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Fina 210 > chapter 7: Development > Flashcards

chapter 7: Development Flashcards

1
Q

development

A

The creation of a new property, from concept, through construction, to tenant occupancy

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2
Q

what can development be driven by?

A

Requirements for a specific user

Speculation

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3
Q

what do the costs of bringing new commercial space to the market include ?

A

development and construction costs

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4
Q

Development costs

A

often referred to as Soft Costs

will start before construction begins

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5
Q

what do development costs include?

A

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

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6
Q

construction costs or hard cost

A

Site preparation (leveling, demolition, clearing)

Actual building costs

Construction costs can include building access roads and ramps, landscaping

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7
Q

Construction companies will often give a fixed price contract based on what?

A

contract based on the approved building plans

Any changes, which are called Change Orders, will result in additional cost changes

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8
Q

change orders

A

any changes to approved building plans

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9
Q

Average construction costs can be obtained from where?

A

from third party sources in the market

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10
Q

steps to the development process

A
  1. dite selection
  2. pre-development
  3. entitlement
  4. construction loan
  5. land acquisition
  6. site work
  7. foundation work
  8. shell construction
  9. tenant fit out
  10. completion
  11. stabilization
  12. permanent financing
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11
Q

site selection

A

Finding a property that satisfies the requirements for the project or that has potential use

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12
Q

pre-development

A

market analysis

detailed planning

Pro-forma financial analysis

Start of discussions with potential investors

Due diligence on site selected

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13
Q

true or false

Different scenarios can be considered during predevelopment

A

true

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14
Q

detailed planning

A

Design

Architecture

Infrastructure requirements

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15
Q

entitlements

A

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

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16
Q

zoning

A

specifies the uses that are allowed within certain areas

ex: Residential, Commercial, Industrial

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17
Q

which types of infrastructure can be built by either the developer or city?

A

Water, power, sewage

Roadway access

Social and community requirements (schools, parks, etc.)

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18
Q

what are the studies that a city may require?

A

Environmental impact

Traffic

Noise

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19
Q

The developer enters into a construction contract with a construction company to do what?

A

build the structure and related infrastructure according to the plans

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20
Q

types of construction contracts

A

Fixed Price (Lump Sum) Contract

Guaranteed Maximum Price Contract

Cost Plus (Time and Materials) Contract

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21
Q

Fixed Price (Lump Sum) Contract

A

a single ‘lump sum’ price for all the works is agreed before the works begin

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22
Q

Guaranteed Maximum Price Contract

A

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

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23
Q

who does the Fixed Priced and Guaranteed Maximum Price contracts protect?

A

the developer

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24
Q

who does the Cost Plus contracts protect?

A

the construction company

25
Q

Site work

A

preparing the site for the construction work to begin

Soil studies

Surveying

Clearing, leveling, digging and removing earth

26
Q

site work surveying

A

setbacks

easements

27
Q

Site work

A

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

28
Q

infrastructure needed in the site work process

A

Power, water, sewage

Access roads, parking, fencing

Trailer, telephone, internet

29
Q

unanticipated risks in the site work process

A

Environment

Endangered species

Soil problem

Cultural issues (burial grounds)

30
Q

construction

A

Construction work according to the specified plans

Pouring of foundation

Shell construction (Outer construction, Floor plates, Major mechanical (HVAC))

31
Q

Interior Finishing and Tenant Fit-out

A

prepare the interior for the ultimate purpose of the building

Tenant specified

Developer specified

32
Q

tenant specified building purpose

A

designed by the tenant to meet his needs

Often partially or completely funded by the developer through Tenant Allowances

33
Q

developer specified building purpose

A

Multifamily

Hotels

Senior residences

34
Q

Stabilization

A

bringing a property to a stabilized NOI position

This can represent significant additional costs for the developer

35
Q

stabilization additional costs to developer

A

Interest (carrying) cost

Operational costs

Leasing and sales costs

36
Q

how to reduce risk in the stabilization period?

A

Pre-leasing or pre-sales (condos) can reduce this risk

37
Q

how to reduce risk in the stabilization period?

A

Pre-leasing or pre-sales (condos) can reduce risk

Delays in construction can negatively impact pre-leasing and pre-sales

38
Q

development risks

A

Entitlement delays

Construction cost overruns and bad estimates

Unexpected conditions

Material/Labor shortages

Scope creep

Delayed Lease-up

39
Q

Entitlement delays

A

due to government working at its own pace

Carrying cost of land

Loss of pre-sale or pre-leasing

40
Q

Unexpected conditions

A

Soil condition

Environmental issues

41
Q

scope creep

A

Changes in tenant requirements or developer demands

42
Q

which are the main 5 fives of development?

A
  1. Predevelopment
  2. Land acquisition
  3. Construction
  4. Stabilization
  5. Take-out
43
Q

is capital required for the main phases of development?

A

ye bruv

44
Q

why must developer must use his own capital or, in some instances, corporate credit to finance predevelopment?

A

Considered too high a risk by most lenders as there is no certainty the project will be executed

45
Q

at which LTV will lenders be willing to lend for the acquisition of land?

(land acquisition loan)

A

Typically low LTV (around 60% or less)

Some land banking loans are also available at lower LTVs (50% or less)

46
Q

when must land acquisition loans usually be repaid?

A

at the start of the construction loan

47
Q

what is the type of rate for the land acquisition loan?

A

Typically variable rate loans based on Prime or Bankers’ Acceptance rate

48
Q

what will the amount of a construction loan be based on?

A

total expected cost

anticipated value at stabilization

49
Q

based on the total expected cost and anticipated value at stabilization, what are usually the LTC and LTC of a construction loan?

A

LTC of 65% or less

LTV of 75% or less

50
Q

can construction loans include the land value in the anticipated value?

A

Can include or exclude land values depending on project

51
Q

what is the type of rate for the construction loan?

A

Typically, variable rate loans are based on Prime or Bankers’ Acceptance rate

Interest is capitalized and increases the principal amount outstanding

52
Q

how is the interest on a construction loan

A

capitalized

increases the principal amount outstanding

53
Q

construction loan draws

A

Amounts that are advanced as the project advances

Often include developer soft costs

54
Q

can a construction loan include funding for carrying (interest) and operational costs during the stabilization period?

A

yeee

55
Q

bridge financing (mini perm)

A

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

56
Q

take-out financing

A

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

57
Q

what is the mount of a take out financing loan based on?

A

based on the value of a property

58
Q

when is a take-out financing loan arranged?

A

Once the property has reached its stabilized NOI, or has been delivered to the tenants

59
Q

to whom do any excess funds of take out financing loan go to?

A

can be distributed to the equity investors

Fina 210 (28 decks)

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