Development & Feasibility Analysis Flashcards

What is the primary purpose of a real estate feasibility study?

Answer: Determining whether a proposed development is financially viable given market, cost, and return parameters

A feasibility study evaluates whether projected revenues, construction costs, and financing conditions will generate returns that meet investor thresholds.

What does 'highest and best use' analysis determine in real estate development?

Answer: The legally permissible, physically possible, financially feasible, and maximally productive use of a site

Highest and best use is the legally permissible, physically possible, financially feasible use that produces the maximum land value.

In development underwriting, what are 'hard costs' versus 'soft costs'?

Answer: Hard costs are direct construction expenses; soft costs are indirect expenses such as architecture, engineering, and permits

Hard costs include all direct construction labor and materials, while soft costs encompass design fees, permits, insurance, financing costs, and developer overhead.

What is a 'pro forma' in real estate development analysis?

Answer: A financial projection of revenues, costs, and returns for a proposed development project

A development pro forma projects total costs, stabilized revenues, financing structure, and investor returns over the project timeline.

What is 'absorption rate' in the context of a real estate development project?

Answer: The pace at which available space in a new project is leased or sold over time

Absorption rate measures how quickly newly delivered units or space are occupied, directly affecting the lease-up timeline and revenue projections.

What is a 'development spread' and why is it important?

Answer: The difference between the development yield and the market cap rate, indicating value creation

Development spread compares the stabilized yield on cost to the prevailing market cap rate; a positive spread confirms the project creates value above replacement cost.