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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
Site work
preparing the site for the construction work to begin Soil studies Surveying Clearing, leveling, digging and removing earth
26
site work surveying
setbacks easements
27
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
28
infrastructure needed in the site work process
Power, water, sewage Access roads, parking, fencing Trailer, telephone, internet
29
unanticipated risks in the site work process
Environment Endangered species Soil problem Cultural issues (burial grounds)
30
construction
Construction work according to the specified plans Pouring of foundation Shell construction (Outer construction, Floor plates, Major mechanical (HVAC))
31
Interior Finishing and Tenant Fit-out
prepare the interior for the ultimate purpose of the building Tenant specified Developer specified
32
tenant specified building purpose
designed by the tenant to meet his needs Often partially or completely funded by the developer through Tenant Allowances
33
developer specified building purpose
Multifamily Hotels Senior residences
34
Stabilization
bringing a property to a stabilized NOI position This can represent significant additional costs for the developer
35
stabilization additional costs to developer
Interest (carrying) cost Operational costs Leasing and sales costs
36
how to reduce risk in the stabilization period?
Pre-leasing or pre-sales (condos) can reduce this risk
37
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
38
development risks
Entitlement delays Construction cost overruns and bad estimates Unexpected conditions Material/Labor shortages Scope creep Delayed Lease-up
39
Entitlement delays
due to government working at its own pace Carrying cost of land Loss of pre-sale or pre-leasing
40
Unexpected conditions
Soil condition Environmental issues
41
scope creep
Changes in tenant requirements or developer demands
42
which are the main 5 fives of development?
1. Predevelopment 2. Land acquisition 3. Construction 4. Stabilization 5. Take-out
43
is capital required for the main phases of development?
ye bruv
44
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
45
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)
46
when must land acquisition loans usually be repaid?
at the start of the construction loan
47
what is the type of rate for the land acquisition loan?
Typically variable rate loans based on Prime or Bankers’ Acceptance rate
48
what will the amount of a construction loan be based on?
total expected cost anticipated value at stabilization
49
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
50
can construction loans include the land value in the anticipated value?
Can include or exclude land values depending on project
51
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
52
how is the interest on a construction loan
capitalized increases the principal amount outstanding
53
construction loan draws
Amounts that are advanced as the project advances Often include developer soft costs
54
can a construction loan include funding for carrying (interest) and operational costs during the stabilization period?
yeee
55
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
56
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
57
what is the mount of a take out financing loan based on?
based on the value of a property
58
when is a take-out financing loan arranged?
Once the property has reached its stabilized NOI, or has been delivered to the tenants
59
to whom do any excess funds of take out financing loan go to?
can be distributed to the equity investors

Fina 210 (28 decks)

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