chapter 7: Development Flashcards
development
The creation of a new property, from concept, through construction, to tenant occupancy
what can development be driven by?
Requirements for a specific user
Speculation
what do the costs of bringing new commercial space to the market include ?
development and construction costs
Development costs
often referred to as Soft Costs
will start before construction begins
what do development costs include?
professional services (legal, architecture, engineering, surveyors)
environmental studies and land remediation
land acquisition (sometimes included as a hard cost)
permits and zoning
project management costs
lease-up and operating costs to bring a property to a stabilized level
financing costs
construction costs or hard cost
Site preparation (leveling, demolition, clearing)
Actual building costs
Construction costs can include building access roads and ramps, landscaping
Construction companies will often give a fixed price contract based on what?
contract based on the approved building plans
Any changes, which are called Change Orders, will result in additional cost changes
change orders
any changes to approved building plans
Average construction costs can be obtained from where?
from third party sources in the market
steps to the development process
- dite selection
- pre-development
- entitlement
- construction loan
- land acquisition
- site work
- foundation work
- shell construction
- tenant fit out
- completion
- stabilization
- permanent financing
site selection
Finding a property that satisfies the requirements for the project or that has potential use
pre-development
market analysis
detailed planning
Pro-forma financial analysis
Start of discussions with potential investors
Due diligence on site selected
true or false
Different scenarios can be considered during predevelopment
true
detailed planning
Design
Architecture
Infrastructure requirements
entitlements
A property owner’s rights to use the land can be constrained by local governments
rights conveyed by approvals from governmental entities to develop a property for a certain use, intensity, building type or building placement
zoning
specifies the uses that are allowed within certain areas
ex: Residential, Commercial, Industrial
which types of infrastructure can be built by either the developer or city?
Water, power, sewage
Roadway access
Social and community requirements (schools, parks, etc.)
what are the studies that a city may require?
Environmental impact
Traffic
Noise
The developer enters into a construction contract with a construction company to do what?
build the structure and related infrastructure according to the plans
types of construction contracts
Fixed Price (Lump Sum) Contract
Guaranteed Maximum Price Contract
Cost Plus (Time and Materials) Contract
Fixed Price (Lump Sum) Contract
a single ‘lump sum’ price for all the works is agreed before the works begin
Guaranteed Maximum Price Contract
sets a limit, or maximum price, that the customer will have to pay their contractor or subcontractor, regardless of the actual costs incurred
Any savings go to the developer
who does the Fixed Priced and Guaranteed Maximum Price contracts protect?
the developer
who does the Cost Plus contracts protect?
the construction company
Site work
preparing the site for the construction work to begin
Soil studies
Surveying
Clearing, leveling, digging and removing earth
site work surveying
setbacks
easements
Site work
preparing the site for the construction work to begin
Soil studies
Surveying
Clearing, leveling, digging and removing earth
Creation of infrastructure needed in the building process
It is often during this stage that unanticipated risks occur
infrastructure needed in the site work process
Power, water, sewage
Access roads, parking, fencing
Trailer, telephone, internet
unanticipated risks in the site work process
Environment
Endangered species
Soil problem
Cultural issues (burial grounds)
construction
Construction work according to the specified plans
Pouring of foundation
Shell construction (Outer construction, Floor plates, Major mechanical (HVAC))
Interior Finishing and Tenant Fit-out
prepare the interior for the ultimate purpose of the building
Tenant specified
Developer specified
tenant specified building purpose
designed by the tenant to meet his needs
Often partially or completely funded by the developer through Tenant Allowances
developer specified building purpose
Multifamily
Hotels
Senior residences
Stabilization
bringing a property to a stabilized NOI position
This can represent significant additional costs for the developer
stabilization additional costs to developer
Interest (carrying) cost
Operational costs
Leasing and sales costs
how to reduce risk in the stabilization period?
Pre-leasing or pre-sales (condos) can reduce this risk
how to reduce risk in the stabilization period?
Pre-leasing or pre-sales (condos) can reduce risk
Delays in construction can negatively impact pre-leasing and pre-sales
development risks
Entitlement delays
Construction cost overruns and bad estimates
Unexpected conditions
Material/Labor shortages
Scope creep
Delayed Lease-up
Entitlement delays
due to government working at its own pace
Carrying cost of land
Loss of pre-sale or pre-leasing
Unexpected conditions
Soil condition
Environmental issues
scope creep
Changes in tenant requirements or developer demands
which are the main 5 fives of development?
- Predevelopment
- Land acquisition
- Construction
- Stabilization
- Take-out
is capital required for the main phases of development?
ye bruv
why must developer must use his own capital or, in some instances, corporate credit to finance predevelopment?
Considered too high a risk by most lenders as there is no certainty the project will be executed
at which LTV will lenders be willing to lend for the acquisition of land?
(land acquisition loan)
Typically low LTV (around 60% or less)
Some land banking loans are also available at lower LTVs (50% or less)
when must land acquisition loans usually be repaid?
at the start of the construction loan
what is the type of rate for the land acquisition loan?
Typically variable rate loans based on Prime or Bankers’ Acceptance rate
what will the amount of a construction loan be based on?
total expected cost
anticipated value at stabilization
based on the total expected cost and anticipated value at stabilization, what are usually the LTC and LTC of a construction loan?
LTC of 65% or less
LTV of 75% or less
can construction loans include the land value in the anticipated value?
Can include or exclude land values depending on project
what is the type of rate for the construction loan?
Typically, variable rate loans are based on Prime or Bankers’ Acceptance rate
Interest is capitalized and increases the principal amount outstanding
how is the interest on a construction loan
capitalized
increases the principal amount outstanding
construction loan draws
Amounts that are advanced as the project advances
Often include developer soft costs
can a construction loan include funding for carrying (interest) and operational costs during the stabilization period?
yeee
bridge financing (mini perm)
can be arranged if property has not reached its stabilized NOI
Typically floating interest rate loan
short-term financing often used by a developer to pay off construction projects or commercial properties before they become profitable
take-out financing
a method of financing whereby a loan that is procured later is used to replace the initial loan
Typically a mortgage loan
The take-out financing is used to reimburse the construction loan
what is the mount of a take out financing loan based on?
based on the value of a property
when is a take-out financing loan arranged?
Once the property has reached its stabilized NOI, or has been delivered to the tenants
to whom do any excess funds of take out financing loan go to?
can be distributed to the equity investors
