Case Study: Townhome Community Considers Expansion
Mainland Valuation Services (MVS) was engaged to complete a comprehensive feasibility study that included a detailed market analysis and feasibility study. The owners of Countryside Meadows, an existing 108-unit townhome community in Kansas City, Missouri, had an opportunity to acquire 4.51± acres of unimproved multifamily-zoned land located adjacent to their existing townhome development. MVS prepared a feasibility report to answer the following questions:
- What are the ideal improvements?
- Is development of the ideal improvements financially feasible as a stand-alone multifamily community?
- Is development financially feasible if the ideal improvements are operated as part of the existing 108-unit townhome community?
The subject (Phase II) of the feasibility study was 4.51± acres of unimproved multifamily land located immediately south of the existing Countryside Meadows.
The existing improvements were the 108-unit Countryside Meadow Townhomes. This rental community included townhome buildings and a clubhouse with leasing office. The improvements were constructed in phases between 1987 and 1995 and were in good condition and operating at a stabilized level consistent with the market.
In order to answer the questions and determine the highest and best use of Phase II, MVS considered two scenarios. First, Phase II would be developed with the ideal 46 townhome units and operated as part of Countryside Meadows, growing the overall operation into a 154-unit townhome rental community. Second, Phase II would be developed with the ideal 46 units and operated as a stand-alone community.
MVS first determined the ideal improvements for the 4.51± acre site. This determination was based on independent research conducted by MVS in the local submarket and adjacent submarkets. MVS considered a detailed analysis of local competition and demographic data. Next, MVS applied several feasibility tests to narrow potential uses to the use of maximum productivity. Based on information obtained from hundreds of actual appraisals on multifamily properties over the last few years, MVS was able to forecast a reliable construction budget for Phase II and an operating pro forma with lease-up schedule. MVS developed value indications by referencing its own database for comparable sales, actual income statements, actual capitalization rates, and hundreds of market interviews with multifamily market participants over the last few years.
The maximally productive use and ideal improvements of the 4.51± acres was determined to be development of 46 townhouse style units with built-in garages operated as part of the Countryside Meadows Townhomes. A 154-unit townhome rental community would enjoy the benefits of economies of scale that neither property could enjoy alone.
With market evidence, MVS was able to demonstrate that development was feasible if part of a larger operation. An operation exceeding 150 units typically benefits from economies of scale (i.e. lower operating expense ratio) and increased marketability to regional and possibly national investors. A notable benefit of a larger community that attracts regional and national investors is their willingness to accept lower returns, which means lower capitalization rates and higher values.
In conclusion, the collective operations would increase the value of both Phase II and the existing 108-unit development. A stand-alone community was not considered financially feasible and therefore did not represent the highest and best use of the subject. The addition of 46 units would increase the overall community to 154 units, allowing for operational efficiencies and value enhancement, and moreover the asset becomes more attractive to a larger pool of regional and national investors.