# Construction Cost of The Building and Implied Land Value

## Construction Cost of The Building and Implied Land Value

Spreadsheet Problem. Refer to the Ch10_Mort Eq Cap tab in the Excel Workbook provided on the website. This replicates the example discussed earlier.

1. Suppose that there is an aggressive lender that is willing to allow the debt coverage ratio (DCR) to be as low as 1.0. Keep all other assumptions, including the loan interest rate and equity discount rate (before-tax equity yield), the same. How does this affect the amount that can be borrowed and the property value?
2. Refer to part (a). Is it reasonable to assume that the loan interest rate and equity discount rate would be the same? If not, would you expect each to be higher or lower? Why?

Spreadsheet Problem. Refer to the Ch10_H&BU tab in the Excel Workbook provided on the website, which replicates the highest and best use analysis example in the chapter.

1. Suppose that the construction cost is \$3.5 million for office, \$6.5 million for retail, \$2.5 million for apartment, and \$3.5 million for warehouse. How does this change the highest and best use of the site and the land value?
2. Use the same construction costs as part (a) but assume that office income would increase by 4 percent per year instead of 3 percent per year. Does this change the highest and best use of the site and the land value?