Module 3

Real Estate Consulting Analyses (Module 3)
3.1 Real Estate Market Analyses
Definition
A MARKET ANALYSIS is a study of the current supply and demand conditions in a particular
area of a specific type of property, used (1) to identify the most likely users of the project, (2)
to indicate how well a particular piece of real estate will be supported by the effective
market demand, and (3) to indicate how well the market is being served by the existing
supply of properties. Essentially, the study will show if there is a need and effective demand
for a new project, or if an existing project has a good long-term investment prospect.
Caution should be made when investing in an unbalanced market. When supply of a certain
type of real estate is short, rents and prices may be high, but only temporarily. New projects
will add to supply and drive prices down. By contrast, when a market is oversupplied the
must be low enough to be an attractive investment.
Market analysis is part of feasibility study to estimate the trend of rent increase or sales for
new projects. This is called absorption rate. It may be expressed as an overall absorption rate
(i. e., the market needs 2,000 new units per year at the price range of P800,000 to P1,500) or
a specific rate for the project (given current competition, the project should capture 200
new rentals per year). This absorption rate estimate is important in projecting the revenue
production of a property.
In performing a market analysis, a consultant must observe the following specific guidelines
when applicable: (a) define and delineate the market area and supply appropriate market
segmentation, (b) define and analyze the current supply and effective demand conditions
that make up the specific real estate market segment, (c) identify, measure, and forecast
the effect of anticipated development or other changes and future supply, (d) identify,
measure and forecast the effect of anticipated economic or other changes and future
demand. (Standard Rule 1-4, USPRCP)
The analysis of economic changes in the market in which the property is located may
include the following determinants of demand: population, employment, and income
characteristics; interest rates; zoning and other regulations; rents and/or sales; new
construction planned or underway; vacant sites as potential competition to the subject;
transportation; taxes; and the cost and adequacy of sewer, water, power, and other utilities.
Forecasting techniques should be relevant, reasonable, practical, and supportable.
Regardless of the forecasting models employed, the consultant is expected to provide a
clear and concise explanation and description of the model and methodologies.
The consultant is expected to provide a comprehensive physical and economic description

of the existing supply of space for the specific use within the defined market area, an
explanation of the competitive position of the subject, and a forecast of how anticipated
changes in future supply (additions to or deletions from the inventory) may affect the subject
property.
The analysis of economic changes in the market in which the property is located may
include the following determinants of demand: population, employment, and income
characteristics; interest rates; zoning and other regulations; rents and/or sales; new
construction planned or underway; vacant sites as potential competition to the subject;
2018 Real Estate Consultant’s Comprehensive Course 3.1

transportation; taxes; and the cost and adequacy of sewer, water, power, and other utilities.
Forecasting techniques should be relevant, reasonable, practical, and supportable.
Regardless of the forecasting models employed, the consultant is expected to provide a
clear and concise explanation and description of the model and methodologies.
The Nature of Real Estate Markets
REAL ESTATE BUSINESS is affected unpredictably by foreign, national or regional events and
by changes in the local economic, government policy and social pressures. However, real
estate failures mostly result from a misunderstanding of real estate markets and failure to
undertake an analysis of the market. While real estate market analysis do not guarantee a
successful decision, it serves as useful information in real estate highest and best use study
and, therefore, minimizes risks in real estate investment
Knowledge of real estate economics is obviously essential in undertaking market analysis.
Supply and demand relationships An understanding of the nature of real estate markets,
such as those for housing, commercial, and industrial property, will help explain the supply
and demand relationships in the operation of the real estate market.
In a real estate context, the principle of supply and demand states that the price of real
property varies inversely, but not necessarily proportionately, with demand, and directly, but
not necessarily proportionately, with supply. The interaction of suppliers and demanders, or
sellers and buyers, constitutes a market.
In real estate, supply is the amount of a type of real estate available for sale or lease at
various prices in a given market at given period of time, assuming production costs remain
constant. Typically, more of an item will be supplied at a higher price and less at a lower
price. Therefore, the supply of an item at a particular price at a particular time, at a
particular place indicates that item’s relative scarcity.
In real estate, demand is the amount of a type of real estate desired for purchase or rent at
various prices in a given market for a given period of time, other factors such as population,
income, future prices, and consumer preferences remaining constant. Demand that is
supported by purchasing power results in effective demand, which is the type of demand
considered by the market.
(The supply and demand forces do not of operate freely when the market is dominated by
the state and centralized planning is imposed or a command economy.)
A distinction must be made between price equilibrium and short-term price distortion,
focusing on the characteristics of real estate markets, the influence of location and the
principle of comparative advantage.
The inherent features of real estate preclude its diverse markets from being highly efficient.
Relate the following characteristics of an efficient market to the characteristics of real estate
market:
1. In an efficient market, prices are relatively uniform and stable, often the primary
consideration in purchase or sale decisions because quality tends to be uniform at a
set price.
2. An efficient market is self-regulating. Open and free competition is subject to few

restrictions.
3. Supply and demand are never out of balance in an efficient market because the
market tends to move toward balance through the effects of competition.
4. Buyers and sellers in an efficient market are knowledgeable and fully informed about
market conditions, the behavior of others, past market activity, product quality and
substitutability. Any information needed on bids, offers, is readily available.
5. Buyers and sellers in an efficient market are brought together by an organized
mechanism, such as the PSE, and it is relatively easy for sellers to enter into or exit from
the market in response to market demand.
6. In efficient market, goods are readily consumed, quickly supplied, and easily
transported.
Real estate markets are not efficient and, due to imperfections such as a lack of product
standardization and the time required to produce a new supply, it is difficult to predict their
behavior accurately. In view of this, consultants must analyze the significant aspects of
market activity that make real estate markets inefficient, focusing on the motivations,
attitudes, and interaction of market participants as they respond to the particular
characteristics of real estate and to external influences that affect its value. This focus
underscores the need for objective real estate analysis in a free market economy and the
responsibility of consultants to the community and clientele they serve.
Characteristics of real estate markets Real estate markets have the following certain unique
characteristics that may cause market distortions:
1. Real estate is durable and fixed in location

2. Legal restrictions prevent orderly market adjustments ]
3. The project gestation period (the time between project planning and project
completion) makes real estate markets sluggish and slow to respond to changing
markets resulting in a varying rates of land absorption
4. Real estate markets are highly localized
5. Supply and demand are slow to adjust to new market conditions
6. Credit availability and its cost affect supply and demand
Factors That Create Demand
Market demand is the main concern of market analysis. People must want to use the
property enough to pay the rents being asked. If the demand to use the property is high, the
demand for buying the property will be high. High demand means top rents, low vacancies,
and good resale prospects. Poor demand means rent reductions, high vacancies, and a
property that is difficult to sell.
The following are key items that produce demand for real estate:
1. Economic growth New jobs and resident increase the need for developed properties.
Rising income means better rents and better prices, as well as more retail sales (see
Local Economy).
2. Good quality The property should have all the standard features expected in the
market, plus something extra that the competition doesn’t have. Appearance,
features, size, and services are valued in today’s market.
3. Good location location can make a poor quality property profitable while good
property can suffer if in the wrong place.

4. Competitive price If the property is less than ideal, it still may be able to competent on
price. It is important to know what segment of the market the project is intended to
serve and price it accordingly.
5. Cost of alternatives Apartments are more popular when house prices are high. House
sells better when interest rates are low.
6. Room for more of that type of property in the market The demand for a specific
property is determined by looking at how it compares to other similar properties in
features, location and price.
Analysing the Housing Market
The national housing market being affected by numerous factors or variables, is highly
segmented. Segmentation results from market imperfections, public policy, and more
important, it is a local market classified by types of occupancy (rental or owner), type of
design and structure, location and neighbourhood age.
Elements of the national housing market
The forces of supply and demand are partly economic, partly sociological, and partly
related to government housing policies.
Factors of housing demand Most authorities relate housing demand to a set of five variables:
1. Migration of households.
2. Net household formation
3. Family income
4. Housing demolitions
5. Relative price of housing services
A decline in individual and family income postpones household formation, results in more
families sharing space, more single persons living with parents and more married persons
living with in-laws. In periods of increasing income, more individuals demand separate
households.
The demand for new housing increases with the increase in the number of single retirees,
separated persons and unmarried singles. While the rate of population growth may be
controlled slowly, the increase growth rate in households increases the demand for housing.
Housing statistics are derived mostly from public records. New construction and the net
change in housing and inventory under construction are derived from local building permit
records. The net change in housing vacancies is taken from real estate companies or from
the housing census. Demolitions and conversions to non-housing use would also be
determined from building permit records. New public housing construction would be
available from public records.
The increasing urbanization rate, or migration of households from rural areas to urban areas,
usually results in a net increase in the demand for housing.
Factors of housing supply The more important variables affecting the supply of housing
include factors that affect the flow of saving, and investments into housing mortgage
markets, government fiscal and monetary policies, lender policies on interest and loans
conditions, and cost of construction. The interaction of supply and cost variables is highly
complex, involving supply factors that affect single-family housing financed by conventional

private mortgages, houses under the government unified home lending program, houses
directly financed by the SSS, GSIS and PAG-IBIG for the members, houses purchased by
multiple-family units, and manufactures homes.
As a consequence, the housing supply as of a given time depends on the quantity or

volume resulting from:
1. New construction in the open market

2. The net change in inventory of finished units and under construction.
3. The net change in housing vacancies
4. Demolitions and conversions to non-housing use.
5. New public housing construction and new construction of manufactured homes
Estimating the demand for owner occupancy The potential market for new housing projects
depends largely on the demand for housing in a given neighbourhood, community, or
locality. National housing statistics are available but may not be current enough to be
useful. Housing consultants may use local information to measure the demand for local
housing
Market analysis for socialized housing Local housing demand generally depends on four
factors:
a) The rate of growth in the number of households.

b) Income and employment patterns
c) Liquid asset holdings income.
d) Space, convenience, and style requirements.
The demand for rental occupancy Compared to the owner-occupancy market, rental
housing is more responsive to change in demand. Rental occupants as a group, tend to be
more informed on the housing rental market than the families in the owner-occupancy
market. The rental market satisfies the housing demand of a special group whose housing
needs are more nearly satisfied by rental units than by owner-occupied units. To predict the
potential demand for rental housing, surveys of the potential demand among selected
groups must be undertaken.
Rent control Moderate rent control in the Philippines only restricts extreme rent increases.
Moderate controls could have little or no impact on new construction, maintenance, or the
taxable value of rental properties.
Rent controls have a different impact on affluent communities and the larger metropolitan
areas. In the more affluent communities, housing is in high demand with limited new
construction. Since rent controls keep rents below the market, rent controls transfer windfall
gains from property owners to tenants.
The Commercial Real Estate Market
Though there are many types of commercial real estate, office space and retail space
dominate. The demand for retail space is a derived demand – a demand derived from the
potential volume of retail sales. In turn, retail sales are dependent on the buying power of
the market area population.

Office space demands are more complex. The demand focuses on space for medical and
dental clinics; local service-oriented businesses, such as accounting, real estate, and
insurance; and headquarters and branch corporate offices.
Central business districts Historically the central business district (CBD) has played a multiple
role: as a centre of city and municipal government and also served as a financial
community and as an office centre for those dependent on financial and government
agencies. Originally it was the main retail centre, allowing for the greatest amount of
comparable shopping. With high pedestrian traffic, stores selling convenience goods found
a ready market. In small towns, the CBD was typically the regional marketing centre, and in
larger cities, the CBB had a high concentration of cultural, entertainment, and recreational
facilities. Observations of downtown Manila emphasize problems facing most metropolitan
centres, such as:
1. Declining sales in the large conventional middle-class oriented stores was caused by
a shift in new office locations and a shift in retailing to lower-income population.
2. Vacant office space was found in older buildings with no immediate reuse.
3. Continuing social problems and physical deterioration of buildings endangered
downtown revitalization of commercial and office buildings.
4. Unfulfilled housing needs were observed in the downtown areas.
While favourable economic and institutional forces favoured revitalization of downtown

Manila, most communities face five main factors that limit the market for the CBD.
1. Diversified property ownership – Central business districts are subdivided into relatively
small lots and blocks to enable each proprietor to build for a particular purpose. Each
property is constructed without regard to neighbouring lots; buildings follow the architectural
preferences of the owner. Today, divided ownership of buildings that follow no common
architectural plan makes it difficult to assemble land for redevelopment.
2. Inadequate parking. The issue is not entirely related to the number of parking
spaces. Inadequate parking encompasses traffic congestion, parking space inconvenient
to main traffic generators, and parking that is expensive relative to the parking costs of
shopping centre. Considered with other handicaps of the downtown area, this factor
contributes to the further decline of the CBD.
3. The change in population. Virtually every city has lost population in central areas
over the last generation. As middle - and upper-income groups have abandoned the city,
the disadvantaged, minority groups, and the unemployed have increasingly concentrated
in central space, further lowering the volume of retail sales.
4. Poor land utilization. Since downtown blocks were largely developed by single
proprietors, the land use pattern follows no integrated planning scheme. While main street
frontages are intensively used, the centre block and secondary streets are often poorly
utilized.
5. Change in downtown functions. The automobile, with its insatiable demands for space
and access, has led banks and financial institutions to consider abandoning CBD for
suburban drive-in facilities. Professional offices have moved to suburban office parks, and
with the transfer of department stores and shopping centres to the suburbs, less pedestrian
traffic has lowered the demand for retail space and decreased the number of customers for

remaining businesses. Thus, the downtown has lost some of its attraction as a financial
centre, as an office centre, and as a shopping centre. Today it is very clear that the
downtown is not serving the same functions as it did before.
3.2 Market-Driven Strategy: A Practical

Technique in Project Market Consulting
An important approach to gain competitive advantage in real estate marketing and
distressed property management is a continuous process in analyzing and strategically
responding to changing environmental opportunities and threats. To do this, consultants
must develop skills in effective strategic analysis, planning, implementation, and control.
Successful real estate business strategies in general points to the importance of market-
based strategies, to clearly study the current real estate market and how it is likely to
change. A market-driven orientation is the basis for deciding how, when, and where to
compete.
Market-Driven Strategy and Performance
The market-driven approach is customer-oriented in understanding the relationships

between strategy and performance, and stresses the ethical marketing behavior. A few
important characteristics of market-driven strategy are:
1. Customer orientation Market-driven strategy places the customer at the center of

planning in the organization (customer orientation), where strategy decisions start
with the market and the objective matching of company capabilities with
customers who expect value in what the company offers.
The traditional approach in competition is changing. Market-driven companies are

increasingly partnering to deliver more customer value by combining the strengths of two or
more organizations. For example, a developer’s notable success in the residential market
may be partly achieved by partnering with the marketing network of Realtors and brokers in
the marketing and documentation of its residential inventory.
The real estate market is becoming more segmented and interrelated in some business
aspects, creating new opportunities and challenges for companies developing market-
driven strategies. Moreover, the interlinked product markets are experiencing rapid changes.
For example, markets for properties, construction materials and home decors, and realty
services, are interlinked by digital technology or information technology.
Strong organizational performance and partnering is essential to survival. Weak performers

will be acquired by their competitors or pursue other avenues to exit from the marketplace.
Some communication companies’ failure to recognize changes in telecommunications had
a drastic impact on these old companies. An encyclopedia publisher experienced similar
problems by discounting the potential impact of CD-ROM technology on the reference
book market.

2. Strategy and Performance There is persuasive evidence from business practice

that superior strategies lead to superior performance, regardless of the
attractiveness of the business environment. High performance is more difficult to
achieve in a demanding environment but organizations with sound strategies
perform well in the market.
Environment clearly affects performance, but companies with effective strategies are
competitive and perform better. For example, Ayala Land and a few others have impressive
performance even though many known developers report major losses.
3. Strategy and Competitive Advantage Competitive advantage results from

offering superior real estate value to consumers through lower prices for equivalent
values and/or unique amenities and benefits that more than offset a higher price.
Competitive advantage often occurs within specific segments rather than covering
an entire product market. For example, a building material supplier may quickly
obtain a position in the market by targeting selected institutional buyers and sell via
e-commerce at competitive prices, offering money-back guarantee and warranty,
and guaranteed 24-hour on-site service. These service features will give an
important competitive advantage with small and medium-size business buyers.
Other e-commerce marketers may not offer comparable services.
Reducing the time necessary to develop new and customized designs, enter new markets,
keep products in inventory, and sell through specialized networks offer a powerful
competitive advantage. Speed as an element of strategy is important because:
1. Changing environment imposes pressures to move products quickly into the

marketplace.
2. Speed allows the companies to more quickly obtain profits from new products.
3. Competitive threats can be avoided or reduced by doing things faster.
Time reduction requires analysis of the activities that make up a process like new
development and construction systems. The objective is to eliminate unnecessary activities
and to reduce the time required to perform essential activities. For example, a developer
substantially cut development time for plans and construction designs by eliminating paper
drawings and testing by use of a computer-aided design process. A fresh plant/garden soil
retailer moves from growers to projects/clients in less than three days compared to nine or
more days via conventional plant distribution. The company receives orders by phone from
catalog displays and the order is transmitted to the grower and picked up the next day by
express delivery.
Marketing Strategy (in general)
The four-step process of designing and managing a marketing strategy are:
1. Situation analysis considers market and competitor analysis, market segmentation,

and continuous learning about markets.
2. Designing a marketing strategy entails customer targeting and positioning strategies,
marketing relationship strategies, and planning for new products.
3. Marketing program development (product/service, distribution, price, and promotion
strategies, designed and implemented to meet the needs of targeted buyers)

4. Strategy implementation and management look at organizational design and

marketing strategy implementation and control.
Marketing Situation Analysis
Marketing management needs the marketing situation analysis to guide the design of a new
strategy or to change an existing strategy. The situation analysis is conducted on a regular
basis to guide strategy changes.
Analyzing Markets and Competition. Markets need to be defined so that the buyers and
competition can be analyzed. As an example, for a residential market to exist, there must be
income groups with particular housing needs and wants and one or more house designs that
can readily satisfy these needs. More importantly, the buyers must be both willing and
financially capable to purchase house design in a specific location that satisfies their needs
and wants.
In general, a product market consists of a specific product or service that can satisfy a set of
needs and wants for the people (or organization) willing and able to purchase the product.
Analyzing product markets and forecasting how they will change are vital information for
marketing planning.
Decisions to enter new product markets are critical strategic marketing objectives to:
1. Identify and describe the buyers,

2. Understand their preferences for products,
3. Estimate the size and rate of growth of the market, and
4. Find out which companies and products are competing in the market.
Evaluation of competitors’ strategies, strengths, limitations, and plans is also a key aspect of
the situation analysis. Analysis includes evaluating each key competitor, highlighting the
competition’s important strengths and weaknesses, and what the competition is likely to do
in the future.
Market Segmentation defines the nature and diversity of buyers’ needs and wants in a
market and further classified in significant terms so that the organization can focus its
business competencies on the requirements of one or more specific groups of effective
demand. Each segment includes buyers with similar needs and wants for the product
category of interest to management, the reasons that they buy or use certain products, and
their preferences. Segments for business product markets may be formed according to the
type of industry, the uses for the product, frequency of product purchase, and various other
factors.
Designing Marketing Strategy
The situation analysis identifies market opportunities, defines market segments, evaluates
competition, and assesses the organization’s strengths and weakness, all needed in
designing marketing strategy consisting of:
1. Market targeting and positioning analysis,

2. Building marketing relationships, and

3. Developing and introducing new products.
Market Targeting and Positioning Strategy. Market targeting determines the people (or
organizations) that management decides to pursue with the marketing program. The
target(s) typically consist of one or more market segments.
The targeting decision sets the stage for setting objectives and developing the positioning
strategy. The options range from targeting most of the segments to targeting one or a few
segments in a product market, considering the market’s maturity, the diversity of buyers’
needs and preferences, the firm’s size compared to the competition, corporate resources
and priorities, sales potential, and financial projections.
Market positioning seeks to place the product in the eyes and mind of the buyer and
distinguish the company, product, or brand from the competition. This strategy, also called
the marketing mix, is the combination of product, channel of distribution, price, and
promotion strategies a firm uses to position itself against its key competitors in meeting the
needs and wants of the target market.
Marketing Relationship Strategies are intended to create high levels of customer satisfaction
cope with a rapidly changing business environment through partnering. Partners may
include end user customers, marketing channel members, suppliers, competitor alliances,
and internal teams.
Forging relationships with suppliers, channel of distribution members, and sometimes

competitors help to provide competitive advantages and superior customer value.
New Product Strategies are needed to consider replace old products due declining sales
and profits. Developing and positioning new market entries require close coordination of
functions to satisfy customer requirements and produce high-quality products at competitive
prices. New product decisions include finding and evaluating ideas, selecting the most
promising for development, designing marketing programs, market testing the products, and
introducing them to the market.
Development of Marketing Program
Market targeting and positioning strategies for new and existing products set guidelines for
the choice of strategies for the marketing mix components (product, distribution, price, and
promotion strategies) to form the positioning strategy selected for each market target. The
objective is to achieve favorable positioning while allocating financial, human, and
production resources to markets, customers, and products as effectively and efficiently as
possible.
Product/Service Strategy needs the following information on current and anticipated

performance of the products (services) to guide product strategy decisions:
1. Consumer evaluation of the company’s products, particularly their strengths and

weaknesses vis-à-vis competition (i.e. product positioning by market segment
information).
2. Objective information on actual and anticipated product performance on relevant
criteria such as sales, profits, and market share.

Product Strategy includes:
1. developing plans for new products,

2. managing existing products, and
3. deciding what actions to take on problem products (e.g. improve product
performance, lower cost, and reposition).
Distribution Strategy decisions include:
1. the type of channel organizations to use

2. the intensity of distribution appropriate for the product of service
Market target buyers may be contacted on a direct basis using the firm’s sales force or,
instead, through a distribution channel of marketing intermediaries (e.g. wholesalers,
retailers, or dealers). Distribution channels are often used in linking producers with end user
household and business markets.
Price Strategy involves choosing the role of prices in the positioning strategy, including the
desired positioning of the product or brand as well as the margins necessary to satisfy and
motivate distribution channel participants. Customer reaction to alternative prices, the cost
of the product, the prices of the competition and various legal and ethical factors establish
management flexibility in setting prices.
Promotion Strategy. Advertising, sales promotion, sales force, direct marketing, and public
relations help the organization to communicate with its customers, cooperating
organizations, the public, and other target audiences. These activities make up the
promotion strategy, which performs an essential role in positioning products in the eyes and
minds of buyers. Promotion informs, reminds, and persuades buyers and others who influence
the purchasing process.
Implementing and Managing a Marketing Strategy
The final stage of a marketing strategy considers the design (or modification) of the
marketing organization and implementation and control of the strategy. Selecting
the customers to target and the positioning strategy for each target moves
marketing strategy development to implementation shown in Exhibit 1.
The Marketing Organization design matches people and work responsibilities in a way that is
best for accomplishing the firm’s marketing strategy. Deciding how to assemble people into
organizational units and assigning responsibility to the various mix components that make up
marketing strategy are important influences on marketing performance. Restructuring and
reengineering lead to numerous changes in the structure of the marketing units.
Implementing and Assessing Marketing Strategy consists of (1) preparing the marketing plan
and budget, (2) implementing the plan, and (3) managing and assessing the strategy on an
ongoing basis.
The typical marketing plan shows the details concerning targeting, positioning, and
marketing mix activities and indicates what is going to happen during the implementing
period, which is responsible, how much it will cost, and expected results (e.g. sales forecasts).

Several factors contribute to implementation effectiveness, including the skills of the people
involved, organizational design, incentives, and the effectiveness of communication within
the organization and externally.
Marketing strategy is an ongoing process of making decisions, implementing them, and

gauging their effectiveness over time. In terms of its time requirements, evaluation is far more
demanding than planning. Evaluation and control are concerned with monitoring
performance and, when necessary, altering plans to keep performance on track. Evaluation
also includes looking for new opportunities and potential threats in the future. It is the
connecting link in the strategic marketing planning process of Exhibit 1.
Preparing the Marketing Plan
The market target serves as the planning unit. The marketing plan spells out the marketing
strategy. Plans vary widely in scope and detail, but all plans need to be based on analyses
of the product market and segments, industry and competitive structure, and the
organization’s competitive advantage.
An outline for a typical plan is shown in Exhibit 2, with the following brief discussion of the
major parts of the outline, highlighting the nature and scope of the planning process.
The Situation Summary describes the market and its important characteristics, size estimates,
and growth projections. Market segmentation analysis indicates the segments to be
targeted and their relative importance. The competitor analysis indicates the key
competitions (actual and potential), their strengths and weaknesses, probable future
actions, and the organization’s competitive advantage(s) in each segment of interest. The
situation summary is brief supported by information placed in an appendix or separate
analysis.
Description of each Market Target includes size, growth rate, end users’ characteristics,
positioning strategy guidelines, and other available information useful in planning and
implementation. When two or more targets involved, it is important to assign priorities to aid
in resource allocation.
Objectives for the Market Target(s) describes what the marketing strategy is expected to
accomplish (objectives) during the planning period for each market target, in terms of
financial, market position and customer satisfactions targets. Objectives are also usually
included for each marketing mix component.
Marketing Program Positioning Strategy statement indicates how management wants the
targeted customers and prospects to perceive brand. Specific strategies for product,
distribution, price, and promotion are explained in this part of the plan, indicative actions to
be taken, responsibilities, time schedules, and other implementation information.
Forecasting and Budgeting includes (1) forecasting revenues and profits and (2) cost
estimates necessary to implement the marketing plan. The people responsible for market
target, product, geographic area, or other units may prepare the forecast. Comparative
data on sales, profits, and expenses for prior years are useful to link the plan to previous
results.

3.3 Highest and Best Use Analysis
An understanding of market behavior is essential to the concept of HBU. Market forces

create market value, so the interaction between market forces and HBU is of crucial
importance. Therefore, HBU is a market-driven concept. HBU analysis is typically provided by
consultants. However, the nature of the engagement sets limits on the extent of HBU analysis
to be undertaken, and the characteristics of the property limit the number of alternative uses
to be considered.
Definition
Highest and best use may be defined as the reasonably probable and legal use of vacant
land or an improved property, which is physically possible, appropriately supported,
financially feasible, and that results I the highest value. The HBU of a specific parcel of land is
not determined through subjective analysis by the property owner, the developer, or the
consultant, but by the competitive forces within the market where the property is located.
Therefore, HBU is an economic study of market forces focused on the subject property. The
benefit a real estate development produces for a community or the amenity contribution by
a project (like a public waiting shed along the city road) is not considered in the HBU
analysis; HBU is driven by economic considerations and market forces, not by public interest.
HBU Compared to Market Analysis and Feasibility Analysis
Market analysis: Purpose is to identify demand for alternative uses, through supply and
demand analysis to forecast absorption rate and probable rents for specific uses considered.
Feasibility analysis: Purpose is to determine respective values based on criterion variables

(e.g., residual land value, rate of return, capitalized value of overall property), through
calculation of NOI/cash flows and selection of appropriate cap rate/discount rate to
determine property value based on criterion variables for specific uses considered.
HBU analysis: Purpose is to determine the use resulting in the maximum value through
specifications in terms of use, timing, and market participants (i.e., user of the property,
equity investor, and debt investor)
The three analyses are interrelated. However, feasibility analyses may involve data and
considerations that are not directly related to HBU determinations. Such analyses may be
more detailed, have different focus, and /or require additional research. Generally, the
feasibility of developing real estate under a variety of alternative uses is studied. The use that
maximizes value represents the HBU.
HBU of Land as though Vacant vs. HBU of Property as Improved
The consultant should distinguish between HBU as though vacant and HBU as improved in
the analysis. The consulting report should clearly identify, explain, and justify the purpose and
conclusion for each type of use.
HBU of Land as Though Vacant There are three reasons to identify the HBU of land as though
vacant in valuation: to estimate a separate land value; to identify comparable sales of
vacant land; and to identify external obsolescence.

The value of land is generally estimated as though vacant. When land is already vacant, the
reasoning is obvious: value the land as it exists. When land is not vacant, however, its value
depends on how it can be utilized. Therefore, the HBU of land as though vacant must be
considered in relation to its existing use and all potential uses.
Land value can be based on potential, rather than actual, use. Example: Consider a
valuable commercial site in an excellent location that is currently improved with a service
station that is free of any negative surroundings. An investor who wants to build a high-rise
mixed-use building on the site may pay a price for the property that includes no value, or
even negative value, for the existing improvements. The potential use, not the existing use,
usually governs the price that will be paid.
HBU of Property as Improved The HBU of property as improved is analyzed for two reasons:
1. To identify the property use that can be expected to reproduce the highest overall return
for each peso of capital invested. This is important to informed buyers who are economically
motivated. Example: A property is currently being used as rental apartments. A buyer would
want to know if this use will continue to produce maximum benefits. If not, would the rate of
return be increased by converting it to an apartment hotel? The value of the property will
differ under these two use assumptions.
2. To estimate the HBU of property as improved to help identify comparable properties. Both
the HBU of land as vacant and as improved should be the same or similar for each
comparable property s for the subject property. Example: It may be inappropriate to use a
comparable property that has a HBU as an office building in considering a property that has
a HBU as hotel.
Example: HBU of Land as though Vacant
Single-Family Residence is in an area zoned for detached, single-family home, some of

which have already been built. The first HBU question is whether the site should be develop or
left vacant. Since the residual value of the site as though residentially improve is positive, the
HBU of the site as vacant is to develop it.
The second HBU question is what type of residence to construct on the site. The builder has
narrowed down the development alternatives to two types of houses, both of which are
compatible with other houses in the neighborhood. Use 1 call for the construction of large
house with estimated market value of P250,000, including the lot value. Use 2 calls for the
construction of a more model house which would be worth approximately P200,000 with the
lot. Similar sites in the area have been selling to builders for approximately P32,000 to P33,000.
The estimated costs of constructing the two houses and their respective value estimates can
be used to identify the HBU of the land. Below are the calculations.
Use 1 Use 2
Market value P250,000 P200,000
Cost to construct new -187,000 -150,000
Builder’s fee - 30,000 - 24,000
Land value P 33,000 P 26,000

The answer to the HBU question as to which improvement should be build is Use , the use that
results in the higher residential land value. Similar sites can be expected to sell for about
P32,000 to P33,000. Thus, if P33,000 was paid for the lot and the smaller house was built, the
builder would incur financial loss.
Example: HBU of Property as Improved
Capital Expenditure Required A warehouse property can be rented for P175,000 total net to
the owners. However, the owners are considering converting some of the warehouse space
into office space and increasing the rent. The conversion would cost approximately P125,000
and would probably add to the market value of the property, which is currently P600,000. An
appraisal estimates that with the new office space, the annual rent could be increased to
P185,000, even though the amount of warehouse space would be reduced. The calculations
used for the HBU analysis are shown below.
W/house use only W/house with Office

NOI P 175,000 P 185,000
Overall cap rate 15% 15.5%
Capitalized NOI P1,167,000 P1,194,000
Conversion cost 0 - 350,000
Property value P1,176,000 P 844,000
Conclusion: The warehouse without offices is the HBU of the property as improved.
Criteria in HBU Analysis
The HBU of both land as though vacant and property as improved must meet four criteria.
The HBU must be (1) legally permissible, (2) physically possible, (3) financially feasible, and
(maximally productive, often considered sequentially. The tests of legal permissibility and
physical possibility must be applied before the remaining tests of financial feasibility and
maximal productivity. Although the criteria are considered sequentially, it does not matter
whether legal permissibility or physical possibility is addressed first, provided both are
considered prior to the test of financial feasibility. Many analysts view the HBU analysis as a
process of elimination. The test of legal permissibility is often applied first because it eliminates
most alternative uses and does not require a costly engineering study. It should be noted
that the four criteria are interactive and may be considered in concert. Matrix analysis can
be used to plot their interaction.
3.4 Location Analysis in Real Estate Study

Location analysis is defined as a thorough study of location in terms of a specific use,
environment, time and anticipated pattern of change. The specific use, in turn, is supported
by the highest and best use analysis, which is defined as a thorough study of the reasonable
and probable use that results in the highest present value of the land after considering all
legally permissible, physically possible and economically feasible use.

Location and site are not synonymous. Location in real estate is defined as “economic
characteristics of real estate composed of immobility, constant change, dependence, and
elements of special distribution. Location is an economic concept even though a particular
location (a site) may be described in physical and legal terms”. Site is defined as “a parcel
of land which is improved to the extent that it is ready for use for the purpose for which it is
intended.
The reasons for a location analysis are (1) to find a site within a location upon which to place
an economic enterprise, (2) Make an investment, (3) or to dispose of a parcel of owned
property at the highest selling price possible.
Selection of the Optimum Site
The optimum site for one enterprise may be totally unworkable for another. The site is
selected on the basis of its desirability for the individual enterprise. Agglomerations of similar
enterprises create economies as distances between suppliers of materials, products, and
services are reduced.
The objective of the location analysis is to determine whether the client’s specific project or
program can be profitable in an area and on a specific site. Sites are compared on the
basis of a matrix of details, including physical, geographic, political, economic, and even
emotional elements.
The optimum site should be selected on the basis of the best set of present and perceived
future measures of these multiple influences. The consultant will usually base his location
recommendations on his analysis of factors such as:
1. Physical characteristics
2. Utility features
3. Zoning features
4. Economic factors
The criteria or standards differ for each site selection process for specific types of use such
as office, retail, industrial, and other special purpose real estate use so that the location (or
the site) may have either a significant or nominal impact on the cost of the enterprise.
Regional Analysis
Since investment in real estate is made long before sales begin, sustained effective
purchasing power in the market is important, particularly at the regional level because many
factors that will ultimately influence the success of an enterprise are determined by regional
economic well being. Thus, it is necessary to analyze the following components of a region.
1. Employment Level Employment

2. Economic change
3. Economic boundaries
4. Population changes
5. Census data Demography
6. Transportation
7. Public services
8. Zoning

Special Location Objectives
Although the analysis that the consultant performs is usually broad in scope, the client may
only need answers to limited and direct questions. Not all location analyses require the study
of a region or even of a broad neighborhood.
Market Identification
The delineation of a market is a process that identifies a location for a use or uses and the
area that the use or uses will serve. Considerable study is needed in order to identify the
market that the client is trying to serve.
Surveys, interviews, and questionnaires may be used to measure the pricing, physical
features, amenities, and services that are a part of the unsatisfied market potential in the
area.
Sophistication of the competition should be considered in the analysis. In the midst of keen
competition, one would expect rents to be increasing rapidly with low vacancies when
strong demand is present.
Market Penetration
Since real estate development is a slow process, it is rare for one enterprise to “scoop” the
market. While planning is proceeding, the potential for competing development should be
considered.
The prime ingredient of a successful real estate operation is location. In this context, the
term location includes physical as well as economic attributes. Location is the one element
in a real estate development that cannot be duplicated exactly by competition.
3.5 Investment Analysis For Proposed

Projects
Analysis of proposed investment properties imposes a heavy responsibility on the real estate
consultant. It requires broad experience and thorough knowledge of prevailing market
conditions.
The consultant’s experience and specialized skill can cover a wide range of engagement for
proposed real estate projects and development, including planned unit development,
residential and office condominiums, shopping malls, hotels, and office buildings.
The complexity of these proposed projects will usually require the collaboration of other
specialists.

Site Analysis
Land acquisition Usually the land has been acquired before the consultant is engaged. It
may have been in the same ownership for many years, or it may require a more intensive use
in view of increased land values. It may have come under the control of a mortgage after s
foreclosure or under new owners as a result of a corporate merger, or the land may have
been purchased recently for the purpose of developing it in the future.
If the consultant will be involved in the land acquisition, it is imperative that an evaluation be
made on the most recent comparable sales, including pending transactions. Before land
acquisition is decided, the consultant must be able advice the client of the market value of
the land sought based on an analysis of recent transactions.
Regulation matters Where land use is defined by a zoning ordinance, it is better practice to
check into the following matters and to analyze their impact on the subject property:
1. Street or alley widening requirements

2. Setback and easement requirements
3. Controls relating to access (for example, the location of garage ingress and
egress)
4. Regulation established by redevelopment agencies
5. Land uses proposed under a general plan
6. Effect of environmental impact studies
7. The situation regarding the transfer of development rights
8. Deed restrictions
Where development is subject to conditional use permit, consultation with staff of the local
planning department and with architectural or planning firms familiar with the policies of the
individuals involved in the permit process is necessary.
Physical Analysis
Size and shape The terrain of the site will determine its suitability for the proposed
development.
Topography and soil Terrain features can be advantageous or disadvantageous for specific
types of development.
Where public water service is not available, underground water level for water sourcing must
be established preferably at the time when the land acquisition is being considered.
Utilities for public service A qualified engineer must check the availability and cost of
sufficient water and sewer services.
Building Design
Consultants can provide valuable input in the development and the preparation of
preliminary architectural designs. The Right Building? “Highest and best use” is an overused
phrase, deeply embedded in the vocabulary of the real estate analyst. However, it is truly
the hallmark in the study of a proposed development.

It is the consultant’s function to carefully study various development plans and finally identify
the type of project that holds the greatest prospect in terms of the client’s investment
objectives. The real estate industry, even in good times, is replete with stories of project
failures and financial disasters.
Business prudence calls for competent consultant from the start of the basic design concept
to establish certain basic design features. Architects specializing in particular types of
building may have the ability to design an attractive, well-functioning building that will
receive good market response.
Financial Feasibility
Financial feasibility study involves the following major studies and analysis:
1. Analysis of demand and supply situation

2. Cost study
3. Income and expense projection
4. Evaluation of the cost-benefit relationship
Analysis of demand and supply situation The methods applied and the statistical data
used in forming an opinion concerning the market outlook for a proposed development will
depend on the type of property. Any forecast is affected by unforeseeable economic
conditions and especially the financial market situations.
The task of projecting the effective demand for most other types of real estate is extremely
difficult, as the decision of the potential consumer is frequently affected by extraneous
conditions that cannot be foreseen at the time the analysis is made.
In connection with office buildings, it is not feasible to quantify future demand by

segmenting the market and pinpointing how much of the demand for space will be
generated by certain types of users, such as lawyers, accountants, and financial institutions.
Another factor that can adversely affect absorption is emergence of outlying competitive
developments that siphon off the “backroom” activities of large corporate and financial
tenants into suburban location with substantially lower occupancy costs. communication
systems. Since absorption projections are inexact by their very nature, it is advisable to make
a series of assumptions illustrating a range of possibilities and thereby highlights the risk
element connected with the project.
Cost study In the cost analysis of the project, the principal cost classifications are:
1. Direct cost. These are the cost of construction (labor, materials, overhead, and
contractor’s profit), including site work, parking, and tenant improvements
2. Indirect cost. These costs can be broken down into the following two major
categories:
a. Construction – related
b. Development–related
3. Developer’s profit. Although not strictly a cost item, developer’s profit is
customarily
provided for in a financial study.

Income and expense projection Two basic method for evaluating the economics of
proposed development are available to the analysis.
Cash flow method The starting point in this analysis is the time of completion of the building,
usually the date the certificate of occupancy is issued. The study will typically cover a ten-
year time frame requiring the following inputs:
Related to income
Related to expenses
Related to investment characteristics
Related to other matters
Adjusted stabilized capital value analysis relates the total cost of the project to its economic
value. It is simplified in that the cash flow phase is limited to the rent-up period from the date
of completion until a stabilized occupancy level has been achieved.
Major Distinctions Between Sale and Rental Projects
Consulting takes on a different aspect when it is related to investment properties primarily for
sale to owner-occupants, such as single-family dwellings and commercial/residential
condominium projects. The consultant’s function is to conduct a comprehensive market
survey to identify sources of demand and to investigate the track record of competitive
developments, including price trends and absorption.
Another real estate consulting pertains to the speculative builder of investment-type

properties such as apartment building, shopping centers, office building, and industrial
facilities. Frequently, a developer will de-emphasize the quality of construction in order to
meet competitive rent level and to achieve profit on sale.
Development and Marketing
If the investment feasibility analysis resulted in a positive outlook for the project, indicating an
area of risk acceptable to the developer, the real estate consultant may then be engaged
to participate in the development process. It may entail some or all of the following
activities.
1. The consultant will participate in the selection of the architect and review preliminary
and final plans, outlines, and detailed specifications.
2. Following final approval of the project, a team will be organized.
3. Concurrently with these activities, loan negations will be under way.
4. Upon the approval of the plan and specification and confirmation of the funding
arrangements, construction documents will be prepared, final construction schedule
established.
5. Depending on the consultant’s experience, he may be involved in the supervision of
construction.
6. In conjunction with real estate brokerage firm, the consultant will , the case of a rental
project, develop a price schedule at which the units will be sold, develop he
standard form lease, and establish rental rates, tenant allowances, and an overall
leasing strategy.
7. Again, depending on the type of project, the consultant may be instrumental in
choosing a property management firm and may assist in the staffing of permanent
building personnel and the appointment of service companies.

It is quite obvious that in order to render the entire spectrum of development-oriented

consulting services, a broad range of experience and capabilities is needed, typically
requiring the services of an organization rather than an individual.
3.6 PROJECT FINANCING: A flexible financing

option for real estate development
and marketing
Project financing, a recent innovation in long-term debt financing, permits a project sponsor
or proponent to tie a debt issue to a specific asset. In long-term debt financing, it involves
complicated provisions and can take many forms. It can be used to finance big ticket
projects like infrastructures and big real estate developments. Most often, a separate legal
entity is formed to operate the project, putting up the required equity capital, while the
remainder of the financing is furnished by lenders and lessors, or property owner as in the
case of real estate development. In one type of project financing, each sponsor guarantees
its share of the project’s debt obligations. Here the creditors would also consider the
creditworthiness of the sponsors in addition to the project’s own prospects.
Project financing offers several potential benefits over conventional debt financing, such as
the following:
1. Project financing usually restricts the cash flows, which means that that the lenders,
rather than the managers, can decide whether to reinvest excess cash flows or to
use them to reduce the loan balance by more than the minimum required, thus
reducing the lender’s risk.
2. Advantages for borrowers are: First, because risks to the lenders are reduced, the
interest rate built into a project financing deal may be relatively low. Second, since
suppliers of project financing have no recourse against the project proponent’s other
assets and cash flows, project financing insulate the firm’s other assets from risks
associated with the project being financed.
3. Project financing increases the number and type of investment opportunities; hence
they make capital markets “more complete.” At the same time, project financing
reduces the costs to investors of obtaining and monitoring the borrower’s operations.
4. Project financing permits firms whose earnings are below the minimum requirements
specified in their existing bond indentures to obtain additional debt financing. In such
situations, lenders look only at the merits of the new project, and its cash flows may
support additional debt even though the firm’s existing assets would not.
5. Project financing permits managers to reveal proprietary information to a smaller
group of investors; hence project financings increase the ability of a firm to maintain
confidentiality.
6. Project financing can improve incentives for key managers by enabling them to take
direct ownership stakes in the operations under their control. By establishing separate
projects, companies can provide incentives that are much more directly based upon
individual performance than is typically possible with a large corporation.

In practice, it would be very cumbersome to actually calculate the future total cash flows to
the project proponent’s firm with and without the project.
3.7 Consulting In Property

Management
Property management may be defined as the planning, coordinating and control of the
physical and administrative operations of a building, such as residential, commercial, or
industrial, income- or non-income producing. Since all improved real estate must be
managed, property management is a field of considerable and significant activity.
The physical management of a property covers all the physical components of the building.
The administrative management covers the financial, accounting, budgeting, and reporting
functions.
The Subjects of Property Management Consulting
How does consulting fit into this specialized management area? Obviously, the consulting
works do not refer to the routine activities undertaken by the company or individual
responsible for the property management function. Rather, the consulting service
supplements or supports the property management function. Consider the following
situations:
1. A company tries to determine whether property management responsibilities should

be handled by an in-house staff or by an outside professional property manager.
2. An owner of an income-producing property needs an evaluation of the property’s net

income performance with suggestions as to how the property could be more efficient
in its net earning capability.
3. An agent charged with the disposition of a property needs to determine its highest
and best use.
4. A developer considers a leasing policy for a new building and requires an up-to-date
analysis of market conditions and of the building plans and specifications to ensure
that the building will perform efficiently.
5. A building owner who had engaged the services of a property management

company desires to evaluate its management program and performance to see any
improvement needed in relation to his investment objectives.
6. A government-owned guaranty company considers completing a foreclosed partly-

built commercial mall located on a prime site and requires a review of the property
use as originally conceived when the original owner obtained a bank loan for the
project.

There are great opportunities for consulting in property management, with the above list
offering just a few examples of the possibilities. Let us review the types of consulting activities
that would be involved in each of these situations.
Clients for Property Management Consulting
1. Organizing the Property Management Function
A corporation faced with the decision to either organize an in-house property management
department or seek outside consulting services needs to examine such factors as the
following:
1. Are the properties leased on an absolute net basis, or is the owner required to furnish
a wide range of services and utilities for the tenants?
2. Are the properties located in a small area convenient to the company headquarters,
or are they located in distant cities or province?
3. Are the properties large enough to command the attention of an outside firm?
4. Are the properties large enough to require the services of an on-site manager and of
an executive-level individual to supervise the manager’s activities?
5. Are the properties multi-tenanted, or single-tenanted?
6. Are the properties producing income, or occupied solely by the corporate owner?
7. Are the properties all of the same type, or are some of them commercial, some
industrial, and some special use?
8. Will the ownership period be temporary, short term or long term? Are the properties
free and clear, or are they encumbered?
Establishing in-house property management staff is easy, but getting the right answers to
these questions is another thing. Unless the company seriously secures the services of a
professional consultant competent in every aspect of the property management function,
the decision could be not only wrong but very expensive to correct.
2. Evaluation of Property Income Performance
In the second situation, the owner of an income-producing property, a large office building
in a medium-sized metropolitan area, wants to determine whether or not the property’s
performance as an investment can be improved.
The first in the checklist needed to carry out the consulting engagement is the evaluation of
the income derived from the property. Competitive properties within the market area are
examined, utilizing a comparative Analysis Form. A numerical rating of 1 to 10 is used, with 10
being the highest rating. This information is gathered for every competitive property in the
marketplace to relate the acceptability of the client’s property income in view of existing
conditions. The next step is to examine the historical years’ actual operating costs and
expenses and the current and future years’ operating budget projection. With the data of
typical operating costs in the area, the costs of providing janitorial service, electricity,
maintenance, and other items are compared on a per square meter basis. This
3. Highest And Best Use Analysis

The third case situation involves the disposition of a property (a more than 10-year old multi-
story downtown motel in a prime corner of a rapidly growing downtown block of a metro
Manila area), and the need to determine its highest and best use. The consultant must
determine whether or not the property in its present form constitutes the most profitable
utilization, and if not, how can he determine to what use it should be put in order to realize
the best sales price. This situation indeed calls for the services of a professional consultant.
The consultant should first need operating information on income and expenses during the
last few years, and a projected operating budget for the coming year or years.
The consultant’s report would include a management plan setting forth the stages of
implementation and describing and documenting the steps leading to the completion and
occupancy of the new facility.
4. New Building Construction
Our next property management consulting opportunity centers on a developer who is

proposing the development of a new building and needs considerable assistance in a
number of areas. First, he requires a close liaison with his architects and engineers in the
creation of the plans and specifications for the project.
Optimum Building Design The consultant’s input should relate, not only to the physical
components of the building, but also to such areas as the external module of the building,
that is, the distance between window mullions on the perimeter of the building, which
affects the flexibility of the interior space layout.
Setting Lease Terms In creating a leasing policy for a new building, the counselor will be
working with the developer, his mortgage lender, his attorney, and representatives of the
entity responsible for leasing the space in the new project. Here we will determine, based on
the market analysis, the rental rate per square foot to be offered. This rate may be uniform
throughout the building, or it may vary with the available views, the floor height and
location, or the quantity of space to be leased.
The shorter the lease contract is better: a twenty-page contract should not spoil a marketing
program when a five-page contract is sufficient. Less sophisticated tenants react negatively
to a long legalistic contract.
5. Assistance In Loan Negotiations
Retaining a consultant early in the mortgage lending process improves the credibility of
borrowers in loan negotiations. Since consultants have a wealth of experience and intimate
knowledge of the marketplace, lenders generally view their findings and recommendations
as significant input and improvement the overall development plans.
6. Evaluating the Property Management Firm
Another important area of property management consulting is the evaluation of the

performance of a property management contractor in meeting an investor-client’s needs.
A client retains a consultant to determine the agent’s level of performance and to
recommend ways for improving the client’s return on investment.

3.8 Consulting In Lease-Or- Buy

Decisions
Supplementary measures are frequently helpful in the decision process, but these may be
incomplete descriptions of economic consequences and, as a rule, should not supplant the
analysis of least cost at the opportunity rate.
THE USE OF PROPERTY, plant or equipment can be obtained by buying, renting, or leasing.
Most of the different benefits and costs of each alternative can be evaluated in economic
terms. However, since non-economic factors may bear heavily on the decision, some
comments on such considerations must be made.
NON-ECONOMIC Sometimes there is no alternative to leasing. Philippine laws allow land

lease for long periods of time, under terms that have all the characteristics of ownership, but
do not allow transfer of title. The lessee may develop the land, erect buildings, sublease,
and do other uses substantially equivalent to ownership.
Some users want convenience in acquisitions and disposals, and pay a premium to the
owner for these services. A rental contract offers flexibility in planning for the time and cost
of replacements and additions that is less true of purchases.
Economic considerations The lease or rental fee substantially represents the profit and
financing cost of the lessor. Unless the lessor’s financing costs and profitability standards or
demands are lower than the lessee’s, it will be unusual for a lease to demonstrate an
economic advantage. Some situations, however, consistently favor a lease.
A lease is useful if the user needs only a part of a property (for example, office space in a
building or such rights as or air space), or needs an asset for less than useful life.
The periodic lease payment is generally deductible for tax purposes. If, alternatively, the
user borrowed the funds directly to finance a project, only the interest portion of the
installment would be tax deductible, not the principal payment.
Finally, the lessor may be in a better position to assume ownership risks because he “pools”
them. A single computer user who has the latest in computer technology, for example,
assumes the risk of obsolescence when be bought.
When a lease appears to have an economic advantage, an evaluation is made to measure

the advantage.
Difference Between Renting and Leasing
Some authors offer distinction between the terms “ renting” and “leasing”, although many
continue to use the terms interchangeably. When a user buys an asset he makes a long-
term investment decision, and makes an initial outlay in the expectation that the asset will
provide a stream of earnings in the form of either increased profits or reduced costs.
In a rental agreement, the user pays rent only as long as he wants to use the property, but is
not obligated to make payments beyond a short or nominal period, say three months.

A lease is like a rental agreement but for longer period, long enough for the owner to
recover, effectively his purchase price and financing costs, which generally means for a
significant part of the life of the asset.
A user who buys, then, makes an investment decision; he assumes ownership risks and makes
an initial capital outlay in order to increase profits or reduce costs. A user who rents makes
an expense decision; he avoids ownership risks and incurs a series of expenses in order to
increase profits or reduce costs. A user who leases makes a combination of investment and
financing decision to make a series of payments that is the same as a combination of buy-
and-borrow.
In some cases it is difficult to distinguish a particular agreement as either a rental or a lease.

To Lease – Is That Your Final Answer? Or To Buy?
But few more difficult questions confront decision makers. There are three basic and major
considerations that have important impact in any lease or buy decision-making case, such
as the following items:
Company ownership
The financial strength of the company
The basic objectives of ownership
Company Ownership In the past companies usually owned rather than leased real estate
facilities. This was true when sale-leaseback transactions evolved due to changes in tax laws
and financing possibilities that emerged from the recessionary years.
Type of Ownership Real estate today is no longer viewed primarily as “housing” corporate
operations. Real estate economics have recognized that real estate serves as an excellent
hedge against inflation and, in time, become a prime income producing asset.
Distribution of Ownership In some instances, the distribution of corporate influences real

estate planning and management. Corporations with many shareholders usually have the
parent company or its real estate subsidiary owns the real estate assets. An in-house property
manager takes charge of real estate matters. In corporations with relatively few
stockholders, partnership in real estate often exists.
The number of stockholders influences ownership decisions. For example, with 50 or more
shareholders, accounting and logistics problems make it difficult to transfer real estate
ownerships to a partnership and, therefore, a less practical approach.
In summary, in tightly held corporations real estate ownership rather than leasing provides an
additional economic advantage. Real estate has been used as a vehicle for the transfer of
both property and income to succeeding generations. t
FINANCIAL POSITION OF COMPANY
Asset Position The decision to lease or buy is usually dictated by the financial position of the
company sometimes the extensive real estate holdings of major corporations can create an
imbalance and induce financial trouble when management dreams beyond the
organization’s financial resources. Whims of management have been known to override
sound corporate planning.

Market conditions very often govern lease or bur decisions as they impact a company’s
asset position. In the early 90s, for example, the demand for space exceeded the supply
and a strong seller’s market existed.
The asset position of a company owning real estate is weakened if that real estate is a
special purpose building.
Liability Position Where real estate is company held, the acquisition of land and buildings
can be funded out of cash flow from depreciation, or purchased using the credit of the firm
with periodic payment from corporate earnings. Thus, real estate is simply a means for
housing an enterprise tied to the manufacture or turnover of products and the profits
generated.
Net Worth Position Corporate lease or buy decision is strongly influenced by the return on
capital. This issue is less important for a major corporation than for a smaller company with
considerable working capital requirements. Smaller companies usually leases real estate,
particularly under sale-leaseback arrangement, since this reduces working capital needs.
The Value of Space Where long-term lease at fixed market rent exists, the lessee holds a very
valuable leasehold interest, which, in turn, the lessee could sublease for profit or sell his
interest in the marketplace. Thus, real estate becomes an intangible asset in the net worth
position of such lessee corporations.
Return on Capital A lease or buy decision is dictated primarily by the issue of return on
capital. Major growth companies often prefer to lease rather than own certain facilities as
the return on their own capital against their net worth position substantially exceeds the
effective rental cost of these facilities.
Certain ratios exist as to the typical percentage of total sales that a firm can afford to pay for
rent. Rent may be measured in the form of either lease payments or debt service.
The advantages and disadvantages of leasing may be summarized as follows:
Advantages of Leasing
Flexibility The lessee can move out at the end of the lease; the
landlord has the vacancy problem
Capital Leasing does not require long-term capital investment

beyond the tenant’s improvements
Credit Major credit strength and being the first tenant in a new
property can result in a below-market rent
Freedom of choice A policy of short or intermediate lease terms can allow

movement from location to location and the consolidation of
operations
Disadvantages of Leasing
Control of decisions Leasing results in a landlord-tenant relationship that can

sometimes be divisive; this can limit internal space alterations
or renovations

Loss of advantages of These advantages can include equity buildup through

mortgage financing, depreciation, and the tax benefits of
owning real estate ownership
Loss of expansion option Owned facilities can easily be expanded, particularly if excess
land is involved
Cost On an after-tax net present value basis, ownership is less

expensive than leasing
Client Objectives The objectives of clients vary, depending on whether they are in an
expansion mode or a contraction mode.
Expansion Stage In the expansion mode, the first step in judging space needs is to project
growth in sales and space requirements over a forecast time period, which can be as much
as ten years. Management’s sales projections are converted to number of people required.
This, in turn, is measured on a per-employee-space-need basis. There are standard ratios of
space requirements for various categories of employees (office employees, service
employees, industrial employees, etc) The skills of employees are important in scheduling
space needs.
Basic employee cost is another consideration. Some corporations operate in several cities.
Likewise, corporate policy can override everything else in the choice of a company’s real
estate site.
All of the above factors interface and become a study of options and alternatives that
relate to the cost of moving, renovating, converting, cost of money, and other costs of
operation and overall corporate objectives. From these costs develops a real estate
strategy that can be adapted to short-term and long-term purposes. In general, short-term
objectives are handled by leasing. As objectives become longer term, and with costs being
equal, the preference is to own.
3.9 Consulting in Distressed Property

Definition of Distressed Property
Distressed property may be particularly defined as the property that does not generate
income or benefit sufficient to support the investment objectives and the funds obtained to
develop it. This definition refers to the financial aspect, the common subject in distressed real
property. However, properties may be in various stages of development or distress. An
existing fully tenanted, income-producing may become property distressed; a fully-
developed property and not producing sales income may be distressed; older buildings
without financing may be distressed. Quick or easy solutions should not be expected.
However, there are guidelines and assistance available for most distressed situations.

UNDERTAKING the turnaround of distressed properties is one of the most difficult but
challenging consulting engagements. Skills and long experience should enable the
consultant to promptly put the distressed property in proper context. Creative and workable
solutions for distressed properties are more multi-faceted than those for most other problem
areas of consulting. There are no standard solutions for the variety of the clients and the
types of property, but the use of the Real Estate Consulting Process and analytical tools and
techniques may be applied to distressed situations to understand the subtle differences and
create the best solutions for the problems.
When a property is in distress, the lender will take actions to protect his position. Often the
lenders don’t have the in-house capability to perform a turnaround program, so that outside
help is sought, especially if the property is outside the lender’s coverage area.
Project Analysis
The project feasibility study prepared for the subject property in distress is a most important
source for information and data analysis. What went wrong can be shown by the PFS, and
can help the consultant decide at the outset how the project will be analyzed. Prompt
decisions and careful analysis are necessary in every case
Inspection checklist The first step is to evaluate the profile and extent of a property’s
distressed condition by reviewing records, such as loan and lease contracts, financial data
and other documents relevant to the property and its default, foreclosure, or involuntary
acquisition. Any advertising, public relations, or market in information originally or currently
being used should be studied for clues of the markets being pursued.
No single part of the analysis should become so important (or negative) that an objective
perspective of the distressed property can not be maintained. Almost every property can
eventually be brought back to useful service. In the development of any property, sensible
reasons are used to bring the property back to market. Often it takes only careful analysis to
find a particular use that will make the property productive again.
Physical inspection The characteristics of the property and its basic engineering, structural,
and architectural design must be often, studied. While a property is falling into a distressed
state, the owner defers maintenance to pay other bills.
Roof inspection usually comes first in the exterior inspection to see whether the expansion
joints were properly installed and the flashing is properly attached and whether all
ventilators, skylights, and mechanical equipment have been properly installed. Exterior walls
may show some signs as to the condition of the roof depending on downspouts, flashing,
and firewalls.
Interior inspection of the mechanical components of the building includes the ventilation
and air conditioning for their condition, adequacy and fuel conservation. Rust on water lines,
improper electric wiring and blocked or misdirected ducting, and non-working air-con units
are primary causes of problems.
Condition and load-bearing capacities of the floors as determined by wear patterns,

cracking, lifting, deterioration of the flooring material, and adequacy of column spacing.

Financial review and record check - Determine what leases are in place with the owner’s
standard lease form, not with the tenants’ own forms. Standard form makes the analysis
easier than when the owner has permitted tenants’ forms to be used, allowing the owner to
be disadvantaged from the very beginning, with concessions to one or more tenants but not
giving to others. A tenant who learns that others have favorable lease terms will want them
too. Collection problems exacerbate other financial problems.
The level of maintenance and the notices regarding tenant policy provide indications of the
quality of property management experienced.
Analysis of budget versus the actual figures, mortgage loan amount and initial equity
available, overrun cost early in the project, may indicate signs of project weaknesses that
grew over time. Analysis of mortgage debt repayment history is an area may reveal
problems early.
Location and HBU analyses The precise predetermined and current use of the project
(office building, housing, industrial, shopping, or mix use) and project location can often tell
at an early stage whether the present use of the project is right for the location. Consider
demographic studies, zoning requirements, neighborhood attitudes and adaptability.
Tenant interviews will reveal property-related problems and the perceived solutions to these
problems. The consultant should always be attuned to the tenants’ needs but should make
no commitments.
Highest and best use analysis is the most sensitive factor why a property is distressed. Was
the site and location properly selected by the developer-owner in the first place? Will
today’s use be appropriate for the property in the future?
Tax effects on the project In most instances, newer properties in distressed situations have
to be kept within the bounds of existing financing and local tax structure. However, there are
a number of advantageous local and national tax programs that might be considered when
making a decision about whether a distressed property can be revamped into a profitable
venture.
Value ”as is” versus completed value This analysis is important for a project that is in an
early stage of development or has not been substantially completed. As a project draws
closer to completion, the use and reuse analysis become much more limited due to the
structural improvements that have been made.
RECOMMENDATIONS When the analysis is completed, the important alternative actions that
may be included in the recommendations are:
Continue ”as is” A properly conceived project which is going along an orderly process of
development, and the solutions to the problems are somewhat easy to implement, it may be
recommended that the project take its present course “as is”.
Continue after redesigning or renovating With architectural and engineering assistance,

simple or complex solutions can improve the basic design of the project. Guided by the on-
site inspection list described earlier, a recommendation can be made to modify the design
of the facility to such a degree that additional cost will help ensure the complete and
successful workout.

Sell partial or full interest It may be necessary to get the present owner out of the project
and bring in investors with new concepts and additional investments. Again, the financial
determination from pro-forma analysis will help show what needs to be done to rescue the
project and perhaps the owner’s financial health.
Modify marketing program Problems usually occur because of the lack of tenants or
insufficient sales. After the location and HBU analysis, identification of the probable tenant
mix or buyer’s market is most important.
Apply computer analysis The current information technology has developed computer
programs with which the real estate professional can create “what if” models for a project.
If computer analysis was not done previously, it should be now. The consultant should create
a desired return on investment model employing realistic time spans, properly estimated
rent-up periods, and income expenses that can go from the low and to the high end of the
spectrum.
Estimate the Time for Recovery The owner and the lender will want to know how long it will
take to bring the project turnaround. Because of the difficulty of a distressed property
situation, all concerned will want a quick simple solution that may not be possible. However,
it is necessary to estimate the realistic time for recovery.
RECOVERY PLAN
A recovery plan is the next service engagement that the consultant must present to the
owner/lender of a distressed property. Assuming that all reasonable assumptions have been
made and that successful recovery is deemed possible by the consultant and the necessary
outside experts, a plan for recovery can now be drafted.
Retain or change management This recommendation is based on thorough knowledge of

the physical condition of the property and the current management’s performance and
physical control over the property. A lender may demand for a complete management
change. Factors such as maintenance, rent collection, and tenant’s relations will be studied
in evaluating whether the present management has been committed to make the property
successful. .
Institute management controls If new management is taking over, sufficient controls must
be initiated. If the present manager is retained, controls can be imposed for his own good
and the benefit of the owner and the lender. It is usually necessary to cut operating costs,
manage exposures, assure prompt rent collection, reduce vacancies and turnovers.
Restructuring mortgage financing Since lenders usually desire work-out, the consultant
should ask for adjustment in the present debt service, and perhaps for a larger loan.
Determining whether new capital in the project is going to be “good money thrown after
bad” must be carefully judged, but it is often preferable for a lender to put more money into
a viable project than to have it foreclosed.
Improve the maintenance program Improving the physical condition of the property may
be necessary due to maintenance deferral problems. A turnaround may be accelerated by
cleaning up small items and upgrading amenities. Spending initially rather than just talking
about future changes can improve tenant morale and help to retain occupancy.

Redirect the marketing efforts When a project is determined to be ready for renewal and
the physical and economic problems have been addressed, the marketing program for the
project may require some changes before recovery is initiated.
Initiate a training program If the present management stays with the project, some changes
will be required. With the help of a consulting property manager or through the exercise of
common sense and good business practices, the present management can often be
retained in order to manage the property more effectively. All books and records must be
brought up-to-date.
Once workout plans have been decided, they must be put into effect promptly. Tenant
turnover and occupancy level must be monitored. Projections must be made as to the
timing of new tenants and the retention of old ones.

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Real Estate Consulting Analyses (Module 3)

3.1 Real Estate Market Analyses

The consultant is expected to provide a comprehensive physical and economic description

2018 Real Estate Consultant’s Comprehensive Course 3.1

Knowledge of real estate economics is obviously essential in undertaking market analysis.

2018 Real Estate Consultant’s Comprehensive Course 3.2

1. Real estate is durable and fixed in location

Factors That Create Demand

2018 Real Estate Consultant’s Comprehensive Course 3.3

Elements of the national housing market

2018 Real Estate Consultant’s Comprehensive Course 3.4

As a consequence, the housing supply as of a given time depends on the quantity or

1. New construction in the open market

a) The rate of growth in the number of households.

The Commercial Real Estate Market

2018 Real Estate Consultant’s Comprehensive Course 3.5

While favourable economic and institutional forces favoured revitalization of downtown

2018 Real Estate Consultant’s Comprehensive Course 3.6

3.2 Market-Driven Strategy: A Practical

Market-Driven Strategy and Performance

The market-driven approach is customer-oriented in understanding the relationships

1. Customer orientation Market-driven strategy places the customer at the center of

The traditional approach in competition is changing. Market-driven companies are

Strong organizational performance and partnering is essential to survival. Weak performers

2018 Real Estate Consultant’s Comprehensive Course 3.7

2. Strategy and Performance There is persuasive evidence from business practice

3. Strategy and Competitive Advantage Competitive advantage results from

1. Changing environment imposes pressures to move products quickly into the

Marketing Strategy (in general)

The four-step process of designing and managing a marketing strategy are:

1. Situation analysis considers market and competitor analysis, market segmentation,

2018 Real Estate Consultant’s Comprehensive Course 3.8

4. Strategy implementation and management look at organizational design and

Marketing Situation Analysis

1. Identify and describe the buyers,

Designing Marketing Strategy

1. Market targeting and positioning analysis,

2018 Real Estate Consultant’s Comprehensive Course 3.9

3. Developing and introducing new products.

Forging relationships with suppliers, channel of distribution members, and sometimes

Development of Marketing Program

Product/Service Strategy needs the following information on current and anticipated

1. Consumer evaluation of the company’s products, particularly their strengths and

2018 Real Estate Consultant’s Comprehensive Course 3.10

Product Strategy includes:

1. developing plans for new products,

Distribution Strategy decisions include:

1. the type of channel organizations to use

Implementing and Managing a Marketing Strategy

2018 Real Estate Consultant’s Comprehensive Course 3.11

Marketing strategy is an ongoing process of making decisions, implementing them, and

Preparing the Marketing Plan

2018 Real Estate Consultant’s Comprehensive Course 3.12

3.3 Highest and Best Use Analysis

An understanding of market behavior is essential to the concept of HBU. Market forces

HBU Compared to Market Analysis and Feasibility Analysis

Feasibility analysis: Purpose is to determine respective values based on criterion variables

HBU of Land as though Vacant vs. HBU of Property as Improved

2018 Real Estate Consultant’s Comprehensive Course 3.13

Example: HBU of Land as though Vacant

Single-Family Residence is in an area zoned for detached, single-family home, some of

2018 Real Estate Consultant’s Comprehensive Course 3.14

Example: HBU of Property as Improved

W/house use only W/house with Office