity of buyers' needs and wants in a market and
further classified in significant terms so that the organization can focus its business competencies on the
requirements of one or more specific groups of effective demand. Each segment includes buyers with
similar needs and wants for the product category of interest to management, the reasons that they buy
or use certain products, and their preferences. Segments for business product markets may be formed
according to the type of industry, the uses for the product, frequency of product purchase, and various
other factors.)

B. Designing Marketing Strategy

The situation analysis identifies market opportunities, defines market segments, evaluates competition,
and assesses the organization's strengths and weaknesses, all needed in designing marketing strategy
consisting of:

1. Market targeting and positioning analysis,

2. Building marketing relationships, and

3. Developing and introducing new products

Market Targeting and Positioning Strategy. Market targeting determines the people (or organization’s)
that management decides to pursue with the marketing program. The target(s) typically consist of one or
more market segments.

The targeting decision sets the stage for setting objectives and developing the positioning strategy. The
options range from targeting most of the segments to targeting one or a few segments in a product
market, considering the market's maturity, the diversity of buyers' needs and preferences, the firm's size
compared to the competition, corporate resources and priorities, sales potential, and financial
projections.

Market positioning seeks to place the product in the eyes and mind of the buyer and distinguish the
company, product, or brand from the competition. Page 222

This strategy, also called the marketing mix, is the combination of product. channel of distribution price,
and promotion strategies a firm uses to position itself against its key competitors in meeting the needs
and wants of the target market.

Market Relationship. Strategies are intended to create high levels customer satisfaction cope with a
rapidly changing business environment through partnering. Partners may include end user customers,
marketing channel, members, suppliers, competitor alliances, and internal teams.

Forging relationships with suppliers, channel of distribution members, and sometimes competitors help
to provide competitive advantages and superior customer value.

New Product Strategies are needed to consider replace old products due declining sales and profits.
Developing and positioning new market entries require close coordination of functions to satisfy
customer requirements and produce high-quality products at competitive prices. New product decisions
include finding and evaluating ideas, selecting the most promising for development, designing marketing
programs, market testing the products, and introducing them to the market.

C. Development of Marketing Program

Market targeting and positioning strategies for new and existing products set guidelines for the choice of
strategies for the marketing mix components (product,

distribution, price, and promotion strategies) to form the positioning strategy selected for each market
target. The objective is to achieve favorable positioning while allocating financial, human, and
production resources to markets, customers, and products as effectively and efficiently as possible

Product/Service Strategy needs the following information on current and anticipated performance of the
products (services) to guide product strategy decisions:

1. Consumer evaluation of the company's products, particularly their strengths and weaknesses vis-à-vis
competition (i.e., product positioning by market segment information),

2. Objective information on actual and anticipated product performance on relevant criteria such as
sales, profits, and market share.

Product Strategy includes:

1. Developing plans for new products.

2. Managing existing products, and

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3. Deciding what actions to take on problem products (e.g., improve product performance, lower cost,
and reposition).

Distribution Strategy decisions include:

1. The type of channel organization to use

2. The intensity of distribution appropriate for the product of service.

Market target buyers may be contacted on a direct basis using the firm's sales force or, instead, through
a distribution channel of marketing intermediaries (e.g. wholesalers, retailers or dealers). Distribution
channels are often used in linking producers with end user household and business markets.

Price Strategy involve choosing the role of prices in the positioning strategy, including the desired
positioning of the product or brand as well as the margins necessary to satisfy and motivate distribution
channel participants. Customer reaction to alternative prices, the cost of the product, the prices of the
competition and various legal and ethical factors establish management flexibility in setting prices.

Promotion Strategy / Advertising, sales promotion, sales force, direct marketing, and public relations
help the organization to communicate with its customers, cooperating organization’s, the public and
other target audiences. These activities make up the promotion Strategy, which performs an essential
role in positioning products in the eyes and minds of buyers. Promotion informs, reminds, and persuades
buyers and others who influence the purchasing process.

D. Implementing and Managing a Marketing Strategy

The final stage of a marketing strategy considers the decision (or modification) of the marketing
organization and implementation and control of the strategy. Selecting the customers to target and the
positioning strategy for each target moves marketing strategy development to implementation. The
Marketing Organization design matches people and work responsibilities in a way that is best for
accomplishing the firm's marketing strategy. Deciding how to assemble people into organizational units
and assigning responsibility to the various mix components that make up marketing strategy are
important influences on marketing performance. Restructuring and reengineering lead to numerous
changes in the structure of the marketing units.

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Implementing and Assessing Marketing Strategy consists of

(1) preparing the marketing plan and budget,

(2) implementing the plan, and

(3) managing and assessing the strategy on an ongoing business.

The typical marketing plan shows the details concerning targeting, positioning, and marketing mix
activities and indicates what is going to happen during the implementing period, which is responsible,
how much it will cost, and expected results (e.g., sales forecasts).

Several factors contribute to implementation effectiveness, including the skills of the people involved,
organization design, Incentives and the effectiveness of communication within the organization and
externally.

Marketing strategy is an ongoing process of making decisions, implementing them and gauging their
effectiveness over time. In terms of its time requirements, evaluation is far more demanding than
planning. Evaluation and control are concerned with monitoring performance and, when necessary
altering plans to keep performance on track. Evaluation also includes looking for new opportunities and
potential threats in the future. It is the connecting link in the strategic marketing planning process.

E. Preparing the Marketing Plan

The market target* serves as the planning unit. The marketing plan* spells out the marketing strategy.
Plans vary widely in scope and detail, but all plans need to be based on analyses of the product market
and segments*, industry and competitive structure*, and the organization's competitive advantage*.

An outline for a typical plan with the following brief discussion of the major parts of the outline,
highlighting the nature and scope of the planning process.

The Situation Summary* describes the market and its important characteristics, size estimates, and
growth projections. Market segmentation analysis* indicates the segments to be targeted and their
relative importance. The competitor analysis* indicates the key competitions (actual and potential), their
strengths and weaknesses, probable future actions, and the organization's competitive advantage(s) in
each segment of interest. The situation summary* is brief supported by information placed in an
appendix or separate analysis.

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Description of Each Market Target* includes size, growth rate, end users characteristics, positioning
strategy guidelines, and other available information useful in planning and implementation. When two
or more targets involved, it is important to assign priorities to aid in resource allocation.

Objectives for the Market Target(s)* describes what the marketing strategy is expected to accomplish
(objectives) during the planning period for each market target, in terms of financial, market position and
customer satisfaction targets. Objectives are also usually included for each marketing mix component.

Marketing Program Positioning Strategy* statement indicates how management wants the targeted
customers and prospects to perceive brand. Specific strategies for product, distribution, price, and
promotion are explained in this part of the plan, indicative actions to be taken, responsibilities, time
schedules, and other implementation information

Forecasting and Budgeting* includes (1) forecasting revenues and profits and (2) cost estimates
necessary to implement the marketing plan. The people responsible for market target, product,
geographic area, or other units may prepare the forecast. Comparative data on sales, profits wide
expenses for prior years are useful to link the plan to previous results.

*HIGHEST AND BEST USE ANALYSIS*

An understanding of market behavior is essential to the concept of HBU. Market forces create market
value, so the interaction between market forces and HBU is of crucial importance. Therefore, HBU is a
market-driven concept. HBU analysis is typically provided by consultants. However, the nature of the
engagement sets limits on the extent of HBU analysis to be undertaken, and the characteristics of the
property limit the number of alternatives uses to be considered.

Definition

Highest and best use* may be defined as the reasonably probable and legal use of vacant land or an
improved property, which is physically possible, appropriately supported, financially feasible, and that
results in the highest value. The HBU of a specific parcel of land is not determined through subjective
analysis by the property owner, the developer, or the consultant, but by the competitive forces within
the market where the property is located. Therefore, HBU is an economic study of market forces focused
on the subject property.

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The benefit a real estate development produces for a community or the amenity contribution by a
project (like a public waiting shed along the city road) is not considered in the HBU analysis; HBUs driven
by economic considerations and market forces*, not by public interest.

HBU Compared to Market Analysis and Feasibility Analysis

Market analysis*: Purpose is to identify demand for alternative uses, through supply and demand
analysis to forecast absorption rate and probable rents for specific uses considered

Feasibility analysis*: Purpose is to determine respective values based on criterion variables (E.g.,
residential land value rate of return capitalized value of overall property), through calculations of
NOI/cash flow and selection of appropriate cap rate/discount rate to determine property value based on
criterion variables for specific uses considered

HBU analysis*: Purpose is to determine the use resulting in the maximum value through specifications in
terms of use, timing, and market participants (i.e., user of the property, equity investor, and debt
investor).

The three analyses are interrelated. However, feasibility analyses may involve data and considerations
that are not directly related to HBU determinations. Such analyses may be more detailed have different
focus, and/or require additional research.

Generally, the feasibility of developing real estate under a variety of alternative uses is studied. The use
that maximizes value represents the HBU.

HBU of Land as though Vacant vs. HBU of Property as Improved

The consultant should distinguish between HBU as though vacant and HBU as improved in the analysis.
The consulting report should clearly identify, explain, and justify the purpose and conclusion for each
type of use.

HBU of Land as Though Vacant*. There are three reasons to identify the HBU of land as though vacant in
valuation:

1. to estimate a separate land value.

2. identity comparable sales of vacant land; and

3. to identify external obsolescence.

The value of land is generally estimated as though vacant. When land is already vacant, the reasoning is
obvious: value the land as it exists. When land is not vacant, however, its value depends on how it can be
utilized. Therefore, the HBU of land as though vacant must be considered in relation to its existing use
and all potential uses.

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Land value can be based on potential, rather than actual use. Example: Consider a valuable commercial
site in an excellent location that is currently improved with a service station that is free of any negative
surroundings. An investor who wants to build a high-rise mixed-use building on the site may pay a price
for the property that includes no value, or even negative value for the existing improvements. The
potential use, not the existing use, usually governs the price that will be paid.

HBU of Property as Improved*. The HBU of property as improved is analyzed for two reasons:

1. To identify the property use that can be expected to reproduce the highest overall return for each
peso of capital invested This is important to informed buyers who are economically motivated. Example:
A property is currently being used as rental apartments. A buyer would want to know this use will
continue to produce maximum benefits. If not, would the rate of return be increased by converting it to
an apartment hotel? The value of the property will differ under these two use assumptions.

2. To estimate the HBU of property as improved to help identity comparable properties. Both the HBU of
land as vacant and as improved should be the same or similar comparable property/s for the subject
property. Example: It may be appropriate to use a comparable property that has an HBU as an office
building in considering a property that has an HBU as hotel.

Example: HBU of Land as though Vacant

Single-Family Residence is in an area zoned for detached, single-family home, some of which have
already been built. The first HBU question is whether the site should be developed or left vacant. Since
the residential value of the site as though residentially improve is positive, the HBU of the site as vacant
is to develop it.
The second HBU question is what type of residence to construct on the site. The builder has narrowed
down the development alternatives to two types of houses, both of which are compatible with other
houses in the neighborhood. Use 1 call for the construction of large house with estimated market value
of P250,000, including the lot value. Use 2 calls for the construction of a more model house which would
be worth

approximately P200,000 with the lot. Similar sites in the area have been selling to builders for
approximately P32,000 to P33,000. The estimated costs of constructing the two houses and their
respective value estimates can be used to identify the HBU of the land. Below are the calculations.

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Market value - Cost construct new - Builders fee = Land value

Use 1

P250,000 -187,000 - 30.000 = P 33.000

Use 2

P200,000 - 150,000 - 24.000 = P 26.000

The answer to the HBU question as to which improvement should be built is use, the use that results in
the higher residential land value. Similar sites can be expected to sell for about P32,000 to P33,000.
Thus, if P33,0Q0-was paid for the lot and the smaller house was built, the builder would incur financial
loss.

Example: HBU of Property as Improved

Capital Expenditure Required. A warehouse property can be rented for P175,000 total net to the owners.
However, the owners are considering converting some of the warehouse space into office space and
increasing the rent. The conversion would cost approximately P125,000 and would probably add to the
market value of the property, which is currently P600,000. An appraisal estimates that with the new
office space, the annual rent could be increased to P185,000, even though the amount of warehouse
space would be reduced. The calculations used for HBU analysis are shown below.

(NOI / Overall cap rate = Capitalized NOI) - Conversion Cost = Property value

W/house use only

Р175,000 / 15% = P 1,167,000 - 0 = P 1,176,000

W/house with office

Р 175,000/ 15.5% = P 1,194,000 - 350,000 = 844,000

Conclusion: The warehouse without offices is the HBU of the property as improved.

Criteria in HBU Analysis

The HBU of both land as though vacant and property as improved must meet four criteria. The HBU must
be

(1) legally permissible,

(2) physically possible,

(3) financially feasible, and

(4) maximally productive,

often considered sequentially.

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The tests of legal permissibility and physical possibility must be applied before the remaining tests of
financial feasibility and maximal productivity. Although the criteria are considered sequentially, it does
not matter whether legal permissibility or physical possibility is addressed first, provided both are
considered prior to the test of financial feasibility.

Many analysts view the HBU analysis as a process of elimination. The test of legal permissibility is often
applied first because it eliminates most alternative uses and does not require a costly engineering study.
It should be noted that the four criteria are interactive and may be considered in concert. Matrix analysis
can be used to plot their interaction.

LOCATION ANALYSIS IN REAL ESTATE

Location analysis is defined as a thorough study of location in terms of a specific use, environment, time
and anticipated pattern of change. The specific use, in turn, is supported by the highest and best use
analysis, which is defined as thorough study of the reasonable and probable use that results in the
highest present value of the land after considering all legally permissible, physically possible and
economically feasible use.

Location and site are not synonymous. Location* in real estate is defined as economic characteristics of
real estate composed of immobility, constant change, dependence, and elements of special distribution.
Location is an economic concept even though a particular location (a site) may be described in physical
and legal terms." Site* is defined as a parcel of land which is improved to the extent that it is ready for
use for the purpose for which it is intended.

The reasons for a location analysis are

(1) to find a site within a location upon which to place an economic enterprise,
(2) to make an investment, or

(3) to dispose of a parcel of owned property at the highest selling price possible.

A. Selection of the Optimum Site

The optimum site for one enterprise may be totally unworkable for another. The site is selected on the
basis of its desirability for the individual enterprise.

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PHILIPPINES CENTRE FOR REAL ESTATE PROFESSIONAL STUDIES

Agglomerations of similar enterprises create economies as distances between suppliers of materials,

products, and services are reduced.

The objective of the location analysis is to determine whether the client specific

project or program can be profitable in an area and on a specific site. Sites are compared on the basis of
a matrix of details, including physical, geographic, political, economic, and even emotional elements.

The optimum site should be selected on the basis of the best set of present and perceived future
measures of these multiple influences. The consultant will usually base his location recommendations on
his analysis of factors such as:

1. Physical characteristics

2. Utility features

3. Zoning features

4 Economic factors

The criteria or standards differ for each site selection process for specific types of use such as office,
retail, industrial, and other special purpose real estate use so that the location (or the site) may have
either a significant or nominal impact on the cost of the enterprise

B. Regional Analysis

Since investment in real estate is made long before sales begin, sustained effective purchasing power in
the market is important, particularly at the regional level because many factors that will ultimately
influence the success of an enterprise are determined by regional economic well-being. Thus, it is
necessary to analyze the following components of a region:
1. Employment level employment

2. Economic change

3. Economic boundaries

4. Population changes

5. Census data demography

6. Transportation

7. Public services

8. Zoning

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C. Special Location Objectives

Although the analysis that the consultant performs is usually broad in scope, the client may only need
answers to limited and direct questions. Not all location analyses require the study of a region or even of
a broad neighborhood.

D. Market Identification

The delineation of a market is a process that identifies location for a use or uses and the area that the
use or uses will serve. Considerable study is needed in order to identify the market that the client is
trying to serve.

Surveys, interviews, and questionnaires may be used to measure the pricing, physical features,
amenities, and services that are a part of the unsatisfied market potential in that area.

Sophistication of the competition should be considered in the analysis. In the midst of keen competition,
one would expect rents to be increasing rapidly with low vacancies when strong demand is present.

E. Market Penetration

Since real estate development is a slow process, it is rare for one enterprise to "scoop" the market. While
planning is proceeding, the potential for competing development should be considered.

The prime ingredient of a successful real estate operation is location*. In this context, the term location
includes physical as well as economic attributes. Location is the one element in a real estate
development that cannot be duplicated exactly by competition

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INVESTMENT ANALYSIS FOR PROPOSED PROJECTS

Analysis of proposed investment properties imposes a heavy responsibility on the real estate consultant.
It requires broad experience and thorough knowledge of prevailing market conditions.

The consultant's experience and specified skill can cover a wide range of engagement for proposed real
estate projects and development, including planned unit development, residential and office
condominiums, shopping malls, hotels, and office buildings.

The complexity of these proposed projects will require the collaboration of other specialists.

A. Site Analysis

Land acquisition. Usually the land has been acquired before the consultant is engaged. It may have been
in the same ownership for many years, or it may require a more intensive use in view of increased land
values. It may have come under the control of a mortgage after its foreclosure or under new owners as a
result of a corporate merger, or the land may have been purchased recently for the purpose of
developing it in the future.

If the consultant will be involved in the land acquisition, it is imperative that an evaluation be made on
the most recent comparable sales, including pending transactions. Before land acquisition is decided, the
consultant must be able to advice the client of the market value of the land sought based on an analysis
of recent transactions.

Regulation matters. Where land use is defined by a zoning ordinance, it is better practice to check into
the following matters and to analyze their impact on the subject property:

1. Street or alley widening requirements

2. Setback and easement requirements

3. Controls relating to access (for example, the location of garage ingress and egress)

4. Regulation established by redevelopment agencies

5. Land uses proposed under a general plan

6. Effect of environmental impact studies

7. The situation regarding the transfer of development rights

8. Deed restrictions

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Where the development is subject to conditional use permit, consultation with staff of the local planning
department and with architectural or planning firms familiar with the policies of the Individuals involved
in the permit process is necessary

B. Physical Analysis

Size and shape. The terrain of the site will determine its suitability for the proposed development.

Topography and soil. Terrain features can be advantageous or disadvantageous for specific types of
development.

Where public water service is not available underground water level for water sourcing must be
established preferably at the time when the land acquisition is being considered.

Utilities for public service. A qualified engineer must check the availability and cost of sufficient water
and sewer services

C. Building Design

Consultants can provide valuable input in the development and the preparation of preliminary
architectural designs. The Right Building? "Highest and best use is an overused phrase, deeply embedded
in the vocabulary of the real estate analyst.

However, it is truly the hallmark in the study of a proposed development.

It is the consultant's function to carefully study various development plans and finally identify the type of
project that holds the greatest prospect in terms of the client's investment objectives. The real estate
industry, even in good times, is replete with stories of project failures and financial disasters.

Business prudence calls for competent consultant from the start of the basic design concept to establish
certain basic design features. Architects specializing in particular types of building may have the ability to
design an attractive, well-functioning building that will receive good market response.

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Financial Feasibility

Financial feasibility study involves the following major studies and analysis:

1. Analysis of demand and supply situation

2. Cost study

3. Income and expense projection

4. Evaluation of the cost-benefit relationship

Analysis of demand and supply situation. The methods applied and the statistical data used in forming an
opinion concerning the market outlook for a proposed development will depend on the type of property.
Any forecast is affected by unforeseeable economic conditions and especially the financial market
situations.

The task of projecting the effective demand for those other types of real estate is extremely difficult, as
the decision of the potential consumer is frequently affected by extraneous conditions that cannot be
foreseen at the time the analysis is made.

In connection with office buildings, it is not feasible to quantify future demand by segmenting the
market and pinpointing how much of the demand for space will be generated by certain types of uses,
such as lawyers, accountants, and financial institutions.

Another factor that can adversely affect absorption is emergence of outlying competitive developments
that siphon of the "backroom" activities of large corporate and financial tenants into suburban location
with substantially lower occupancy costs, communication systems. Since absorption projections are
inexact by their very nature, it is advisable to make a series of assumptions illustrating a range of

possibilities and thereby highlights the risk element connected with the project.

Cost study. In the cost analysis of the project, the principal cost classifications are:

1. Direct cost*. These are the cost of construction (labor, materials, overhead, and contractor's profit)
including site work, parking, and tenant improvements

2. Indirect cost. These costs can be broken down into the following two major categories

a. Construction-related

b. Development - related

3. Developer's profit. Although not strictly a cost item, developer's profit is customarily provided for in a
financial study.

Income and expense projection. Two basic method for evaluating the economics of proposed
development are available to the analysis.

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a. Cash flow method*. The starting point in this analysis is the time of completion of the building, usually
the date the certificate of occupancy is issued. The study will typically cover a ten-year time frame
requiring the following inputs:

1. Related to income
2. Related to expense

3. Related to investment characteristics

4. Related to other matters

b. Adjusted stabilized capital value analysis relates the total cost of the project to its economic value. It is
simplified in that the cash flow phase is limited to the rent-up period from the date of completion until a
stabilized occupancy level has been achieved.

Major Distinctions Between Sale and Rental Projects

Consulting takes on a different aspect when it is related to investment properties primarily for sale to
owner-occupants such as single-family dwellings and commercial/residential condominium, projects. The
consultant's function is to conduct a comprehensive market survey to identify sources of demand and to
investigate the track record of competitive developments, including price trends and absorption.

Another real estate consulting pertains to the speculative builder of investment-type properties such as
apartment building, shopping centers, office buildings, and industrial facilities. Frequently, a developer
will de-emphasize the quality of construction in order to meet competitive rent level and to achieve
profit on sale.

Development and Marketing

If the investment feasibility analysis resulted in a positive outlook for the prospect, indicating an area of
risk acceptable to the developer, the real estate consultant may then be engaged to participate in the
development process. It may entail some or all of the following activities:

1. The consultant will participate in the selection of the architect and review preliminary and final plans,
outlines and detailed specifications.

2. Following final approval of the project, a team will be organized.

3. Concurrently with these activities, loan negotiations will be underway.

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4. Upon the approval of the plan and specification and confirmation of the funding arrangements,
construction documents will be prepared, final construction schedule established.

5. Depending on the consultant's experience, he may be into in the supervision of construction.

6. In conjunction with real estate brokerage firm, the consultant will, in the case of a rental project,
develop a price schedule at which the units will be sold, develop the standard form lease, and establish
rental rates, tenant allowances, and an overall leasing strategy.
7. Again, depending on the type of project, the consultant may be instrumental in choosing a property
management firm and may assist in the staffing of permanent building personnel and the appointment
of service companies.

It is quite obvious that in order to render the entire spectrum of development-oriented consulting
services, a broad range of experience and capabilities is needed, typically requiring the services of an
organization rather than an individual.

PROJECT FINANCING: A Flexible Financing Option for Real Estate Development and Marketing

Project Financing, a recent innovation in long-term debt financing, permits a project sponsor or
proponent lo tie a debt issue to a specific asset. In long-term debt financing, it involves complicated
provision and can take many forms. It can be used to finance big ticket projects like infrastructures and
big real estate developments.

Most often, a separate legal entity if formed to operate the project, putting up the required equity
capital, while the remainder of the financing is furnished by lenders and lessors, or property owner as in
the case of real estate development. In one type of project financing, each sponsor guarantees its share
of the project's debt obligations.

Here the creditors would also consider the creditworthiness of the sponsors in addition to the project's
own prospects.

Project financing offers several potential benefits over conventional debt financing such as the following:

1. Project financing usually restricts the cash flows, which means that the lenders, rather than the
managers, can decide whether to reinvest excess cash flows or to use them to reduce the loan balance
by more than the minimum required, thus reducing the lender's risk.

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Advantages for borrowers are: First, because risks to the lenders are reduced, the interest rate built into
a project financing deal may be relatively low. Second, since suppliers of project financing have no
recourse against the project proponent's other assets and cash flows, project financing insulate the
firm's other assets from risks associated with the project being financed

3. Project financing increases the number and type of investment opportunities; hence they make capital
markets "more complete." As the time, project financing reduces the costs to investors of obtaining and
monitoring the borrower's operations.

4. Project financing permits firms whose earnings are below the minimum requirements specified in
their existing bond indentures to obtain additional debt financing. In such situations, lenders look only at
the merits of the new project, and its cash flows may support additional debt even though the firm's
existing assets would not.
5. Project financing permits managers to reveal proprietary information to a smaller group of investors;
hence project financings increase the ability of a firm to maintain confidentiality.

6.Project financing can improve incentives for key managers by enabling them to take direct ownership
stake in the operations under their control. By establishing separate project companies can provide
incentives that are much more directly based upon individual performance than is typically possible with
a large corporation.

In practice, it would be very cumbersome to actually calculate the future total cash flows to the project
proponent's firm with and without the project.

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