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. They are also performed to evaluate the feasibility of renovating or upgrading an existing property. 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.
Following is a summary of the steps in performing a feasibility study:
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.
Most market studies focus upon the revenue portion of a profit and loss statement. 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.