Economic and commercial value

Economic and commercial value

From the attractiveness of the space to the evaluation of investment and long-term costs

3–1. How does the fountain create economic value?

The decision to build a fountain usually starts with one goal: to improve the quality of the square, to increase the attractiveness of the commercial center, to create a tourist destination or to strengthen the identity of a complex. For economic evaluation, this goal should be translated into specific questions: Who will benefit from the project? How is this benefit created? How much of it is measurable? And how much will it cost to maintain it over time?

In a commercial center, the fountain can be designed as a meeting place, a rest area or a performance point. In a tourism complex, it can be part of the visit program. For the municipality, improving the quality of public space may be the main investment goal.

In introducing business center solutions, OASE emphasizes the entry experience, visitor retention and creating a memorable place. These explanations represent the design and business approach of the company; To determine the extent of effect in a given project, we still need data from that project. Source: OASE, fountain solutions for commercial centers ^[14]

Therefore, the economic evaluation of the fountain should clarify the path of generating benefits. Visual appeal, more visits, more purchases and owner income are different steps and the relationship between them should be investigated.

Figure note from the source manuscript

Figure 1-3: Photograph of a fountain in a commercial center or GSO tourism complex; The entrances, the viewing area and the activities of the surrounding units should be clear in the picture. Subtitle: "The commercial value of the fountain depends on its connection with the activities of the complex."

3–2. Determining the beneficiary; Who benefits?

Before calculating return on investment, it should be clear from whose point of view the analysis is done. The owner of the shopping center, the water fountain operator, the store owners and the municipality do not have the same income and expense streams.

For example, an increase in the sales of a restaurant does not necessarily increase the income of the owner of the complex in the same year. If the lease is fixed, the potential impact on the owner's income may appear when the lease is extended or the unit's vacancy period is reduced. In share-of-sales contracts, the revenue relationship can be more direct.

In the evaluation of an urban project, attention should also be paid to the relocation of activities. If customers are simply transferred from one business center to another center in the same city, the benefit to the second center is not necessarily the same as the net benefit to the city as a whole.

The UK MHCLG assessment guide emphasizes comparison with the no-intervention situation and consideration of activities that are transferred from other locations. These methodological principles are useful for project analysis; The criteria and coefficients of that country should be considered separately from the conditions of Iranian projects. Source: MHCLG assessment guide ^[15]

3–3. From visitor presence to realizable income

For a business complex, the possible path of generating income can be examined as follows: attracting or returning visitors, being present in the activity area, making a purchase and transferring a part of the benefit to the intended beneficiary.

Each stage depends on the project conditions. For example, a longer stop by the fountain may be accompanied by using the surrounding cafes; But if the viewing place does not have a proper connection with the units, the result will be different. The time of the show should also be coordinated with the activity hours of the complex.

In the introduction of the Eaton Center fountain by Crystal Fountains, the purpose of the design is to create a gathering and resting place for families and friends during shopping. This example shows the role of the fountain in the experience of visiting; The description of the project alone is not the basis for determining the percentage of sales increase. Source: Crystal Fountains, Toronto Eaton Center ^[16]

For a preliminary estimate of additional sales, the following relationship can be used:

Additional sales = number of additional referrals attributable x purchase rate x average purchase amount

This relationship is a simple model. If the increase in the purchase amount of previous customers is also checked, it should be calculated separately so that the same benefit is not recorded twice. Also, to arrive at a profit from sales, the costs associated with additional sales must be deducted.

In the analysis of the owner of the complex, only a share enters the cash flow that is actually assigned to the owner according to the contract and operating conditions.

3–4. Property value, brand and revenue opportunities

A fountain can be part of a property's quality improvement program. Its possible effect on rents, unit occupancy, or sales value should be considered along with location, accessibility, building quality, tenant mix, and market conditions.

To estimate the increase in property value, it is important to compare with similar properties and the opinion of a qualified appraiser. The number obtained from the price difference of the two projects does not determine the share of the fountain without controlling for other differences.

On the other hand, if the increase in property value is calculated from future rental income, adding all the same income and the total increase in value to the model at the same time can cause a recalculation. The hypothetical sale date and rent receipt period should be clear in the model.

Other opportunities, such as sponsoring shows, renting event space or producing promotional content, should also be evaluated based on contractual feasibility. The number of views of a video or the publication of a photo of a fountain does not automatically generate cash.

This book suggests that benefits be recorded in three groups: contractual revenues, evidenced estimates, and unconfirmed opportunities. This classification reveals the extent to which the decision relies on each benefit.

Figure note from the source manuscript

Figure 2-3: Two complementary photos of a project; The view of the water feature and its connection with the event space or business units. Caption: "Visual appeal enters into financial analysis when the path to profit realization is clear."

3–5. initial cost; From design to delivery

The initial cost of the project should cover all the activities necessary to achieve the expected operation.

In the reconstruction project, the collection of previous equipment and the possibility of stopping part of the activity of the complex should also be investigated. Also, the space occupied by the fountain may have an alternative use; Its opportunity cost, if meaningful, should be seen in the comparison of options.

To compare the offers of contractors, the scope of supply and execution should be the same. Price differences may result from differences in treatment, protection, equipment quality, display schedule or delivery service.

In Iran's estimates, the currency, base date, price validity period, tax status and the basis of conversion of foreign currency items must be clearly recorded.

3–6. Operation and maintenance cost

The annual cost of the fountain includes electricity, compensation water, purification materials and services, cleaning, operating force, repairs and other services required by the project. Major equipment replacements should also be anticipated in the year of occurrence.

For electricity estimation, installed power is not the same as actual consumption. Display pumps, filters, lights and control equipment may have different operating hours.

In a simple example, if the average input power of a group of equipment when working is 30 kW and its activity schedule is 6 hours a day, during 300 days:

Annual energy of the same group = 30 × 6 × 300 = 54,000 kilowatt-hours

This amount should be calculated with the consumption of other groups and with the related tariff structure. Fixed costs or other components of the bill, if any, are also included separately.

The US Department of Energy, in the sources of pumping systems, presents the assessment of the initial cost, energy, maintenance and end of life together. The selection of the pump and its control method must be in harmony with the actual needs of the system. Source: Guide for improving the performance of pumping systems ^[17]

The financial forecast for replacing parts is different from the actual payment. If a replacement cost has entered the cash flow in a given year, the accounting provision for the same cost should not be re-recorded as a cash outflow.

3–7. Life cycle cost and time value of money

Life cycle costing aggregates project costs over a specific study period. To compare the options, the period, base date and method of handling inflation should be common. Future costs should also be converted into time value.

NIST's guidance on life cycle analysis emphasizes the coordination of discount rates and cost bases. Fixed figures in terms of purchasing power are calculated at the real rate, and inflation-adjusted figures are calculated at the adjusted nominal rate. The prescribed rates for American government programs are not considered the proposed rates for Iranian projects. Source: NIST, Life Cycle Costing Guide, 2025 Edition ^[18]

The simple life cycle cost relationship is as follows:

$LCC=C_0+{\sum }_{t=1}^n\frac{O_t+R_t}{(1+r{)}^t}+\frac{D_n-S_n}{(1+r{)}^n}$

In this regard, $C_0$ initial cost, $O_t$ annual operating cost, $R_t$ replacement cost, $D_n$ final collection cost, $S_n$ residual value, $r$ discount rate and $n$ is the number of years of study.

To compare the plan's finances with the situation without its implementation, the net present value is calculated:

$NPV=-I_0+{\sum }_{t=1}^n\frac{B_t-O_t-R_t}{(1+r{)}^t}+\frac{S_n-D_n}{(1+r{)}^n}$

In this regard, all the figures are incremental compared to the base situation and $B_t$ is the cash benefit of the selected beneficiary. A positive result means that the present value of the benefits is greater than the costs in the assumptions of the model; The realization of this result will depend on the validity of the same assumptions.

3–8. educational example; The fountain of a commercial center

We assume that the owner of a commercial center will check the implementation of the fountain compared to the continuation of the activity of the complex without the fountain. All the figures below are hypothetical and in billions of Tomans with fixed purchasing power in the base date.

This example is simple, pre-tax and without financing modeling. Opportunity costs and additional side effects are assumed to be zero; They should be checked in the real project.

The $3 billion annual benefit, just for this example, is made up of three hypothetical components: $1.5 billion in net increased rental income, $0.6 billion in net additional parking revenue, and $0.9 billion in net show sponsorship revenue. The direct cost of realizing each income is deducted from the same component, but the cost of running the fountain is listed separately in the 0.9 billion row.

It is assumed that these amounts are fixed from the first to the tenth year, are received or paid at the end of each year and are only related to the intervention under review. These assumptions must be replaced by evidence in actual use.

The annual cash flow, before major replacement, is equal to:

3 − 0.9 = 2.1 billion Tomans

The present value factor of ten annual payments at a rate of 12% is approximately 5.6502. Therefore:

The present value of the annual flow = 2.1 × 5.6502 ≈ 11.865 billion Tomans

The current value of the replacement cost of the fifth year is about 1.135 billion tomans and the current value of the remaining 10th year is about 0.161 billion tomans.

As a result:

Net present value = −10 + 11.865 − 1.135 + 0.161 ≈ 0.892 billion Tomans

In this scenario, the net present value is positive; But the distance of the result from zero is limited and changing benefits or costs can change the decision.

Dividing the initial cost by the annual flow gives a simple payback period of about 4.76 years; This number does not take into account replacement costs. With the replacement payment at the end of the fifth year, the sum of the flows received until then is again less than the initial capital. The stable compensation of capital in annual calculations occurs in the sixth year; Assuming a uniform distribution of that year's flow, about 5.71 years. This calculation also does not take into account the time value of money.

Figure note from the source manuscript

Figure 3-3: Cash flow diagram of this example; Display the initial payment, annual flow, fifth year replacement, and tenth year residual value. Title: "Hypothetical educational example; billion tomans at a fixed price.

3–9. sensitivity analysis; How stable is the result?

In the previous example, the annual interest is one of the most important uncertain inputs. Keeping other assumptions constant, the result changes to:

These three modes are educational scenarios and no specific probability of occurrence has been attributed to them.

In this model, the annual benefit required to reach zero net present value is about 2.84 billion Tomans. This threshold helps the owner know how much benefit should be supported by a valid contract, data or estimate.

The discount rate is also effective. For the middle scenario, the net present value with a real rate of 8% is about 2.96 billion Tomans and with a rate of 18% it is about −1.34 billion Tomans. These rates are chosen to show sensitivity only.

In the actual project, opening delay, reduced operating hours, increased cost of parts and lower realization of financial support income should also be investigated. Risks that may occur simultaneously are best seen in a composite scenario.

3–10. Evaluation of the fountain for the municipality

For the municipality, direct income is not the only decision criterion. Improving the public space, making it possible for citizens to use it and strengthening cultural programs can be the goal of the project.

In this case, two complementary evaluations are necessary: the financial capacity of the municipality for construction and maintenance, and the value that the project creates for the community. Positive social benefits do not eliminate the need for operating budgets; Just as not having direct income alone does not indicate that the project is worthless.

The Green Book Guide defines public assessment as examining the costs, benefits and risks of different options to achieve a goal. Using this logic makes it possible to compare the fountain with other options for improving the same space. Source: Green Book general evaluation guide ^[19]

The proposal of this book is to compare several options with a common goal: continuation of the status quo, limited improvement, a simple fountain and a more extensive display fountain. In each option, life cycle cost, quality of use and maintainability should be checked.

Benefits such as citizen satisfaction or place identity, in the absence of a valid monetary valuation method, can be reported with clear and independent indicators. The weight of the criteria should be determined before scoring the options.

3–11. How to document the economic result of the project?

For a valid assessment, pre-implementation data should be recorded as much as possible: traffic, available sales, rent collection, unit occupancy, event schedule and current site costs.

After opening, compare similar courses. Holidays, seasons, promotions, new store openings and access changes should be factored into the data interpretation. If there is a suitable comparison range, the changes of the project can be measured with the changes of that range.

For each recorded benefit, four issues should be clear: the beneficiary, the data source, the method of attribution to the project, and the degree of certainty. The initial estimate should also be distinguishable from the actual result of exploitation.

In GSO examples, it is suggested that the economic case of the project includes scope of implementation, approved cost, recorded consumption, maintenance cost and results approved by the employer. Where no data is available, the same limitation should be mentioned.

Such a case shows the reader how the economic quality of the fountain results from the coordination of the design, operation and management of the complex. Chapter 4 will examine the role of fountains in urban tourism and destination formation, focusing on location, display program, and linkage with tourism routes.