Calculating required FAR that makes a development feasible
I'm working on a deal that one of our clients has under contract. It's a couple acres and sits just outside of a major CBD. The city is in the process of adopting a new comprehensive zoning plan, and it's likely to impact our property, although we don't know how much. We've done our underwriting as if we are not going develop, but I'm trying to figure out at what FAR would redevelopment start making sense.
I know there are countless other factors, but is there anyway to solve or back solve for a feasible FAR? I feel like there might be a calculation similar to that of a break-even.
I don't have much experience with development so I'd appreciate any help.
Take your site area and multiply it by the max FAR per the zone. Then you'll need Avg unit SF & efficiency assumptions, which might be hard to quantify without historical & or someone on your team with dev experience. Can always hire an architect for a prelim yield study. Good rule of thumb in Type V Garden is 950sf Avg unit size w/ 70% efficiency. For Example
FAR 2.5, Lot SF: 30,000sf, Avg Unit Size: 950 SF.
Max GSF: 30,000 * 2.5 =75,000
NSF =52,500 (75,000 * 70%)
Units = 55 (52,500/950)
In my experience, the Maximum permitted FAR is well above what is feasible for the site. Permitted density /= Achievable density, you dont always have to max it out.
It seems like the site you're looking at is in a CBD and could accommodate a 15+ story building. I haven't underwritten many buildings like this but I do know you have to break out NSF/GSF per floor and assume a lot of parking, so maybe drop total building efficiency as a whole down to 50%.
This is just a way to back into a permitted FAR driven unit count . If you want to run a sensitivity to see when redevelopment makes sense, you'd have to assume $/SF to build and $/SF you can rent for. Then take estimated NOI/ comparable cap rates for your property value. 6.0% return on cost minimum as a rule of thumb for development in SoCal. Keep in mind the Federal Funds rate is at 5.07% with cap rates = to and often times above that. Development spreads are extremely thin these days. Developemnt does take years though, in 2-3 years rates might be in a different place.
You would need to have a spreadsheet set up with your construction proforma built out and land basis plugged in, with any costs that are sensitive to the building area (e.g. hard costs) linked to a corresponding input. Would then also need the revenue side and exit assumptions set up.
Then you can goal seek the building area input to get to your required yield/margin/whatever desired metric.
Ultimately the big thing to remember is that your hard costs and likely some other costs will scale equivalently to your density. In a lot of markets right now, costs are so high that building extra units doesn't get you any closer to your goal (either breakeven or dilutive because incremental costs outweigh the additional value added).
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