Financial Analysis Report on Risk Management and Finance

This financial analysis report examines the construction project of St. Martin Hospital in San Francisco, focusing on risk management and finance. It explores the use of Enterprise Resource Planning (ERP) systems to improve project performance and increase profits. The report utilizes the Characteristics Analysis Method (CAM) and the Risk Analysis Method (RAM) to identify and assess critical risks. It covers technical aspects of ERP project risks, project control systems, and provides a detailed risk management plan. The report also analyzes financial aspects, including development plans, interpreting analyses and valuations, and interpreting appraisals. The report recommends a project control system that includes regular meetings, risk assessments, staff training, communication, and environment monitoring. This comprehensive analysis offers insights into managing risks and financial strategies within the construction project, providing valuable information for project management and finance professionals.

STUDENT
FINANCIAL ANALYSIS REPORT

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Contents
TASK – A: RISK MANAGEMENT..............................................................................2
EXECUTIVE SUMMARY.............................................................................................2
INTRODUCTION...........................................................................................................3
PROJECT BACKGROUND..........................................................................................4
PROJECT RISK MANAGEMENT..............................................................................4
Technical Aspects of ERP Project Risks...............................................................................4
PROJECT CONTROL SYSTEM..................................................................................7
01. Regular Meetings of the CMT...................................................................................7
02. Risk Assessment for the Project................................................................................7
03. Staff Training for Internal Control...........................................................................7
04. Regular Communication with Staff..........................................................................8
05. Testing and Monitoring of Environment..................................................................8
CRITICAL EVALUATION...........................................................................................9
Characteristics Analysis Method (CAM)..............................................................................9
01. Organizational...............................................................................................................9
02. Entrepreneurial..............................................................................................................9
03. Related to Business.......................................................................................................9
04. Financial.......................................................................................................................9
05. Technological..............................................................................................................10
06. Contractual..................................................................................................................10
Risk Analysis Method (RAM).............................................................................................10
CONCLUSION..............................................................................................................11

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TASK – B: FINANCE...................................................................................................12
EXECUTIVE SUMMARY...........................................................................................12
INTRODUCTION: SCENARIO – 1............................................................................13
INTRODUCTION: SCENARIO – 2............................................................................13
DEVELOPMENT PLAN..............................................................................................14
SCENARIO – 1..............................................................................................................14
INTERPRETING ANALYSES....................................................................................15
INTERPRETING RESULTS.......................................................................................16
SCENARIO – 2..............................................................................................................16
INTERPRETING ANALYSES....................................................................................18
INTERPRETING RESULTS.......................................................................................18
DEVELOPMENT PROPOSAL...................................................................................18
INTERPRETING VALUATIONS...............................................................................19
01. The Residual Method...............................................................................................19
02. The Term & Reversion Method..............................................................................20
03. The HARDCORE/Layer Method............................................................................20
INTERPRETING APPRAISALS................................................................................22
CONCLUSION..............................................................................................................24
LIST OF REFERENCES..............................................................................................24
APPENDIX: TASK – A................................................................................................26

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ACCOUNTING FINANCIAL ANALYSIS REPORT
TASK – A: RISK MANAGEMENT
EXECUTIVE SUMMARY
The focus of this report is on the construction project of St. Martin Hospital based in
San Francisco. In construction sector projects, most entrepreneurs have the tendency of
establishing a process for risk management. Such a process is incorporated in their
projects, with the purpose of improving the project’s working performance and
increasing profits. Enterprise Resource Planning (ERP) is one of the most widely
chosen tool by entrepreneurs for risk management in their project. The aim of this report
is to analyse the critical risks which the project being discussed can face. In this case
study, involving St. Martin Hospital Project located in San Francisco, ERP has been
used through adoption of a process which is spread over the following two stages –
1. In the first stage, the analysis uses the Characteristics Analysis Method (CAM).
This method is used as per the specific requirements of the project, thereby
providing recommendations which help in dividing the project into smaller Sub-
Projects, allowing them to be managed easily.
2. In the second stage, the analysis uses the Risk Analysis Method (RAM). This
method first identifies the risks in the project and then assesses them critically.
With the successful implementation of the Enterprise Resource Planning (ERP)
systems, the entrepreneur can link all the important functions of the project, including
management of the orders, administrative process, financial systems, human resources
and controlling the external suppliers and the patient records, into an ‘integrated
system’. This also allows the entrepreneur to share all the data, thereby enhancing its
usefulness for the Board of Management. The primary motive of an ERP system, after
implementation is to generate potential in enterprise for enhancing the overall
competitiveness.

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INTRODUCTION
The project is concerned with the construction of an hospital by incorporating an
innovative health system, creation of wards for critical patients and also by
incorporating the latest ‘Infection Control Systems’ which is going to limit the risks to
the patients, the staff as well as the visitors. The aim is also to enhance the hospital’s
environment and atmosphere (Loosemore et al., 2012).
It is a factual that risks tend to be higher for entrepreneurs because of ‘Cost Overruns’
experienced by them as delay in the process of construction can put financial strain on
the enterprise and may even result in slowing down the construction activity
(Loosemore et al., 2012). To facilitate the entrepreneurs in such difficult times, there are
various tools and methods available which can help the entrepreneurs to improve
management of the project by using the ERP systems (Hillson, 2012). From the various
models available, this study has chosen Characteristics Analysis Method (CAM) and
Risk Analysis Method (RAM) for this specific project so that the hospital can
improvise the impact on the environment. The process makes use of CAM to facilitate
the recommendations proposed under ERP about dividing the project into small
manageable Sub-Projects and RAM for analysing various critical risks for the project,
which can be identified and assessed through the use of ERP process (Hillson, 2012).
PROJECT BACKGROUND
In this section, a brief discussion will allow a glimpse of this project related to St.
Martin Hospital. This project is under the management of St. Martin Foundation which
was founded in 1926 and presently is involved in maintaining 12 such hospitals in and
around the state of California. This project will incorporate a most modern Operation
Theatre, two Outpatient Centres and in-house Diagnostic Centre in San Francisco. With
more than a century of experience, St. Martin Foundation has the combination of an old
thought process and the latest technology to make this project a success technologies
(Davis & Jarvis, 2007).
Hence, St. Martin Hospital project can effectively, safely and economically incorporate
all the recommendations proposed in this report. This report will also discuss the
capabilities of the hospital’s workforce and the management in implementing major
disease-management solutions, while bringing about an environment control program

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during the course of this project’s development (Mcneil, Frey & Embrechts, 2010). This
project is also about the incorporation of a new ‘Heart Centre’ and a ‘Research Centre’
which will accommodate the most modern, state of the art equipment and technology
(Davis & Jarvis, 2007).
PROJECT RISK MANAGEMENT
Technical Aspects of ERP Project Risks
Research studies have evaluated the ERP risks and on the basis of those analysis, this
report has prepared a checklist of six main risks (these have been discussed under
Critical Evaluation Section), which an entrepreneur must look into while implementing
the ERP Project Risk procedures:
1. Organizational
2. Entrepreneurial
3. Related to Business
4. Financial
5. Technological
6. Contractual
Further to the checklist described above, this report carries on with three important
aspects associated with Risk Management and these have been discussed briefly
hereunder.
Stage 1: Risk Identification
Spectrum covering projects is very large as well as diverse. The nature of projects is
also so different that it can be very difficult to categorize them using a simple method.
More common classes under which risks can be placed are Economical, Technical and
Managerial (Hillson, 2012). A possible method can be to scrutinise the project as a
system and then identify the risks likely to affect the project, thereby evolving a
database of relevant risks for the project. On the basis of this, it can be inferred that the
identified risks and the impact they have on the project, can be stated as the driving
forces and this can help in developing a risk management strategy or a risk management
policy (Loosemore et al., 2012). In the view of this report, risks can be broadly
categorized as Top Down and Bottom Up. The first category shall provide list of risks
which are perceived by the project’s top-level management and would refer to strategic
issue risks. On the other hand, the second category shall provide list of risks which are
of operational nature (Das, 2006).

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Stage 2: Risk Assessment
Broadly, for assessment purposes, there are Direct Risks (DR) and Indirect or
Transferred Risks (TR). DRs directly affect the performance or operations of a
projects, whereas TRs are those risks, which develop when a direct risk happens
(Loosemore et al., 2012). After collecting the information on identified risks, impact of
each DR can be estimated. This estimation can be kept simple or can be made rigorous
(Hillson, 2012). However, this report is of the view that a simple estimation of the risk
impact should be preferred to start with. At a later stage, the administration can build
into their system a rigorous estimation depending on the project’s size, complexity and
cost (Das, 2006).
Stage 3: Risk Management
The final step is managing the risk. This depends largely on the total impact the risks
has on the project. It is not difficult for management to analyse impact created by each
risk on the project and the creation of total potential loss, which each risk can cause to
the project (Hillson, 2012). By selecting a number of what if analytical questions and
combining them with cost benefit analysis, the administrator can decide on formulating
the appropriate risk management strategy and hence implement a risk elimination or
reduction methodology (Dobson & Hietala (ed.), 2011).
Figure – 1: The Process of Risk Management Plan
To minimize risks related to this project, this report recommends that the entrepreneur
must apply a Risk Management Plan (See Figure-1) at three different stages of the

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project while implementing the ERP process. The three stages are – The Selection \
Stage; The Implementation Stage and The Usage Stage. According to experts and in the
opinion of this report, it has been observed that the Risk Management Procedures,
which are adopted in a planned and systematic way, all through the project’s ERP
process, create an inbuilt ability, in the implementation of the project, to reduce the
possibility to risks occurring during the progress of the project (Dobson & Hietala (ed.),
2011).
In the opinion of this report, it has been observed that major mistakes have the
likelihood of being committed in a project when the ERP process is in its early stage of
being implemented. It is also the observation of this report that the efficiency of risk
management is increased when risk management is introduced at early stage during the
life cycle of the ERP process. This report recommends that it is worth considering
implementation simultaneously while planning and selection of criteria for
implementation of the ERP system (Das, 2006).
PROJECT CONTROL SYSTEM
The suggestion of this is that apart from following the above noted technical aspects of
risk management, St. Martin Hospital must also decide to control risk factors during
construction of the project by following the following procedures:
01. Regular Meetings of the CMT
The Construction Management Team (CMT) must meet once every week to review
construction activities and provide guidelines to the working staff. The committee
should include members from the administration, medical, technical, environmental
services and diagnostics departments. This is known as the Selection Stage. Apart from
this, if required, the team must have representatives of architects and contractors (Das,
2006).
02. Risk Assessment for the Project
Guidelines issued by the San Francisco Department of Public Health (SFDPH) must be
followed by the CMT for all construction projects to determine the future risk potential
on staff as well as the patients once the project has been completed. In this respect, all
the appropriate departments of St. Martin Hospital, which are to be involved with
running of the hospital, after the project is completed, should be kept informed about the
guidelines issued by SFDPH. The CMT shall make comparative analysis of the

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construction activities in respect of their future effect on the patients and accordingly
put in effect the desired controls which are required for their effectiveness. The final
analysis of the CNT should also be used to evaluate the recommendations which are to
be implemented for safety of the construction staff and should include use of Personal
Protective Equipment (PPE), maintaining negative air pressure in the construction area
and also maintenance of an anteroom to prevent spreading of dust. The format, which
shall be developed by the CMT of St. Martin Hospital, should remain in force till the
final clearance of the project has been obtained from the San Francisco Department of
Public Health (SFDPH) (Davis & Jarvis, 2007).
03. Staff Training for Internal Control
This is the Implementation Stage. It is mandatory to impart training to the internal staff
and the contractors so that they familiarise themselves with the internal control
procedures associated with the risks. San Francisco Department of Public Health
(SFDPH) makes it mandatory for the working employees of the contractors as well as
the sub-contractors to pass the one-hour course on internal control procedures which
shall be conducted by the CMT as per the guidelines provided by SFDPH. It is
mandated by SFDPH that contractors who do not qualify for the norms of this training
course are not to be given eligibility status for bidding any of the hospital projects
(Davis & Jarvis, 2007).
04. Regular Communication with Staff
Information should be regularly shared with the concerned personnel working on the
project. CMT can make use of different modes for relaying the required information.
These modes can be inclusive of memos, e-mails, departmental meetings and
notifications through the notice boards. These are some of the standard procedures
which managements follow to carry out communication channels between the
construction management team of the hospital, the administration of the hospital and the
contractors/sub-contractors and their staff. Whenever the construction management
team suspects that a potential hazard is going to happen, the management team should
immediately involve the all the other construction teams so that the necessary and
required steps can be taken to contain the hazard by involving the staff which is directly
connected with the suspected activity area (Kendrick, 2009).
05. Testing and Monitoring of Environment
This is the Usage Stage. The environment monitoring and testing procedure shall be
carried out in two phases:

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1. Monitoring the environment and making sure that the construction activities being
carried out conform to the standards laid down by SFDPH for internal control and
safety during the tenure of the project.
2. Testing the Air Quality as per the required assessment norms laid down by the
SFDPH to test if the prevailing internal control barriers strong enough in
preventing dust from entering the hospital.
The air quality testing process requires the testing of real-time particulate level along
with samples for detection and prevention of bacteria and fungus. Since these periodic
tests are costly and add to the cost of the project, it is advisable for the CMT to review
the budget from time to time and objectively conduct the monitoring. This report
suggests that these services are to be given priority under the following circumstances:
 Evidence is detected of damage to water in and around the project area.
 The construction activity is generating dust.
 The project is in a position to cause damage to the domestic water supply in the
surrounding areas (Kendrick, 2009).
CRITICAL EVALUATION
Characteristics Analysis Method (CAM)
In the first stage, this method, which is actually a tool, is used for ensuring that the
project is consistent and manageable. CAM is also used for measuring risk impacts
through different goal contents and development approaches adopted by the CMT.
Here, through a hypothetical risk scenario (Refer to Appendix: Task-A), this report tries
to show how results obtained by using CAM can help in deciding the recommendation
which can help the CMT in splitting the large and complex project of St. Martin
Hospital into small, manageable Sub-Projects listed below.
01. Organizational
The inputs obtained from the risk scenario and put into CAM have been taken from the
proposition documents of the project. Also, the knowledge and experience of the CMT
from previous projects and from requirements mentioned in this project’s portfolio can
prove helpful.
02. Entrepreneurial
This second segment of CAM helps the entrepreneur to formulate recommendations
about those aspects of the CMT which are to be given more attention so that the

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management can successfully manage the ERP system for the project. Entrepreneur is
concerned about managing the complete project, including time management, cost
management, scope management, quality management, communication management,
human resource management and integration management.
03. Related to Business
In this third segment, questions related to business are put to the employees. These are
in the form of either a positive or a negative statement and from the answers obtained,
the CMT arrives at their applicability to the project on a scale of 0 to 5 (where 0 denotes
fault or not true; 5 refers to exactly right; and N/A denotes respondent saying ‘don’t
know’). This segment is prepared by using a MS Excel spreadsheet and it is
programmed to provide automatic tabulation. The results are controlled by the pre-
formulated decision rules of the CMT (Mcneil, Frey & Embrechts, 2010).
04. Financial
The detection of toxic material did much financial damage to the project. The
management had to bear the cost of the testing laboratory and also had to pay the
workers for the three days of suspended work (Mcneil, Frey & Embrechts, 2010). To
dispel the doubts of those workers who were working on the hazard area and who were
concerned about their health, the management had to get them examined at another
hospital to convince them there was no damage coming to their health (Kendrick, 2009).
05. Technological
Although the laboratory reported in ‘negative’ for the toxic levels or any harmful
particulates, the management had to adjust many technical details. A team of specialists
was engaged for analysing whole of the construction site for any other hazardous
materials. The employees had to be provided with a copy of the laboratory report to
convince them about the results. The Technical Committee of the CMT made
recommendations to St. Martin Foundation about the steps required for further
protective measures for the welfare and safety of not only the hospital staff but also for
the construction workers (Mcneil, Frey & Embrechts, 2010).
06. Contractual
As per the contractual laws, if such a situation arises, it is mandatory for the project
management to conduct visual inspection of the construction site after the results have
been received and to take a decision about continuation of the construction activities.
This being a standard exercise to be undertaken by the project management, it was
fulfilled and the project work was resumed. It is part of the investigation exercise to

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conduct a visual inspection, after samples of the toxic material have been taken for
analysis (Kendrick, 2009).
Risk Analysis Method (RAM)
In the second stage, the management makes use of this method which the CMT finds
helpful in identifying the essential risks and also their probability in context to the
project. In the analysis carried out using RAM, CMT draws employees from all the
departments of the organisation. These are interviewed and on the basis of their
statements, CMT is able to identify the various ERP risks connected with the project.
The CMT evaluates each specific risk on the basis of the list prepared for each activity.
The individually filled tests are analysed on the basis of close interaction between the
employees and the management representative (Frenkel et al., 2005).
The Final Risk Assessment is carried out by the CMT by evaluating each risk separately
and assessing the probability of each risk individually. This is classified into a tabular
form (Refer to Figure-2) on a scale of one to five. Number 1 denotes a very small effect
and probability, whereas Number 5 refers to a high catastrophic effect and probability.
The risk number, obtained by the multiplication of the Impact Number with the
Probability Number, is taken as an indicator defining the significance of the risk. This is
measured on a range of 1 to 21, where number 1 refers to a Low Significance Factor and
number 21 refers to a High Significance Factor (Frenkel et al., 2005).

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Figure – 2: The Risk Matrix
CONCLUSION
In this ever changing world of technology, expansion has become a necessity and
modernisation has attained the requirement of the times, hence hospitals too need to
acquire new technologies and upgrade their equipment. However, this modernization
cannot be completed without addressing the impact changes occurring in the
construction of projects. This report has embarked on the importance of construction
projects by focusing on control of risks by the hospital administrations, thereby averting
hazardous situations and reducing risks to employees as well as patients. It has been
established in this report that the most essential factors worth considering by the
administrators are – Communication; Controlling the Environment; and Training the
Employee. With the implementation of these factors, the hospital administrations can
control risks and can carry on the construction activities with confidence (Hillson,
2012).
The implementation of CAM, as discussed above, also establishes the fact that efforts of
project management should be aimed at Communications Management and Human
Resource Management while bringing the project to the finishing stage. Employees’
commitment needs to be strong, so that the management can make use of newer
technologies so that efficient construction processes can be utilised to their full potential
(Dobson & Hietala (ed.), 2011). Although, it is easier for administrators to stick to old
ways for a change, this report lays emphasis on the view that if management is given
good reasons to implement a change and the purpose behind the change is explained,
they will avoid using the old ways of doing things (Hillson, 2012).
Hence, it is important for experts to create clear vision of what they propose to change
and this is where communication actively with those involved in the change becomes
essential. Equally important is the fact, as CAM suggests that for a long running project,
it is essentially good to divide it into short-term exercises, as this will maintain the
interest of the workers in the project till they achieve their final aim (Dobson & Hietala
(ed.), 2011).

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ACCOUNTING FINANCIAL ANALYSIS REPORT
TASK – B: FINANCE
EXECUTIVE SUMMARY
The purpose of this project proposal is to apprise the Board of Management of SalDev
Developments Ltd. about the financial advantages of investing in a commercial
development project in San Francisco, CA. The selected section of land is located on
Kansas Street in the city of San Francisco and is very close to the upmarket commercial
areas of the city. Comprising of 2.90 acres, the cost of the land is $61,898,760 (126,324
sq. ft. at $490 per sq. ft.). The site area comprises of 10 parcels of land and has been
sanctioned a 3.0 FAR.
This parcel of land was shortlisted after conducting an exhaustive market survey and a
thorough financial analysis of the potential uses of this site. With 75,794 sq. ft. of retail-
cum-office space, this site has the least financial risk for SalDev and has the potential of
highest returns from the market. In the following pages the feasibility study of this
proposal has been described in more detail. There has been laid special emphasis on the
specific financial elements of this development project. The site is very conveniently
located near one of the busiest commercial district of San Francisco and is surrounded
by a mix of residential and commercial properties including many popular bars and
restaurants, fashion retail shops, office complexes and residential apartments.
INTRODUCTION: SCENARIO – 1
This section of land had been purchased by USAA from real estate developer ZOM
Clarendon L.P. in 2011 at a price of $13,500,000 (Refer to Deed Book / Page: 4482 /
1337). The San Francisco County Zoning Office had approved the site plan of ZOM
Clarendon in 2005 for the construction of 155 office units with a mix of 18,540 sq. ft. of

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retail space. However, the proposal could not materialise as ZOM Clarendon had
financial difficulties due to financial downturn in the real estate market. With an
approved site plan, that was given approval about eight years ago and ow that the site is
available for sale, management of SalDev Development Ltd. has shown keen interested
in the purchase and development of this land. The following financial analysis takes into
account the comparative analysis of some of the biggest and best for determining why
this is the most feasible investment for SalDev in the current market scenario of San
Francisco. (CBRE - San Francisco Office MarketView Q1 2019 at
https://www.cbre.us/research-and-reports/San-Francisco-Office-MarketView-Q1-2019).
INTRODUCTION: SCENARIO – 2
The second option provided to SalDev is again a very important opportunity of
developing five adjacent lots in Potrero Hill. This section of land has approval of the
County Planning Authority for building four double unit buildings (total of 8 condos)
and one single family house. This opportunity in the county of San Francisco for
building a unique project is rare to find in the fantastic Potrero Hill location, which is
adjacent to San Francisco's most exciting developments and attractions, namely, Crane
Cove, Pier 70, Mission Rock, AT&T Park, Uber HQ, Warrior's Chase Center, the
Exchange (Dropbox) and UCSF. Surrounding amenities include a mix of beautiful
parks, decent restaurants and cafes, leading tech companies’ offices, health fitness
centers and convenience stores. (Colliers office report Q4 2011).
DEVELOPMENT PLAN
SCENARIO – 1
Brief particulars of the property to be developed into a commercial office space are
furnished below. Photographs of the actual location and the site have been shown in
Figures-1 & 2.
Address Lot 923 to 932, Kansas St, San Francisco, CA 94107
Construction year 2019
Tenant Private Businesses / Traders
Plot Area 2.90 Acres (126,324 sq. ft.)
Floor area 75,794.40 sq. ft.
Total Purchase Price $61,898,760 (126,324 sq. ft. at $490 per sq. ft.)

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Lease term 10 years unexpired term, FRI, with 5 yearly rent
reviews (upward only)
Rent $5,684,580 p.a. ($75 per sq. ft.)
Market rent $6,063,552 p.a. ($80 per sq. ft.)
Figure – 1: Location Map of the Kansas St. Property
Figure – 2: Site View of the Kansas St. Property

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INTERPRETING ANALYSES
As the borrower, the capability of SalDev to repay the loan does not face any difficulty
even if there is a small downturn in the property’s ‘Market Value’ during the long
repayment tenure of the loan. As per the analysis conducted in this report, there is a very
low probability of SalDev to lose its ability of repaying the loan as SalDev’s ability in
meeting the interest payments of the loan remains quite comfortable throughout the
period of the loan (Towey, 2013). Thus, despite the fact that there can be a shortening of
the unexpired lease term, there is a very low probability of default by SalDev and hence,
as per this report’s analysis this option is a ‘low risk’ profile (Pratt, 2010).
Analysis show that the investor’s cash flow has remained positive. The final ratio of the
investment when compared to its unleveraged IRR (Internal Rate of Return) shows a
healthy return of 116% per annum, and the leveraged IRR at 225.65% (Sherratt, 2015).
This shows that SalDev, if makes the choice of this real estate investment, will not face
the uncertainty of meeting the potential future cost to maintain the building, in case it
remains for a short period, including any refurbishment costs. The level of achievable
rent, against a new letting, could have been of importance for SalDev in case there
would have been an unexpected downturn in the medium term (Myers, 2012).
INTERPRETING RESULTS
In this (Scenario-1), SalDev need not maintain an allowance, within the current
purchase price, in case SalDev meets the unexpected possibility of refurbishing the
entire building after the current lease expires. Although, this does not absolve SalDev of
the uncertainty of any future financial responsibility in case of a future vacancy, but it
does allow the company to make an assessment of any future impact on the Target
Returns and in making a decision of how to tackle such an eventuality (Kirkham, 2014).
To allow the Board of management of SalDev to make a comparative assessment, this
report has given an alternative investment proposal in Scenario-2. In the alternate
Scenario-2 below, the report illustrates, another property, of a lower area while keeping
all other parameters, including the debt finance, at the same ratio of 65:35, where 65%
is the loan amount and 35% is the contribution of SalDev (Lavender, 2014).

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SCENARIO – 2
Brief particulars of the property to be developed into a commercial office space are
furnished below. Photographs of the actual location and the site have been shown in
Figures-3 & 4.
Address Lot 653 to 657, Alemany Boulevard, West View
Avenue, San Francisco, CA 94134
Construction year 2019
Tenant Private Businesses / Traders
Plot Area 2.31 Acres (100,623.60 sq. ft.)
Floor area Ratio 60,374.20 sq. ft.
Total Purchase Price $51,318,036 (100,623.60 sq. ft. at $510 per sq. ft.)
Lease term 10 years unexpired term, FRI, with 5 yearly rent
reviews (upward only)
Rent $5,131,807 p.a. ($85 per sq. ft.)
Market rent $5,433,678 p.a. ($90 per sq. ft.)
Figure – 3: Location Map of the Alemany Property

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Figure – 4: Site Plan of the Alemany Property
INTERPRETING ANALYSES
In this scenario, capability of SalDev as a borrower, comes down as SalDev is not in a
strong position to repay the loan in case there occurs a small downturn in the property’s
‘Market Value’ during the prevailing long repayment tenure of the loan. The financial
analysis displayed in this report show that there is an increased probability of SalDev in
losing its ability to repay the loan if SalDev choses this option of investment. SalDev
may also compromise its ability to even meet the interest payments of the loan
comfortably through the period of the loan (Towey, 2013). Thus, considering the factor
of the probability can occur with regard to the unexpected shortening of the lease term,
there can be a probability of default by SalDev and hence, as per this report’s analysis
this option is a ‘high risk’ profile (Pratt, 2010).
INTERPRETING RESULTS
Financial analysis of this Scenario-2 have shown that although SalDev’s cash flow
remains positive if investment is made in this real estate project, the results of
investment returns, when comparing the unleveraged IRR (Internal Rate of Return) at
94.32% does not show a healthy financial position as compared to the previous
Scenario-1 returning 116% per annum. Similarly, the leveraged IRR at175.48 in
Scenario-2 is also weak in comparison to that of 225.65% achievable in Scenario-1
(Sherratt, 2015). These results show that SalDev, in case it makes the choice of
investing in Scenario-2, may have to face the uncertainty of meeting the future potential
cost to maintain the building, including any refurbishment costs, even if it remains

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vacant for a short period. Achieving the level of the achievable rent, in case of a new
letting can be difficult for SalDev in case there is an unexpected downturn in the market
even for a short term (Myers, 2012).
DEVELOPMENT PROPOSAL
For making financial evaluation of an asset, especially in case of real estate assets, many
different methods can be employed by investors and promoters. The choice of the
Comparative Analysis Method depends on the internal contribution of the
promoter/investor and the amount of borrowing. This report shall keep its focus on three
most widely used methods - ‘The Residual Method’; ‘The Term and Reversion
Method’ and ‘The Hardcore/Layer Method’ for determining the best value asset in
which SalDev can make investment (Davis & Jarvis, 2007).
INTERPRETING VALUATIONS
01. The Residual Method
An ideal methodology is presented through the use of this method to individual
investors or entities investing in commercial or residential properties. This method has
been used by investors who either invest for reselling of the asset or for using it as an
income medium. Investors make use of this method before buying an asset or when
developing a section of land, for commercial or residential purposes. The purpose of
using this methodology is to determine whether the developed property will prove to be
profitable, after taking into consideration the investment that will be made for the
purchase and developmental of the land (Myers, 2012).
It is important that SalDev uses this method to carry out an analysis of both the
properties discussed under Scenario-1 & 2. This will prove to be beneficial for SalDev,
before purchasing the land as the Board of Management of SalDev will know that the
company does not invest in a section of land where it would stand to make a loss instead
of making a profit from the project (Sherratt, 2015). To arrive at a result using the
Residual Method, this report has already conducted a comparative development analysis
of both the scenarios so as to make it easier for the Board of Management of SalDev to
not only determine their investment budget but also to make the investment and
development of the project profitable. Some of the parameter taken into consideration in

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this report are – Pre-Construction Costs; Cost of Construction; Period of Construction;
Investment Amount and its Yield; Rental Income; Property Taxes and Fees; Finance
Cost; and Operational costs (Sherratt, 2015).
SCENARIO – 1
The section of land admeasures 2.90 acres and at buying price of $490 per sq. ft., the
cost of the land comes to $61,898,760. Cost of development including construction,
maintenance and marketing costs totals to $16,852,388. If SalDev decides to sell if for
$100,000,000, the Residual Value of the asset is determined by using the equation:
Residual Value = Selling Price – (Cost of Land + Development Costs)
Hence, The Residual Value is = $100,000,000 – ($61,898,760 + $16,852,388) =
$21,248,852.
In case SalDev decides to retain the asset after development and starts earning rental
income from it, the data from the financial analysis shows that Gross Revenue earned in
the year will be $62,001,072 and SalDev will incur maintenance expenses of
$16,100,009. Thus The Residual Value will be the Net Profit earned, which is
$45,901,063.
SCENARIO – 2
The section of land admeasures 2.31 acres and at buying price of $510 per sq. ft., the
cost of the land comes to $51,318,036. Cost of development including construction,
maintenance and marketing costs totals to $18,254,825. If SalDev decides to sell if for
$80,000,000, the Residual Value of the asset is determined by using the equation:
Residual Value = Selling Price – (Cost of Land + Development Costs)
Hence, The Residual Value is = $80,000,000 – ($51,318,086 + $18,254,825) =
$10,427,089.
In case SalDev decides to retain the asset after development and starts earning rental
income from it, the data from the financial analysis shows that Gross Revenue earned in
the year will be $31,990,356 and SalDev will incur maintenance expenses of
$9,474,475. Thus The Residual Value will be the Net Profit earned, which is
$22,515,881.
02. The Term & Reversion Method
Using this method, this report is required to value the asset, which is under
consideration, by assuming that the ‘Passing Rent’ which is $68,040,000 per annum in

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Scenario-1 and is $39,074,400 in Scenario-2 will revert to the market rent, in a five year
period (Baum & Baum, 2015).
Here, it has been assumed that the present value at 5.10% of $1 as shown in Table-03
will change the initial yield, which is 5.10% into a reversionary yield of 6.00%. This
approach, which is shown here in Table-03 is known as the ‘Term and Reversion
Method’ and the derived cash flow is considered as being derived ‘sliced vertically’.
03. The HARDCORE/Layer Method
In this report an alternative approach has also been adopted and this also gives the same
result. This method, known as the ‘HARDCORE Method’, also uses the same
methodology as used in the Term & Reversion Method, but here the cash flow is ‘sliced
horizontally’. The results derived by this method are shown in Table-04. It should
however be noted by the investors that the ‘Total Returns’ which are shown in the table,
on the basis of 5.10% initial yield, do not reflect the total return of the investor. The all-
risks yield of 5.10% is notional and has been shown to indicate that the actual rental
growth, which shall increase the income generated during the holding period, will also
help in producing capital gain in case the investor plans to a resale of the asset. Hence,
on the basis of these assumptions, the overall return to be expected by the investor can
be around 7% to 9% p.a. (Myers, 2012).

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Rent Passing (Rent as per Contract) 68,040,000
Year Purchase (YP) Perpetual @ 6.00% 17
CAPITAL VALUE 1,134,000,000
Rent Uplift 4,536,000
Year Purchase (YP) Perpetual @ 6.00% 17
PV of $ 1 @ 5.10% 1
CAPITAL VALUE 50,278,318
TOTAL 1,184,278,318
SalDev Developments Ltd.
CONVENTIONAL US VALUATION (HARDCORE/LAYER, TOP SLICE)
HARDCORE/LAYER
TOP SLICE
San Francisco Real Estate Project
Vauation and Appraisal: Scenario - 1
VALUATION
Hardcore/Layer & Top Slice
TABLE - 04
(All Amounts are USD)
INTERPRETING APPRAISALS
The appraisal of this report has taken into consideration the following risks, which in
the view of this report are very much relevant to an investment project. It is highly
recommended to the Board of Management of SalDev to these into account while
making plans for long term investments, especially in the real estate sector. (Baum,
2009).
Interest Rate Risks
In the lending markets, the mortgage interest rates tend to remain low and when these
are combined with favourable economic conditions of a market, they give high
yields.Hence, if SalDev is looking for investments in the San Francisco real estate
businesses, it does not surprise the experts as the lenders also look to such real estate
markets and this is good news for SalDev (Myers, 2012). It is expected that interest
rates, in these sectors, for high value construction loans shall remain favourable or the
short term investments. However, looking at the volatility in the markets, it is not

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possible to accurately predict the interest rate trends in the long term investments.
Hence SalDev must move with caution as there is can be a risk of interest rates rising.
Finance Risk
In San Francisco, markets for apartments are the desirable avenue for developers such
as SalDev who are planning to enter into construction development on a permanent
financing basis. However, SalDev must move with caution in case a financial crisis,
similar to the one of 2008, occurs. Under such conditions, the lending market is going to
turn hostile and this can cause the loan-to-value ratio to compress for SalDev, thereby
reducing availability of debt and hence increasing the requirement of internal equity for
SalDev (Myers, 2012).
Construction Cost Risk
When planning a real estate project, investors such as SalDev need to be careful about
the risks evolving because of the construction costs, as they constitute the second largest
expense after cost of the land. Since this cost is dependent on external factors, an
increase in their costs has a substantial impact on returns being expected by SalDev
from the planned project. Oil is one of the main source of energy which is used for
producing and transporting raw materials used in the construction industry. Therefore
prices of oil make the largest impact on materials required for a construction project,
caution is essential for big investors such as SalDev to keep a close look on the oil
prices (Myers, 2012).
Internal Rate of Return
This ratio is the "annualized effective compounded return rate" or rate of return on an
investment or a development project. This shows the net present value of all cash flows
(both positive and negative) from the investment by equalling them to zero. In the
present report, the investment cash flow of SalDev is showing a positive result, even if
the company faces certain unexpired lease periods, which create a negative impact on
the final value of the company’s investment. This is because the investment shows a
high geared IRR (Internal Rate of Return) of 175.48% per annum, which is strong
enough to cover the lean periods (Sherratt, 2015). It is noticed that the higher the IRR
for a project and the amount by which it exceeds the cost of capital is also greater, it
produces a higher net cash flows for the company. Thus the uncertainty surrounding the
potential cost of maintaining the vacant building, including the necessary refurbishment
costs and including the level of rent achievable against new letting could be of

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importance for the investor if there is an acceptable return delivered in the medium term
(Myers, 2012).
CONCLUSION
Hence, when this report is concluded, it is evident that SalDev Developments Ltd. will
be greatly benefitted if it develops the present project as a mixed-use building which
features apartment units in combination with street-level retail bays. Based on the
market reports and analysis available, a mixed-use project comprising of apartments and
street-level retail has the highest demand in and around the cosmopolitan cirt of San
Francisco. In the opinion of this report, among the factors essential for the success of a
real estate project, the hard and soft costs, market demand and supply, financial markets
and local county support are the most essential. The success of any development is
contingent on these factors and if they change, there arise the need to re-evaluate the
whole project. Such a proposed real estate development will not only contribute to
revitalization of the San Francisco horizon, it will also compliment the vision of the
Local Council Plan.
LIST OF REFERENCES
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Das, S. (2006) Risk Management: The Swaps & Financial Derivatives Library.
Singapore: John Wiley & Sons.
Davis, A.E. and Jarvis, P.R. (2007) Risk Management: Survival Tools for Law Firms.
Chicago, IL: American Bar Association.
Dobson, I. and Hietala, J. (ed.). (2011) Risk Management: The Open Group Guide.
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Frenkel, M., Hommel, U. & Rudolf, M. (2005) Risk Management: Challenge and
Opportunity. New York: Springer.
Goodhart, C. and Hofmann, B. (2007) House Prices and the Macroeconomy:
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Hillson, Dr D. (2012) Managing Risk in Projects. Surrey: Gower Publishing, Ltd.
Karadimitrio, N., Magalhaes, C. and Verhage, R. (2013) Planning, Risk, and Property
Development: Urban Regeneration in the England, France, and the Netherlands.
Oxon: Routledge.
Kendrick, T. (2009) Identifying and Managing Project Risk: Essential Tools for
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Taylor, J. (2008) Project Scheduling and Cost Control: Planning, Monitoring and
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APPENDIX: TASK – A
(The assumed scenario considered for discussing the various segments of CAM.)
The contractor carrying out the construction of St. Martin Hospital has reached the stage
where ground is being dug to lay the foundations of the Operation Theatre, the Research
Centre and the Diagnostic Centre. While digging and removing a large rocky segment
of the soil, the workers come across a patch containing asbestos buried under neath the
rocks. Tests conducted on the air quality in the area show that these were large patches
of asbestos under the exposed soil. The CMT was immediately informed, as well as the
design and architect team of the hospital. The construction activity was immediately
suspended. For the safety of the people working on the site, the hazardous area was
quarantined and the other workers and staff, working in nearby areas close to the
hazardous area were also relocated. The construction activity was put on hold until the
final results were obtained about the toxic level of the asbestos. The results obtained on
the third day confirmed that the toxic level was very minimal and the asbestos could be
disposed-off in a secluded forest area.