Consultanf's Decision: The Role

Consulling Tools ond Techniques

GFfrAF'TER 2 2.1 .

for Decision Moking

The Consultanf's Role in Decision Moking

unique Role of the reol eslole consuilont. unlike oihers who serve ihe reol estote morket incideniol to o moin service (such os brolleroge or opproisol), ociuolly enters into the client's decision-moking situoiion where lhe clir:nt objeclives ond criterio ore oppiied (oltered, modified ot'resloted) ond o decision is rnc;de. The consvltont simuloies lhe decision-moking process for the clieni. the client ieccis io ihe- plon wiih, possible modificotion of originol objeciives ond criierio. ond finoltyjdecicJes; with |orrtinuin! guidonce ond odvice from the consulloni. The consullonl's significonl serviCe -objeclive is,fo ensure thot ihe client's problem in lerrns of objeciives is cleorly defined ond ollernclive-slrotegies or solulions ore suggested ond <;ncrlyst:cj oncl o course of ociion i: sr.r.rcted. THE

The consullonl is bolh o speciolist onO cr qenerolisl os he brings his own speciol expertise to the ciient's decision-moking process ond recognizes the potentiol neecl for copobilities beyorrcJ I'ris own in octing on or implerrrCntinQ'..,o decision on professionols for porticulcr specicltir.:s thol pertoin to the questions'ci hond. 'Suclr professionols might include lowyers. occounlcnis. architects, engineers, ecorrcmis{s, leosing ogenis, brokers, opproisers, finonciol onolysts, or olhers whose knowledge is p ,rtinehl ond beyond the consullonts own expertise in ony of ihr:se disciplines. li is the consr-rllorit's--respons'lbiliiy to use ony of ihese speciolisls to coordinote their collective efforis pn bel-rolf of-the clieri't ond to interpret the contribuiion of ecch speciolisl to the client's d6cision-moking br-ocess, ond io the implementotion of o decisiorr

The consultont's oreo of experlise mo7 be limiied to some reol estoie expertise in the generc-:l orecs of nro*eling, mo'ncgemenh--or finonde. The bonsultont who is highly speciolizr:cl irr c single oreo moy require the sdrvices of other consullonts with other reol esicte-orie'nted skills. Wilh the odionces in decision theory, consultonts nroy fincl the need for moclest I'etooling in their pr:riiculor spcciolty, os well os others. io be oble to understond ond in lcrprr,:i for lhe client ihe onolysis of oihers ond lheir input to the decision-moking process of ihe client.

Prellmirrory Ancllysis of Clienl Probiems (Needs ond Objectives)

A prol:lenl moy be defined

op o siturrlion in which-somelhing hos gone wrong wilhoul explonclion. This definition provides c dislinclion between problem solving ond decisionmoking Problems ore historicol in noture, cnd problem-sofving involves fintJing the couse of o deviotion from a normol siluotion. .As sr;ch;'o pr'oblem.i6 the stricl sense of ihe word moy nol cctt-'olly exist. os the clienl's "difficultv' mgy_pe one of moking o de-cision from omong ollerncii,re ,3oUr:es of ociion (such o'.i sele-ting from omong ollernolive investmenl

opportunilies or moking o decision to buy, sell, leose, e1c). The consultonf 's role, iherefore, is more ofien thot of oiding the client in deciiibll mEking r:other ihon problem solving. Thus, il is imporlcrrrl fol lhe consullonl io moke this ,lislinclircn between problem solving ond decisionrnoking cri the oulsel in order lo serve lhe clienfiFeda bdd. Historicolty. emphosis hos been ploced on iclentifying ond solving "problems" for clienti w.hen the ultimcte need io moke o decision lros been the moin issue.,,-Empirisialhbuld be ploced more on decision- moking ond on decision-moking iools. Client "frroblerm'; ore ndt p obieclives ond their orliculotion,-ibfne@ thol ore centrol lo the consultont's role ond represenl ihe foun<Joiion upon which the onolysis of the olternotive courses of o<--tion ond ultimote decisions ore bosed.

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20i$

Reol Eslole Consulionl's Comprchensive Course

2.1

Consulling Tools oncl Techniques

GHAPTER 2

for Decision Moking

ldentificotion ond Stqlement of Objectives The mosl crilicol slep to ihe client's decision-moking process is io identify precisely the client's gools or objectives to ovoid the vogue .,olio.' of objectives in his investmeni decisions, such os conflicting objeciives thoi require oriiculotion ond resoluiion prior to the formotion of o decision process or the onolysis of 'lhoi process. This informotiol is ocquired in ihe initiol informotion-gothering infenview-with the.cliqnt. The gools or objeciives elicited from inierview wiih client moy iequire eithe--r broode\ning or nonowing. refinement or restotement in o more precise moitner tfro{ mo/'i'gquire prlio-rliizing iheiryetZiiv" imporionce to the clieni os well os to minimize or elimindte conflicl. i

:r:3

Being the firsl slep in lhe decision-moklng pf,o..rr, il is imperoiive lhoi ihe consulicnt ideniify the precise noiure of the client's in ierms of his reol objeciives cnd how lhose '"aimcltt1r" objectives con be best ochievea WliFnlhd coniext of invesiment opporfunilies. The rr,ojor concem of lhe consullont of this stoge is to dislir-rguish between ihe client's F:,erceived ond

reol needs ond to tronslote lhose needs i2to weigl3ted opiions for decision mol:ing.

Slolemenl ol clienl objeclives The obility pf iire qlient to exploin his objectrves in precise terms moy be so limited ihoi lhe donsufionf r.nrr'l odd precision to ciieni's stoiements regording his gools. For exompte. ip(estmJ"i;ui".ii"gs-moy be stoted in lre: form of cosh flow or yield ond cosh flow returp objeptLv-ei moy be. in the form of roles or pesos. The consultont provides the ciesjred q(e.eisiof/ by sepcrctilg_ihe concepts ond opp>f,7ing specific pesos ond/or percenloge terms of eoch. rhe con{uttont ftos on obligcrlion lo resolve ony conflicis thot result from more precise stotemenls of client gools. Foi examole, ihe clienl moy stote thot ccsh flow is relotiyEly unim-poitcni but ihot o high yielcd is rcquired. Thot stoiemeni implies sioying poY:r,.ojoossiblg neeQ for ioi'shelter. ond on emphosis on copitcrl goin. These objeciives need to be restoib*d bv ll-re coniulioni os precisely or; possible reviewed. possibiy revised, by t(e clieni oliore.olt6inotive courses of octiorr moyond be

considered

i

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Nolure of inveslmenl objeclives Ihere ore two cotegor.ies of ciient objeclives cbout his investmeni posiiion. Pride of ownership. specitrc locoiion. design, occessibility ond Fung Sui conformonce ore criterio thol ore eosily described but ore non-quonlifioble. The impoct of such nonquoniifioble objeclives rnoy,influence llre levgl of cosh flow or relurrr. but lhis is o consideroiion ihe consultont must decid a ea: Tne quoniifioble ond meosuroble feoiures of clieni objectives ore usuolly less cleor but lvrricrr corr be ipecificolly quolified ,::nd onotyzecl by ihe consultoni. These objectir{es inclube levels of cosh flow in pesc cmounts or rotes, level of inves.tment by the client, coBltgl recovef;,,lox shelter, "ilh", leveroge. profitobili\, versus liquidity requirements, ond risk'versus relurn. Thesg more meosuroble obleciives to be defined ond discussed wilh the-dlier+t before16e consultont con proceecJ vrithneed ihe decision plon, utilizing these objectives os criterio ogoinsl which olternotive courses of oction moy be evoluoted. Allemolive course of oclion Altgrnolivdjourses ot=ocltion or strotegies ore clrcwn from client objectives involving identifico\io-n of ne.c"a-ootq ond lools of onotysis cncl decision moking thot might be opplicoute, rii-or.rees -to cony'irnptement the engolgenrenl ond ideniificotion of ihe iime ond froriey Lonstroints imposed on the entil process. tn hypothesizing olternotive slrotegiesLr.cl?un*tato.ti"1,-ir'rl consuliont sets the',ork pton for estoblishing desiroble oclion ond impidirrenting th6 decision. Bosed on the consuliont,s knowledge, experience, ond judgr:renl os well os the ogreed objeciives of il.re client. ihe

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2015 Reol Eslole Consullonl's Comprehensive Course

2.2

t.

Consulling Tools ond Techniques

CHAFI'TER 2

for Decision Moking

decisiorr rnoy ronge from no oction oi oll to o compleie chonge of the clienl's investment posiiiorr. All these steps ore cjescribed in lhe consulting process.

Scientifi,c Steps in Decision i!1s:king The scienlifi'c melhod of decision-moking slorls wilh lhe clienl "problem" thoi needs definilion ond solufion. Problem solving ond decision-moking ore two seporote processes, eoch one presenting different perspeclives totheclieni ond lhe consultont. While ihey moy ulilize sirnilcr tools of onotysis. they Will uiilize lhose.-lools diilqrently, providing different forms of input ond informotion into the process. Problim solvipe requires tinJing o meons for overcorriin<; o bonier to on objeclive. De.cisio-n-moking"is- oction orieniej ond need not deol wiih o "problem" in ihe stricl sen'c: of *he *ud To repeot, too much emphosis is usuolly ploced on problem solving when in focl, clienls hove soughl ossislonce in lheir decisiori - making process. Decisir:n-moking Process vs. Consulling

Process The following shows The Decision-

Moking Prccess incorporoling the modifiCcitioii-,qegording definition of the problem. This Decisiorr-Mcking Process differs fronr the Consuli.ing Process. Although there ore some similorilies, the Decision-Moking Process fecusgs on o decision being reoched, whereas lhe Consutrling llrocess is concerned wilh lhe consr)[ing engogemenl lhcl covers the olherlerms ond conclilions lh
STEPS lru RElr,L ESTATE DECISION MAKING ll-re decision r.rcking process in reol estoie consists of o series of sleps thr:t goiher reot esfote cicrto onO inloiinotion. onolyze ihe informotion, ond ihen onive cl o decision bosed on lhe onoiysis. The formol procedure is colled the scientific method involving the follou,inq series of sleps:

l.

Cleorty idenlify ond define lhe problem or purpose of lhe invesligcrlion. This step is criticol, for unless o reol estole investor knows exoctly whot lre is ottempiing to decide. ihe investor will lret -ocquire thb-inforrnotion needed to moke o sound decision- One cleorfy defined purpose might be to decide if now is the time to purchose o porticulor reol estote pr,:perty. sov properl"y X.

2-

Collecl relevanl dcrte. Wiih tfre probleni o'rpurpo5€,rcleorty defined. lhe investor then of o decision it is equolly importont to ovoid materiol thot is bxtroneous ond inel&ont to the problem of hond. An inveslor would. ottempl to gother os n-ru-ch/econojhic. sociot. phyri."f ond po6ticol doto relevonl to Properly X os lim-e ond money ollciw. gotherrs informotion il'rol wottld be useful in oriiving

3.

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Ancrlyze lhe dolo cotlecled. With the problem :le;orly defined ond ihe relevont doto collected. on irt"estor must lhe conelcrfe'-clossify. ond onolyze the doto ond onive o prelirrrinory decision - often colled o.gzpgthesis. After clr'roi1oi.'g the informotion, on inveslor moy tentotively decicie thot Prop,p#y-X is the right pro[er! ond thot now is the tirrre to buy.

2015 Reol Eslole Consullonl's Cornprr:hensive Course --____:_.-:__

2.3

t.

Consulling Tools snd Ter'ctririques

GHAPTER 2 4.

for Decision A[oking

Formulole ond lest lhe lenlalive decisions {hypolhesis). At ihis point in m<.rsi scientific invesiigolions. experiments ore conduciecl to see if ihe tentotive decisicn or hypothesis is correct. For reol esiote, it is difiicutt to experiment wilhout hovirrg lc moke firm commilmeni in odvonce. ln olherwords, few sellers let on invesior iry tire properfy before buying io see if the properl"y produces lhe desired resulls. Frequenlly. The only tesiing ovoiloble is to determine how other similor porcelwith similor owner-s is doing in the morkeiploce.

5.

Anive at o finol decision or conclusion. Tol
properhy now. it should be recognized.thoi-ihere-is-e_oossibility thot the invesior is moking o misioke. ln other words, therd is chonce Jhot this is hpt ihe lime lo buy- So or-r investor should ihen eslimoie ihe proUobitity of bEing wrong on{ aecide if he is willing to ioke ihe risk. lf it is decided ihot the propbrty is on'occSpioble risk, lhe purchose iokes plcce. The scieniific meihod is the rotiongl 'woy to opprooch reol estote decisions. Unforiunciefy, ioo mony people moke recrl estote decisions bosed on emotions. The role of the recrl esiote consultont is to bring rotionol behoV'or io a'u"ry errrotionol business. Below is ihe diogrom of the sieps in lhe scientific meihod.

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STEPS rN THE REALFSTATE-DEC|SIOh{

MAKTNG PROCESS (A Supplemenl tct-the Reql Esfcie Consulting Proces:i)

Preliminory Slolemenl of Objectives A. lnvesiment+elurn onolysis (roiios ond.relc,riionship)

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1l

l. 2. 3. il.

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Sophislicoied proiections ond hisioriccl figures oncrlysis Less sophisticoted on-thg-sppt decision onolysis (by hunch, inirriiion, Judgment ond logic of lhe c'onsulloni.ls long experience ond c,:niinuing

educotion) I

Refinemenl ond Direcling of Objeclives Express complex relotionshp,in-$fnp1e itctemt.nls B. Simplify lorge doto sets iplo morg-.eomprehensible proportions for rnothemoticol onotysis (modeling) I i' C. Verify ond volidote the on-ihe-dpoi judgi'nent iof the consultont or clieni)

A.

ldentific
l.

Siotisticol Decision Tools [t9 ldenlify ond exploin voriobility in doto sets)

o. a

-

]

Collotion,

c lossifi Co tio

2015 Reol Eslole Consullonl'c C\

n o{-cf lriterpretql[bn of

doio

2.4

Consulling Tools ond Techniques

G}IAPTER 2

for Decision Moking , bbsis of

b. c.

Decision on lhe thqonolysis ldentify the limiiotion', ond opjiicotions

',

bt tfre stolislicol meosures thot evolve from stolilticol onoiyiii (thot ;ndy foll short, porticulorly in reol eslole decision mokin.q) such-os: I ) meosures of cenhcrl iendency

2) 3) 4)

meosures of dispers;onl siotisiicol inference :nd prediciion regression ond correlo_il_g1 _onolysis \,

2. Finonciol Decision Tools (to provideJhe bosis for ochieving o bolonce investment risk ond inveslment return ond between profitbbility ond liquidil"y, ond for moking seleciions from onrong inveslment opportunities); Rr:cognize ihe volid criticism ond problems on the vorious lools for either simplicity or compleiity. incensistencies in ronking investment ollernotives. f or wide+onging inveslper:l relurn eslculolicins, for differences in the liming ond direction of cosh flows, ond the like'l, Disiinr;uish rotio modeis vs. yield models.

o.

Profitobility meosures, 1o recetr_e_r coqilolond ochieve return on copitol

l) 2l

Net present volue modbl (DQcision rule: highest net present volue) Profitobiliiy index nrodel (Rule: highest posilive index)-tRR. A|RR, M1RR. FMRR.

b.

Liquidity meosurei (Rule: shortesJ period'.lo recover investment from cosh low) -Poyo ble period; cur i'e nt rotiA; O/f roiio.

f

3. Operotions Reseorch (on onclysis.of the efficiency of

lperotions of one or more inveslrnenl vehicles lo better ensure the long-lerm inveslmeni poieniiol of the invesiment in ochieving eiiplicii gools'Drecise=ly,expressed by ihe client) include thc- following: ir

o. Linecr progrommirig, to deter:mine the bg(t ollocotion of scorce resources ( plonning by motherholicol iechniqu_es| b. Monle Corlo simulolion, 1o e-nobk! lhe clienl or consultonl to onolyze by computer simulotion vcrious combinotions of the risk ond return ond moke more profitoble decisions,over-the long lerm.

c. Boyesion onolysis., o form- of stcriisticol onolysis where subjeclive probobilities (refened tc'os--pftp1 probobilities) ore ossigned to the

occurrence of some' reol-world phendmenod. Gome theory (regorcjlesi btmo.del) forcgs the porticiponis to moke o series of inteneloled gools-orjented decisi6n regording the disposition ond d evelopmenl of osp'ec I s q ps!ro-g!e_{ Jrom reol-world ph en om eno. tv. V.

Development of Decision Models/ Slcrlemenl/ Plon Seleclion ol Course of Aclion lhcrl:

A. Besl fits objectives 8. Minimizes conflicts c. con be implemented A

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within ihe time ond money constroints irnposed

-.--ffit20'15 Reol Fslole Consullonl's Comprehensive

Course

2.s

t.

Consr"rlling Tools ond Techniques

GHAPTER 2

2.2

for Decision Moking

'The Cgns,ultinSl process

Definilion The Reotly Estcrte Consulling Process

defined os ihe professionol looi ir-r purrsuing 6; reol eslote consulling engogemeni -opb" lo ensure on orderly method of solving o rt,.ol eslofe> problem or helping o client reoch decisiop-on-cllernotives ovoiloble. Ihe Consulling process is (I dislincl ond syslemcrlic melhod by yfhich compelenl consullonts opply lheir knowledge ond skills lo lhe solulion of reol eslcrle'prollerns."ll is one of lhe sources of slondords for proclice common lo lhe differenl coniulling'disciplines ond, lherefore. unifies the disciptines inlo o single profession. .

Ihe Consulling Process is-o model,for resglvlng olt,kinds Ll reol eslole problems, regcrdless of whelher the subjecl motler is reoi-prope'rty, personol-prolerf, or
DEFTNIT|ON AND TERMS

Or ENGAGqMENT

ldenlificalion ol Problem ond obieglle Siindord t odoibs.ses lhe concept of i<.jenlifying lhe client's objective or purpose ond'tfre prbblems oncf iss.rLs roised for soluiion or decisionmoking' There is on importont differerrce between performing on imporiiol,con-sulling service os o disinteresled third porty thol respollds-lo the c:lienf ,s sioted objeciive ond perfor.ming o consuliing service ihot is intended io focililo-te llre oi'hieu"-.nl of ihe clienl's objeciive, such os ihot perforrned by on opproiser. broker. or oiher,lic'ensed specictists. Defining lhe reol eslole.:ng.ogemenl inchldes lhe iniliol-idenliflcolion ol lhe client problem ond slcrlement ol the obieclive ond purposb'lor which lhd consulling ;n;"gernenl is lo be conied oul' The consultoni ond lhe client possible the os Jn-ust delermine os questions to be roised. the reolty problems ond issues "o-pt"t"ty to be solved, ond the ultinrole gools to be ochieved-

t.

lniiiol interviews wilh the client by the consultont <-,re necessory to deierrrrine cs rr^rc1/ of ihe client's objeciives ond occeptoble olternolives. tt is esseniii to mo* lrre cli.,,nt,s ctiiiude qbout the projecl ond the problems. 'ls-lhg oltitude $i;si\ive. or does the client lrc.:ver some doubls ond queslions.obout the erlsogemini? vrr,"ir""g;til gocr rtre clienl is ottempling to ochieve-- ona whqt prioii'ties.t.rortJ b.e considered? ";-;;;-i; For erxcmpte, the engogement moy be to find o suitoble-locoiio-n for o'pioject. lf o locotion hos been found, the engogement rrroy be lo help the client decide whoi kind of the site ond the proboble morkel ond the prospe'ctive lenonts building shoul<J be built on for the propc,serd project. FinolV, the consultont moy ossist in the plonning of on entire proposed proiect.

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Flnonclol' sociol ond elhicol issues At ihe ,t,:rt of the engogement c]is<:ussions, i.l is importont to know from the client the finoncici slotus of the project. ls ihene odequote finoncing ovoiloble from equity ond mortgoge ioon, or will the project be finorrced enfirely by mortgoge loon- lf there'ore portners, iire consultonts rnoy consider ih,-- cfter-tox "qrif

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2015 Reol Eslsle Consullonl's Comprehensive Course

'1

2.6

;:ii

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Consulling Tools ond Techniques

GF$APTER 2

for Decision Moking

impoct lo porlners in different iox brockels. ln the cose of'rlimiled portnerships, syndicotions, or instilutionol investors on cr cosh bosis, theiconsuliont's cJncern becomes one of cosh flow lo property rother thon cosh floyv to equity. tfres-e-#otters reloie directty to the time involvement of lhe consultont ondilhe finol Feiommendotions.

Conskoints in the Engogement Physicol ond Time Considercrlions Al the-begipning of the engogement process, it is necesscry to deiermine whol kind of pioperfy is\involved. ls il proposed conslruclion, on existing clistressed projeci. project to be imprdved. demolished. rented orsold? A proposed construction or property'lhot is to de olteiqd or exponded moy very well involve o long-term commitmenl on tlre pprl of lbe- c9l1qultont.".An exisling project moy involve only on invesirnent onotysis to determih,e whelher or not th_e'finonciol gools of ihe client con be ochieved in the project. Any unique or unusuol feolu,'es of the property mighi influence the issues to be sotved ond the quesiio:.: b" 19

"Ty:fd.

ln delermining the time frome invlMed. considerotion sfrould be given olso to the time of submissiorr of vorious ports of the leport ond osCertoin *hether the entire engogement will be completed os o single ond finoirepori. A mojor projecl io be constructei in stoges c.rVgr o number of yeon vrould involve detoiled onotysis of llre iniiiol stoge ond considerotion of the-p,olentiolimpoci of the loter stoges. The consultc.rnts moy be colled upon for onolysis of ihe iiming of the lote, r stoges.

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2015 Real Eslole Consultonl's Comprehensive

Course

2.7

Consulfing Tools qnd Trechniques

GHAPTER 2

for Decision Jlioking

FLOWCHARIT OFTHE REAL ESTATE CONSULTING PROCES5 (FoR

LJcBtsF

FTEAL E5TATE

coNsulT^r.rrs)

I

L-/

THE ENGAGEMENT i

ldentif| Subjecl

Purpose

Reporl

rrinertv

Problem

Reporl Formol

Ime/Doie

IHE CONSUTTING RELAIIONSHIP Agree on Purpose & Defined Problem

Sel Crilique Poinls

[. t

Compile Dolo

Anolyze Dolo & Develop-11formolion.

Fornrulote Conclusions Recommendolions

I

Y PREPARE THE REPORT U']TH

Definiiion of & Problem

Doto Anolyzed & lnfo Develpped-

USIONS & RECOMMENDATIONS

Rep(Yl Fdmot & Crilique Poinls

Engogemenl

l:.

Obligoiion

REPORI .

Check Accurocy of

Check Logjc & Reosonobleness of Conclusions & Recorrrnendolioru

Computclions

Aulhenticote/Dslribule Writlen Report

2015 Reol

Esl
Comprehenslve Course

Posl-Reporl

Didogue

2.8

Consulling Tools ond Techniques

CFIAPTER 2 The Consr,rltcnl os o

for Decision Moking

Coordinotor )

Coordinalion ond Communic
considerotion of ihe resources ond the the consuJtcrt'rl crnd oulside speciolists su'ch .',s orihiiecls,.occountonts, engineers, controcfors, monogemetrt personnel, londscop'e crcl-rilects. surveyors, dernogrophic.s, ecologists, ond lowyen. lt is criticol lo hove on understr:n'Jing*whot dolo the consultont must generote ond whot dcticl ihe client will furnish. The Set of plons cind spdcificotions on proposed projects or on projects to be oltered or exponder.l must be ovoiloble, though o finol set of working drowings rn
personnel

c--rl:;o

ir-rcludeis

lhoi wili be needed. Suclr personnel requirement inclucjes lhe sioff of

Plonning ond Budgetfrng lhe EngoEe rrrenl The const-rlting process includes engoqcnrent budgel for in-house monpower, outside speciolisls. speciol tosks of individuols. oncl o job plon ond work flowchort.

Most experir,-nced consultcnls hove .irr lrouse dclo files on similor types of project where reference con be hod for demogroplric informoiion. lonstruction cost dolo on similor projecis. revenL;e ond expense dolo for c6;ppqrotive onotysis, ond informotion on public ulilities. niuc|r of supplementory doto oncJ informotion for the engogement come from such

in-hor;:,,: Iile.

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t.

THE ENGAGEMENI COT{TRACT: ESTABI.IS}IING THE TORMAT CONSUTTING RETATIONsHIP

ln order io furlher insure ihe sotisfoctory implerrrentolion of ihe engogement, it is importoni to estoblish ;he consuliing relotionship wiih the clienl, porticulorlylhJ ogr".ment reoched exoctly cs (1) whcrl services the consullont 'vill piovide [2) in_whot form, ond (3) of whot time. This undersic;nding w,ill cleorly define tlrc r"tponsibility of the clienl ond the consultonlLikewise, il i:; importont to ogree on iire feq or fees for ihe service coniroct ond the incidentcl exoenses to be bome by lhe client l,o ovoid misunderstonding. lhe fee moy be in o lump sum or on o per diem or hourly ijcsrs-. A'rEloiner bosis moy be oppropriote in some coses, especiolly in mojor engogernenl involving long-term consultotion or where the client's credii cnd firronciolstonding is unovoiloble. The scheduler of fee poymeni moy be in periodic retoiner fee os

o pori of the totol fee, plus progress poyllents. With well-estoblish cli..,:nts or in smoll engogements ihe entire fee moy be poicl crfter completion of lhe report.

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2015 Rer:l Eslote Consulionl's Compr*hensive -1

Course

2.9

Consultirrg Tools crnd Ieclrrriques

GHAPTER 2

for Decision MokCng

PIANN|NG rHE ENGAGEMENT EXECpTION I, When the consulting engog"*".tt thi consuttoni prepores the pton to "onhoJ-t,is-sigired, implemenl ihe engogement, beglnning with the seliingr-of deodlines ond coordinoiing lhe effort of the sloff ond oulside services. lt ifdesrroSl-6-to sel review points to see if ihe losks ore on schedule ond to check llire quoli\jr of the works completed lo dote. This review technique will determine if mid-prdeet chohges cre ;reeded to produce on tinre.ihc desired quolity results. A review technique frequentty usecJ for big engogements is the so-cr:lied pERT (Project Evoluoiion ond Review Techniqu?s-)_or lhe CpM {Criticol poth Method) nt:trvod<. EXECUTING IHE PLAN OF

ENGAGEME!{T,,,

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Performonce of ihe engogement qolls tof{p- compilotion of oll required dotc from both internol ond externol sources ond lhe developmeni oi',relevont ond useful infonnotion from such doto. As necessory doto fnO in;ormation ore':bompiled, ihe onolysis work of the engogemeni is undertoken. Therdoio and informolion ore onolyzed from the slonclpcirri of quolity, guoniiiy, ond relevonce to lhe engogement. Doto processing frequepily involves computeronolysis in the speciol prggrorn.developed-for ihe engogement. Unlikr,'reol estote opproisers' foirly stondordized fonirot. coSsgling *otti ore rorefy uniform wilh ecclr other consuliing works done in the popl. AltHough ,ihere r*oy be o consideroble clegree of similority omong consu,lting engopemenfs, o pcriiculor reol estote problem cr issue will require lhe development of o specific progrom for doio ond informolion onolysis.

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rHE coNsurTtNG REpoRr: pREpARtiJG,

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Preporolion The preporolion of ihe octuol reporl mo\/ begin eorly in the plbn c,f e;<ecution with the preporotiorr of supporting lob!-es,'seheduies o.nd olher illusirotive moieriols. l.l..l porf of the report moy be prepored unlil ihe completioh of the relevont conclusions ond supporting motericls. The finol repof shoulcl'6e -crrefully-prepored ond edited 16 o55ur.1= f6.1 it onswers the moin problem ond iisues, or{a ft'ot the conclusions ond recommerrdotions will ossist the client in mcrking o prudenl decisidn. The report should compty with oll the'conir_ociuoi obligotions pertoining to the pirrp-rose of the engogement, timing. ond ihe forrn of presentctior. The volume of dolo ond inforrnolion in the report is dependent on the noture of the ;:roblem ond the form of repori og;reed upon- A verbol presentotion of the wfJ.terrrep-ort nrcy contoin less dotc but wiih recsonoble explonotion of the kinds of doto cniitysis uted; wiih nrinirnum but significont grophs, chorts, phoiogrophs, ond oiher visuol

Reviewing All compulotions in the-report-sftoUta-undergo,occurocy lesls. A finrrl clreck of lhe logic ond reosonobleness of lhe,.concluiions onrJ recgmmenclctions should bt> mcce (by o review ponel for big engogemeritsl-to _q$ule lnot lhe report ond oll iis fin,Cings hove considered lhe moin purpose of the engogemerri. Sometimes, the finol repor1is preceded by meeting wiih ihe client before this is finolized ond submitied.

Presenling The writlen report is presented in pre-set oppointrnent with ihe <:lient. presentotion is given completely bui briefly, 'with odequote time crllowedThe to occommodoie ony questiorrs from the client. The written report should odequoiely convey ihe findings in occordonce with the definition of the ogreement ond should olvroys refleci

the professionol integrity of the consultont. A ------.-.a

2015 Reol Eslale Consullonl's Cornprehensive Course

2.10

t,.

Consulling Tools ond Techniques

GFEEPTEII 2

for Decision Moking

.?"3 PROJ Ef,T IFFASIBIHTY STIIDY Definilion ond Furpose of Project feosibility Sludy

(pFS)

PFS is o thorough ond systernotic onolysis of oll the foctors lhot offecl the possibility of success of ct p,'oposed project or undertcking.'The findings presented in ihe PFS serve os the bosis for rJer:iiing whether lhe project is lo be obondoned, revised or pursued. The pFS is o tool or icchtrique in the unificotion or synlhesis of individuolstudies on the morket. technicol. finonciol, so,:io-economic, ond monogenrent ospects of ihe project.

ln developing o proiect feosibility i'rav o l,onsultonl musl obse,rve lhe following ", """14O, coni'plele specific guidelines when opplicoble: (o)'prepor"ig morkel onolysis, (b) opply lhe resuHs of lhe morkel onolysis to olteinotivc course oiocii
An imporlorrt slep in feosibility siudy or cr-rolysis is to prepore or cbtoin o complete morket onc\'sir. Ihe crrnsultcnt should comport: tl,': fgllowiir! criterio from ihe clienl's project to the resulis of the rncrrk<-'i onolysis: the projeci l:,.ldgjet (oll construciion cosis, fees, corryzing cosls, ond otrgioinq prooerfy operaling, expensers); thq ,l!m-e=_s.9quenc6 of r:ciivities {plonning, 66n5+;r1r:iion, ond morkeling); the type oird cosl of finoncing obtoinoble; ond cosh flow foreccrsls over the clevelopment ond/or holding period; ond yield expectotions. The consullcrrl should hove enough doto io esJiinAie..-whether the project will develop occorciing ilte expectcrtions of the clienl ond is economicolty feosible in occordonce with client's explicilly defined finonciol objec'tir",es

f. A GOOD FFASIBIUTY STUDY is o key lo inveslnib-nl decisio6 ond helps ovoid the pitfolls ofter lhe proje,'ct lros been commitied. A feosibility- onolysis focuses of how well o proposed projeci is likerly to succeed for o porticulcr client-investor's objectives. Briefty, lhere ore four

mojor sleps tor good feosibility sludy:

, l

-

23. 4-

ldentify the objectives of the client-irrvestof,-in--c.lpdlrb the impoct the investor wonts the project to moke ond the finonbiolrequirehbnts of lhe investment. Undertoke o fhorough morkel onolysis ihot_willindico{e reosonoble lurnover. lclentify the constroints ond cOsts of the pr6p51Apply tne finor,ciol meosures ond techniqd-es os ti-re'finol determinanl of Feosibility. the sloted <.rbjectives of lhe client-in)ejstor: 'l

The credentiol ond quolificotions of the consulioni will offer clues os experience irr the lype of property under considerotion.

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201.5 Recrl Estate Consulfonl's Cornprehensive -

CoursL.

2.11

Consulling Tools ondl Teclrniques

GHAPTER 2

for Decision F*toking /

PRoJECT FEASIBILITY STUDY FLoYIZGHAFTT

PRE.FEASITJILITY

PROJECI

MARKFT

TECHNICAL

TOIAL/EXCESS DEMAND

I

FEA.SIBILITY

FtNANCtAL

PRODUCT STUDY

MANAGFMENI

PRODUCT COST & EXPENSES

'.1

PRODUCT PROCESS

MARKFI SiIARE

PRODUCT VOLUMF

PRICE / SA LES FORECAST

MATERIALS

BUSINESS

c)RGANIZATI

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Bosic Ports of o comprehensive projest Feusihirity srudy There oie generorly five mojor componerrts of o- comprehensive PFS. nomely: the morket sludy, the technicor study, the finoqrcior study, the monogemenr sfudy. ond sociol desirobilifu study. The first four determines the finol ieosibniV rr rvr will decide os to 'v ' er lhot - ---'-:"'' level whether lo go oheod or obondon the project.

Morkel sludy Generolly. on investor is ottroctec lo invest in o business project with o minimum risk ond c higher rote of returngn-investment.--llowever, the mojor considerolion is whether there is on omple effective demonf for-tQe pJu.i u"i"g;;JL."o or proposed to produce' lf reosonoble demonc bxists. cLneni s-u[ply-is then invesligoled lo delermine whether there is o substontiol excess ilemgrd t" ili#td'r1ew projeci could enler into the industrv. lf it is discovered ihot thqr.e is-ii,T-encrgh a"*I1a-# ti.*J,ljuct nor o new demond con be then the"proiect'moy o? olherwise, unreosonoble "t::I,"d, loss mcry be incuned if the projeci is implemgnlej "L"naoned;

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2Ol5 Reql

Estote Consullonl's Comprehenshre

Course

i_66__.

2.12

Consulling Tools ond Techniques

GFUP-FTER 2

for Decision Moking

on lhc r: lhr:r hon'c. if the findings ihdicotr thoi

iQere is o bufficient effective demond for lhe producl, th'= 66pnootiiive position bt the firm in tfb industn) is evoluolec. lnformotion on the prevcriling prices of the product orb goliicred ohd onoty.zEa. pricing tor ftre project ond ihe quolity cf ilre product relolive to ihe prcduets of-lhe--i-uneni ond potentiol procedures ore corefully siudied,-followed by the exorninoiion of the morkeiing progrom. The present morketing :;lroiegies of the compelitors. :elling orgonizotion, ierms of soles. chonnels of disiribuiion' locotion of soles oulle'fs, iicrnsportotion ond worehousing, ond other relotive informclion ore token into occount.

Finolly, ':orclutsic-:ns drown from ihe slucly specificolty identify whether there is excesj effeciive d<:rnoncJ for the producl ond lhoi the prgject sholl enjoy competilive morketing

posiiion.

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Technicr:t slrrdy This study identifies whetirel the producl,,could be produced of the desiroble volume cncl slondords of quolity.'wilh mininrum cost- ln d monufocluring firm. study focuses on the follorving:

l. 2. 3'

4.

he rrroteriol component of the product- ond the sources of such moteriol componenls ore identified, including -the olte\qnoiive row moteriols, ovoilobility, curent oncl prospeclive sources c'nd co(ls, the7ilses ond olher opplicoiions of ihe product ond iis by-product.l The production process, where lhe clelcriled flow chorfs indicote moteriols ond energy rr.'quiremeni of eoclr slep; ihe normcil. durotidn of fhe process. ihe production proc(:'sses used by flre competitors ond thd.pr,ocess-". e;.::r".J;;" odopted. I

The production mochinery ond eqr rip:men-t, lfreir specificotions, roted ccpocities. cost cnci ircrlarrcing of copocilies of -eoch mojoi ohd ouxiliory equipmeni, ovoilobility of spore ports ond repoir service, idenlificotion of moqhinery suppliers, iheir guorontees. cle:liverry oncl ierms of poyment. Plr:nt locotion ond loyout, distonce to so-urce of rowmoteriols ond mo*ets, lhe effeci

of

lo'yout in moteriols flow ond moteriols horidling ond storoge. provision for exporlsion. the structures io be constructed or rented, improveirents like roods, clroin<:ge fcciliiies ond their cosls.

5.

Ulililies for woste disposol. specific fo.iq11i", lit<e electriciiy, fuel. wcter, supplies ond thl,.ir respective uses, quoritily require_-e, _ovoitsbi|iV of sources ond copocities, olternoiive source ond costs, with the usuoi eiiviroqment impoct ossessment.

6'

Recruilrnenl ond troining progroms of p".9onnet os ietlos the stotus ond timetoble of the projecl

Finonciol st'ucJy This study determines tlre profitobility level of the projeci thot is generolly definecj cs tl're relotionship of the nel income ofter toxes to the loiol investment. lt is moinly bosed orr ther ovoiloble opportunity cost irr o porticulor period of iime ploce. ond This stucfy qlso involves the following: l

'

'{ tlrorough coveroge of oll the celoiled monelory informqtion on the iotol project cosf initiol copitol requirements, sources of finoncing, finonciol stolements ond the

20'15 Rerrl Eslole --nffii

Consullonl's Comprehensive Course

2.13

l'

Consulling Tools ond'fechniques

CHAPTER 2

lor Decision Mclking

2.

finonciol onolysis, ono if,9 pfJhe ossumpiigns used which ore c:ruciol in view ""lid,'ly of lheir impoci on lhe vorioble fogtors ol ihe siud.

3.

ldentificotion of sources. .rrr*ncy, securi\r, repoyment it nnonqng.incjieotirig'rn" period, intetest ond otHer feotutes, ihe stoius of finoncing from .o"h source reloiing io octuol rerqrggg_ jGody mode, oppricofions orreody cpproved. opplicoiions pending ond oppliCotions siill to be mcde including inforrriotion on how lhe contingencies ond seolonolpeoks in working copitol sholl be finonced.

4.

Anolysis

of the finonciol.stoterpilnfu_(bolonce sheet, income stotemeni.

flow) to show ihe finonciol heolth of iAe business, finonciol informotion lofurrcls provide operotionol

meosuremenl such og brbok-eVqn volume, soles ond price,s, ornounl of soles required io eorn o gertoin brnount of \profit, ond ihe cosh poybock period. ond sensiiivifu onolysis. ___ * ,,_ .! ',,

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Monogemenl sludy The objectivq oi irre monog.rmenl feosibility siudy is to dr;termine the oppropriote business orgonizotionj monpowerrequired'pefore ond durirrg the commerciol operoiion of the projecl ond lheir'funclions. lt covers ihgiollowing:

l.

of business orgonizotipn. orgb-;izoiion chort ond funciion_s of eroch unit of monogemeni. '. 2' How ihe projeci sholl be LmonoEied befor,e -onb during the operoting periods,

3. 4. 5.

Type

identificotion of the firms or persons involved or to be involvJa in stuJTing lhe different ospecls of the project. Number of lobor. skills. duties, ond ti-me io be d'eVoied to the project. I cornpensctions. fringe benefiis ond monpower focilities. Recruitmenl ond troining pro$ro-, of'personnel. Sloius ond timetoble of ihe pioject.

r

l. Socio-economic siudy The project moy be clossified os o government or o privoie projeci. ro o governmenl projecf. socio-economic desrrobiliiy is given priority over profiiobility. Therefore, feosibility is chorqclerized by tlre-level ol socio-economic desirobitity.

A pdvole entity's moin pdority, on .t[e other hcnd, is profitobility. willr desirobilifu

socio-e.conomic os o desired consequelc-e-lFofitooiritv.-ir'r",teosibility is choroclerired by profffobility wilh socio-economlf is-nebq:s-ory con. sgquenc".'tn-gou",,.,-"ni mointy feosibility studies, socio-economic desirobility is'giv--e_n aistinct tog-rs; *'r,ire prir"=r"'Jrojecl i" studies, it is treoled os o port of ihe economic orGcT

Soclo'economic deskobllity is meosured in lerms of lhe volume ond volue of employmenl generoled ond loxes pold to lhe governmenl, public services. economic conlrlb,,llon ond envlronmenl proleclion.

A)15 Reol Eslole Consuhqnl's Comprehensive iir-i!3tu

--ry--

Course

2.14

Consulling Tools ond Techniques

GH,EPTER 2

for Decislon Moking

Sleps {Foinlers) in Preporing Project fieosibility Sludy The following steps mcry serve os o generol guide-on-hof-lo prepore o

PFS:

1.

lrJentify ond lisi down lhe technicol people (ond firms) who will be involved in preporing the vorious ospedls of ihe study. The list usuolty includes lhe project proponents ond investors.

2.

lnvestigoie the morkel leosibiliiy both by observotions ond by scientific reseorch. Feosibility is generolly chorocterized by excess effective demond ond o Cia_0-1pe1!l!ve oncJ long-lerm rnorket position of the project. lf not feosible, crbondon immedioiely the ideo cf puiting up o new project 1o ovoid unnecessory losses. ln'vestmenl options reloted lq lhe some morkei moy be considered, such crs iust joining the equity of cn,exislinS cgnp_ony.

3. ll the morket is feosible, proceed with the lechnicol sludy. which refers to o long terms bosis. ond of the reosonoble cost produce the producl of the best possible quolity ond price crcceptoble to the morkel. lf nol fqg,sible, obohdon the projeci. s-.rfficient ovoilobilit'7 of ithd-ieiouibes-EQuired on

4. lf

technicolly feosible. proceecJ with th'e. .finonciot sludy which refers to the crvoilobility of the necessory finohcing ot'reosonoble cosi ond terms, ond profitcble operotion thcit will soiisfy the deslrcble investment volue.

5. lf finonciolty feosible, proceecl

with the monogem"nJ'Ord, ihot refers io the c.rgonizotionol set-t-rp thol con perform its functions efficiently cnd effectively, u,ith ovoiloble quolified lobor. lf nol feosible, r:b.ondon the project.

6.

7

ln o cose of o governr4ent proiect. the next siep is the ossessment of lhe sociol desirobility of the project, which refers to the reosonoble economic benefils thol r,r,ili occrue to tlre people living in the comm_unity ond to the immediote vicinities. ln lhe cose of o privote projeci. viobility depends lorgety on the project proponent's concepts of volues beyond profit. Sociol viobility is, therefore, very relolive to the volues equoled to soclq!benefits. Prepore the Summory of the trojecl Fggsibility, indicoting o brief description of lhe project, lhe highlights of the mojor'ossumptions mode, such os effective d,:mond projeclions, morket shore--ond priqe, investmenl cost. method of finoncing. ond other importcn't foctdn, ond ihe summory of findings ond conclusions regording morkgi. technicol.

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finonciol feosibililies-

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201$ Reol Eslole Consullonl's Comprehensive Course

2.15

t.

Consulling Tools snd Teclrniques

CHAPTER 2

for Decision ,Moking

2.4 INVESTMENT MEASUREMENT

TOOLS

ln developing o cosh ffow ond/or inveslmeul onolysis, o consuHonl nrusl observe lhe lollowing speciftc guidelines wherl-oppllcrrbhe:-(o)-con{der ond ono}yze lhe quolity ol lhe income slreqm, (b) consider ond cinolyze tfe-hislory ol elpenses qnd reserves, (c) consider ond onolyze ffnoncing viobility ond lerms, (d) se_lect ond s,LnRorl lhe oppropricrte melhod ol processing lhe income slreom, (e) consi-liii- und ono[rze the cosh llow relurl(s) ond reversion(s) to lhe specified investfoilnt pogilion'overo-irolecled lime period(s). (slondord Rule

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iIARKET VATUE AND INVESTI,IENT VATUE os opplied lo real gslcte,mul Ue quolified. "The volue of yorrr properly is o sloiemeni noi specifii enorJghlb be meoningful to reol eslote F:,rofessionols. The stotement "Your property is epiimotTd-lo,.hove o'rporkei volue of P500.0C0" conveys more explicil meoning. Of nec-6gsity, bonsulionls qnd, opproisers refer lo m,:rkel volue. insuroble volue, liquidotion volue, ond other precisely identified ond defined typres of volue. Consulting ossignments frequently coll for estimotes of morke'l volue or investm<:ni volue os well os ossocioled onclyses thot fwill--eno6le o clienl to moke one or more i.ecl t-=siote THE WORD VATUE

P500,000" is

decisions.

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Morkel volue refers to lhe volue in ifre morketploce. lnveslmenl volue is the specifjc volue of goods orservices to o porticulorin{eslor ({-iiqss of invqstors) bosed on individuolinvestrnenl requirements. Morkel volue ond invesi5nent volue ore different concepis; the volues estimoted for eoch moy or moy not-be nu'mericolly equol.depending on the circ;umstonces. Moreover, morket volue estimoies ore commonly mode withoul reference lo investment volue, but investmeni volue estimoles ore frequently occornponied by o rrrorket volue esiimote to focilitote decision-moking..

Mo*el volue eslimole

ossumes 1no spqtiftc buyer or seller; lhe esiinrofe ,:s115i6gs;, o hypotheticol tronsoction in which{both t$e brayei cnd the seller hove the understonding ond molivotions thot ore iypicol of the nfq{et ior lhe -pyoperly or interesls bcing volued. Approisers musi distinguish betweeh..6is o*n-l no*fe{g6. perceptions. ond oitiludes ond those of the morket or morkets for lhe ploperty-in queslion. The speciol requiremenls of o given client ore inelevont to o morket volue esiirr,oie.

ln controsi, lhe gools ol o specinc inv-esfor ore Oirriity.r.lcrled lo inveslmenl volue, which reflec-ls lhe qdvontoges or disodvodtoges
A,

:ds_ir__

2015 Reol Eslole Consullonl's Comprehensfue Course

2.16

t.