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ECONOMIC ANALYSIS PROJECT

CE 332 - Professionalism, Engineering Economics and
Construction Project Delivery

MEDICAL/PROFESSIONAL OFFICE BUILDING
MOUNT PLEASANT CORPORATE CENTER
Date Due: March 25, 2013




Submitted by:

Al Harthy, Atif
Costantino, Brandon M
Cummings, Ryan M
D'Angelo, Dominick A
Dantapalli, Rohit Reddy


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Table of Contents
Project Executive Summary.3
Project Description4
Assumptions.........6
Risks...............9
Discussion of Financing.10
Cash Flow Diagram and Computations12
Summary of Project.....15
Group Self evaluation.16
Project Meeting Minutes and Attendance..17











Project Executive Summary
The report contains an economic analysis of the 2-Story Medical/Professional Office
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Building on Lot 4 of the Mount Pleasant Corporate Center, located in Scranton, PA. The goal
of the problem is to gain a 35 percent net profit by selling the building after its completion.
The necessary analyses include assumptions made in order to calculate the cost estimates,
which will then lead to the creation of the detailed cash flow diagram as well as the
calculations for the equivalent uniform annual cost (EUAC) of the project. After these
calculations were finished, the individual spaces could be sold at a known value to create a
profit. Another piece of information included in the report is the analysis of the important
assumptions and risks that had to be looked into to base the calculations. The next
important point is the discussion of financing. The decision for loans was based on the fact
that since this is a private sector project, the acquisition of grants would not occur so the
decision to take out two loans was really the best option.
After all of the decisions were made, the overall calculated value for dollar per
square foot came out to be $284.62/SF and the EUAC value was -$189,824. The total net
profit of the project was $2,524,018 after the building was sold in year 8. The overall
report shows and elaborates upon the economic and timeline aspects of such a large
project and how many assumptions need to be looked into to start and finish a project of
this magnitude.



Project Description
The objective of this project is to perform an economic analysis of the construction
of a 30,800 square foot, 2 story Medical/Professional Office Building on Lot 4 of the Mount
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Pleasant Corporate Center, located in Scranton, PA. This project is being constructed by a
private building developer who intends to sell each medical and office space to the
respective tenants. The design will start immediately after the initial purchase of the land
and will take about one year for the design and securing of the land development
approvals. The project will span eight years, which includes the construction and time for
each unit to be sold. Following the seventh year, the developer will sell the building for a
35% net profit. The main goal is to find the costs and incomes associated with the project
from its inception through the sale of the last tenant space. The plan is for the developer to
sell the building one year after the last tenant space is sold. The developer will be
responsible for the maintenance of the site and building until it is sold.
The economic analysis of the project in this report entails cost estimates with a
descriptive timeline of the overall process as well as the necessary assumptions made to
estimate the total costs. This will include cash flow diagrams as well as equivalent uniform
annual cost (EUAC) calculations. Also, there are many different risks involved with such a
large project that the risks must be included in the decisions made. The building must be
properly maintained, which includes grass cutting and snow removal during the proper
months. Also included in the estimations are the cost of building insurance, utilities and
advertising, both major and minor. All of these are time-related which mainly start year 5
and go to year 7 based on the fit-out timeline. The advertising will range from brochures
and signs to billboards and a website. Many people need to be involved in this project such
as a real estate agent, both a A/E and a CE that will all need to be paid promptly and
properly after the completion of their desired duties. Financial considerations and
decisions must be made for this project, whether that is paying out of pocket or taking
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loans out along the way to acquire the proper funds for the project. The main flow of this
project starts with the initial land purchase of $800,000. Following the land purchase is the
start of the sitework, which will cost $500,000 during the second year. After that, during
the fourth year is the foundation and steel package, which will cost $3,100,000. Another
big consideration for this problem is the fact that during a three year span, from year 5 to
year 7, there are medical fit-outs as well as offices being built. After the completion of these
spaces, the offices and medical spaces will be sold and the tenants will take over occupancy.
The final step in this process is to sell the building. The plan is for the developer to sell the
building at the proper cost to make a 35% net profit.









Assumptions/ Decision Points Income and Expenses
In order to estimate the EUAC of the project, we need to assume certain costs related to
building, maintenance and interest. These may not be accurate as they were obtained from
several different sources, but they are still applicable to the project, and will help to better
understand the expenses across the lifecycle of construction. We consulted a construction
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manager to ask about some of the costs. These are the main assumptions made concerning
the expenses of the project:
The interest on commercial loans is at 4% / year
Total interest on EUAC is 6% / year. We were told that this was within the average rate
for any project.
We also need insurance to cover any major damage to the building, which is no less than
$ 1,250 / month = $15,000 / year
Grass cutting costs $80 / acre, twice a month, 8 months / year = $1,280 / year. We
assumed that only 1 acre of the site would need to be cut.
Snow Plowing: $160 / acre, 8 times a month, 4 months / year = $5,120 / year. We
assumed that it would snow for 4 months a year, and on average it would need to be
cleared 8 days each month. Also the $160 rate includes plowing the snow and spreading
some salt.
The utilities are based on the area outside the building and the remaining 3600 sq. ft of
the building, including a lobby, restrooms, the stairs and an elevator.
This includes:
Water: $ 75 / month
Electric: $ 700 / month
Sewage: $ 50 / month
Wireless Internet: $ 75 / month
Maintenance: $ 300 / month
Altogether it is approximately $1200 / month ~ $15,000 / year.
Advertising will cost $900 / year initially for years 2 and 3. Then it will cost $3,500 / year
after that, until the fit outs start selling. Also, a real estate agent will be hired, and he gets
paid 4 % of the sale price of each unit sold.

To fund the project, the owner will mostly depend on loans. The only thing that will be
paid out of pocket is the land, which costs $800,000. After the first year, he will take out a
loan of $2,200,000 to cover the sitework, foundation and design costs. Since the building
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core and shell requires a lot more money, a loan of $3,000,000 will be needed at year 4. We
assumed that the loans would be paid back by the end of the project when the owner sells
the building.
Decisions were made concerning how to sell the fit-outs and the building. For each fit-
out, 35% is added to the cost of building it. This doesnt account for the land and work
expenses, but they will be applied once the building is sold. At the end of the project, all the
expenses were added, we subtracted income from that, and 35% was added to the
difference to calculate the final selling price of the building. This would allow us to achieve
the final aim of a 35% profit.








Risks
In any project there are many risks involved throughout the whole completion
process. Many of the risks can be accounted for in environmental, financial, and conditions
that were unknown at the start of the project. Any of these risks could cause time delays,
which intern could add unneeded expenses to the project.
The environmental risks that could be involved in this project include protected
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environmental areas, pollution caused by the construction process, and pollutants in the
area that were initially unknown. To prevent these risks from becoming a problem the site
should be thoroughly checked for waterways, any type of animals habitats that possibly
would need relocated, and soil tests to know what is exactly in the ground and how it will
act during the construction processes. If any of these risks were to become a problem they
could cause significant time delays and cost overruns that were not initially projected.
The major financial risk, as with any project, is that the project could be build, but
the offices or medical fit-outs would not sell. Also a large issue could be if the owner ran out
of money half way through the project. These financial risks are heavily based on where the
project is located and what type of office demand there is in Scranton, PA. All of these
financial risks should be taken into account at the start of the project to reduce their
capability of inhibiting the completion of the project.
There are many unforeseen conditions that could occur throughout the course of the
project. These conditions could include weather conditions, labor strikes, or
miscommunication throughout design processes. Also a large risk could be that there is an
agreement made but the buyer is not able to get the loan. Any of these conditions could
cause large time delays and cost overruns in many areas of the projects.
Discussion of Financing
A project of this size will normally be financed through borrowed monies to cover
the expenses throughout the entire project. The group decided that the original price of the
land would be paid through out-of-pocket money at a total of $800,000. The rest of the
financing would be obtained through loans. First, an initial loan will be taken out of $2.2
million at year one and will be used to finance the first three years and part of year four
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Second, another loan will be taken out of $3 million to cover the rest of the projects
expenses.
The group also discussed how the owner would be paying the loans back. It was
decided that the owner would be paying these loans back out-of-pocket until the first fit-
out was sold. The money earned through selling the fit-outs would be used in tern to pay
the loans off until the building was sold at the end of year eight.









Cash Flow Diagram and Computations
Year 0

Initial price of the land = $800,000

Year 1

C/E Fee 1 = $32,000

Year 2

C/E Fee 2 = $8000
Site Work = $500,000
Foundation and Steel Package = $240,000
A/E Fee 1 = $24,000
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Minor Advertising = $900

Year 3

A/E Fee 2=$140,800
Minor Advertising = $900

Year 4

Building Core and Shell =$3,100,000
Major Advertising = $3,500

Year 5

Medical Fit-out 1A = $198,000
Medical Fit-out 1B = $100,000
A/E 10% Fee = $29,800
Utilities = $15,000
Building Insurance = $15,000
Major Advertising = $3,500
Landscape and Snow Removal $6,400
Real Estate Agent = $16,092
Selling Medical Fit-out 1A = $267,300
Selling Medical Fit-out 1B = $135,000





Year 6

Medical Fit-out 1C = $100,000
Office 2A = $50,000
Office 2B = $50,000
A/E 10% Fee = $20,000
Utilities = $15,000
Building Insurance = $15,000
Major Advertising = $3,500
Landscape and Snow Removal $6,400
Real Estate Agent = $10,800
Selling Medical Fit-out 1C = $135,000
Selling Office Fit-out 2A = $67,500
Selling Office Fit-out 2B = $67,500


Year 7
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Medical Fit-out 2A = $120,000
Office 2C = $50,000
Office 2D = $50,000
A/E 10% Fee = $22,000
Utilities = $15,000
Building Insurance = $15,000
Landscape and Snow Removal $6,400
Real Estate Agent = $11,880
Selling Medical Fit-out 2A = $162,000
Selling Office Fit-out 2C = $67,500
Selling Office Fit-out 2D = $67,500


Year 8

Utilities = $15,000
Building Insurance = $15,000
Landscape and Snow Removal $6,400
Owner Sells for net profit of 35% = $8,766,198








Cash Flow Diagram


Loans
Financing Interest Loan Amount Years Total Interest cost

Loan 1 0.04 2,200,000.00 7 2,895,049.91 695,049.91
Loan 2 0.04 3,000,000.00 5 3,649,958.71 649,958.71
Out of Pocket Money 800,000.00
Total 7,345,008.62 1,345,008.62

Financing and Computations
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Item Column1 Column2 Column3 Price($)

Initial Land Purchase 800,000.00

C/E Fee 1 32,000.00
Sitework 500,000.00
Foundation and Steel
package 240,000.00

C/E Fee 2 8,000.00
A/E Fee 1 24,000.00
A/E Fee 2 140,800.00
Building Shell and Core 3,100,000.00

A/E Fee 3 35,200.00
Building Insurance 60,000.00

Lanscaping and Snow
Removal 25,600.00

Utilities and
Maitenance 60,000.00

Advertising 12,300.00
Medical Fit-outs 518,000.00

Office Fit-outs 200,000.00
Real Estate Agent 38,772.00

A/E 10 % Fit out Fee 71,800.00

Total Costs 5,866,472.00
Total Interest Payment
on Loans 1,345,008.62

Total cost to get 35%
profit 9,735,498.84

Fit Out Total Return 969,300.00

Selling Price for 35 %
profit 8,766,198.84

Cost per square foot for
35% profit 284.62

Total Net Profit 2,524,018.22


EUAC Calculation
Present Value
P0 = 800,000 + 32,000(P/F,6,1) + 772,900(P/F,6,2) + 141,700(P/F,6,3) +
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3,138,700(P/F,6,4) + 383,792(P/F,6,5) + 270,700(P/F,6,6) + 290,028(P/F,6,7) +
36,400(P/F,6,8) - 402,300(P/F,6,5) 270,000(P/F,6,6) 297,000(P/F,6,7)
8,766,198(P/F,6,8)
P0 = 800,000 + 32,000(0.9434) + 772,900(.8900) + 141,700(.8396) + 3,138,700(.7921) +
383,792(.7473) + 270,700(.7050) + 290,028(0.6651) + 36,400(0.6274) - 402,300(0.7473)
270,000(.7050) 297,000(0.6651) 8,766,198(0.6274)
P0 = -$1,179,035
EUAC
EUAC = -1,179,035(A/P, 6%, 8)
= -1,179,035(0.1610)
EUAC= - $189,824







Summary of Project
The aim of the project was to construct a 30,800 SF medical office building in
Scranton, PA, and to sell it to achieve a profit of 35%. To start off the owner purchases the
land for $800,000, with money he has saved up. Then construction begins, and in order to
fund it loans must be taken out. As the design professionals, we were responsible for
calculating the costs, loans and selling prices, to ultimately find the EUAC. Some costs had
to be estimated along the way, but these were reasonable assumptions with the help of
reliable sources. Finally, the building was sold to the Tenant Owners Association, for a final
price of just over nine million dollars.



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Project Meeting Minutes and Attendance
Meeting 1 March 1, 2013
The group met in the classroom and exchanged meetings. Another meeting was scheduled
during this time.
Everyone was in attendance. 15 minutes

Meeting 2 March 14, 2013

The group met in Kunkle Lounge where we discussed the parameters of the project and
laid out when people would get paid and when. Ryan Cummings was named project
manager and was put in charge of organizing meetings and keeping the information
discussed during the meeting.
Everyone was in attendance at the meeting. 1 hour 30 minutes

Meeting 3 March 17, 2013

The group decided on who would be in charge of what portions of the project. Atif Al
Harthy was put in charge of the assumptions/ decision points income and expenses, Ryan
Cummings was put in charge of the cover page, table of contents, and the risks, Dominick
DAngelo was put in charge of the project executive summary and project description,
Brandon was put in charge of the final cash flow diagram and computations.
Everyone was in attendance. 2 hours

Meeting 4 March 20, 2013
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Ryan Cummings, Atif Al Harthy, and Rohit Reddy Dantapalli met with the teacher to discuss
questions and concerns. 30 minutes

Meeting 5 March 21, 2013

The group met in Kunkle Lounge and worked on the EUAC calculations and discussed the
assumptions and prices that would be used for these assumptions.
Everyone was in attendance. 3 hours

Meeting 6 March 23, 2013

The group met in Hammond computer lab and worked on individual parts. The Cash Flow
diagram was finalized and EUAC calculations were checked.
Everyone was in attendance. 5 hours