Houston Feasibility studies are a combination of a market study and financial analysis used to determine if it is financially feasible to develop a proposed property. A market study reviews existing and prospective market conditions regarding factors such as rental rates, occupancy rates and absorption. The analysis utilized to determine whether a proposed property is financially feasible contrasts the estimated market value of the proposed subject property with the cost to build the property. In many cases, the market study requires an effective date consistent with the time when the proposed subject property would be completed. They are also performed to evaluate the feasibility of renovating or upgrading an existing property. Investors often perform intense due diligence prior to purchasing or developing a property. However, in many cases less consideration is given to changes required at an existing property. There are a meaningful opportunities to enhance the value of existing properties which have been owned for a period of years. Feasibility studies determine whether a property is financially feasible and whether its complete and stabilized value are equal to or exceed (1) the total costs to build it, (2) entrepreneurial profit and (3) an adequate return for the capital invested to develop the property. While it is often possible to obtain a fairly accurate estimate of the cost to build a property, research and judgment are required to estimate the minimally acceptable level of entrepreneurial profit and return on investment for a specific property. In some cases, entrepreneurial profit can be thought of in gross dollar terms instead of as a percentage of total project cost. Both entrepreneurial effort and the return to investors vary with time and the risks of a project.

Following is a summary of the steps in performing a feasibility study: The scope of work needs to address the level of research performed and the report format. For example, should the report be as brief as possible or should it provide a mind-numbing level of detail. Effective communication in defining the scope of work is critical for a mutually successful engagement.

• Develop scope of work with client;
• Gather data (rent comparables, properties under construction, proposed properties, market occupancy and absorption, submarket occupancy and absorption and data for economic drivers which impact future prosperity for the real estate market); and
• Analyze data to develop opinions of market rent, stabilized occupancy and the time likely required for the proposed property to reach stabilized occupancy. While developing an opinion of market rent is often quite straightforward, developing an estimate of the time to reach stabilized occupancy requires accurate information regarding current occupancy levels and proposed construction. Estimating market rent is difficult when a project varies from what is typical in the market.

Most market studies focus upon the revenue portion of a profit and loss statement. The deliverable from a market study focuses upon market rent, market occupancy and the time to reach stabilized occupancy. They do not address operating expenses or the value of the property at stabilized occupancy. A feasibility study addresses the factors in a market study and also addresses operating expenses and the value as stabilized. Feasibility studies also address whether the indicated market value is sufficient for the property to be financially feasible.

A feasibility study involves two areas where seasoned judgment is necessary: 1) judgment regarding market rent, occupancy and absorption and 2) judgment regarding the amount of entrepreneurial profit and return for the equity investor necessary to make a property financially feasible.

OConnor & Associates is the largest independent appraisal firm in the southwestern US and has over 40 full-time staff members engaged full-time in valuation and market study assignments. Our expertise includes feasibility studies, valuing real estate, business personal property, business enterprise value, purchase price allocation for businesses, valuation for property tax assignments, partial interest valuation, estate tax valuation, expert witness testimony and valuation for condemnation. We have performed hundreds of feasibility studies.

To obtain a quote or further information for a feasibility study, contact either George Thomas or Craig Young at 713-686-9955 or fill out our online form.