Exam 1 Flashcards
What are 4 things that developers need to be successful ?
Land/Knowledge/Tenants/Capital
Grasskamps’ 3 major groups of Development?
Consumers, Production, Public Infrastructure
What are the 5 steps of the Real Estate Development?
1) Planning and Initiation
2) Feasibility Phase
3) Commitment Phase
4) Construction Phase
5) Management/Operation Phase
What is apart of the Feasibility Phase?
Data Collection, Proforma/Budget, and Data Analysis
What is apart of the Planning and Initiation Phase?
Set objectives/ Assemble team
What makes up the Commitment Phase?
Finalize the development team and obtain project financing
What is comprised of the construction phase?
Completing Final Design, Selecting the Construction Team
What is apart of the Management and Operation Phase?
Operating of the facility and conducting a market program
What do developers do?
1- Obtain entitlements/approvals
2- Arrange Financing
3- Approve Leasing/Selling the Development
4-Property Management
What are contributors to a developers’ project going south?
- Paying too much for land
- Not knowing the market
- Poor Appraisal
- Poor QC/QA
4 parts of the RE Cycle?
1) Recovery
2) Expansion
3) Hypersupply
4) Recession
The recovery stage?
Made up of negative rental growth, excess space absorbed, low rental growth
The expansion phase?
Rents rise rapidly
Hypersupply?
Rent growth slows as there is oversaturation in the market?
Recession Phase?
Below-Inflation/Negative Rental Growth
3 Considerations of Due Diligence?
- Dependent on public sector for approval and infrastructure.
- Long investment period of no cash flow
- Changing market conditions
Why would you want to meet with neighborhood organizations and why would you want to take their ideas into consideration?
HOA’s know the area and are educated about the issues at hand, can sometimes foresee things that others can’t
Regulatory Process with Development
A lengthy process that is only getting longer and without the citizens and council being able to put a name to the face and a lil bit of money to the cause, its less likely to get traction.
NIMBY
Not in my backyard
LULU
Locally Unwanted Land Use
NOPE
Not on Planet Earth
CAVE
Citizens against virtually anything
BANANA
Build absolutely nothing anywhere near anything
Importance of Traffic Studies
To understand the effects that the development will have on the environment, prolific in planning for growth around your development (read more about this)
What are some items that are involved with Land Development?
Site Clearing and Grading
Utility Installation
Telecom
Easement Repair, etc
Advantages and Disadvantages to Joint Venture
Adv: Frees up developers equity for other uses like planning and construction costs, avoidance of equity investment in land
Dis: Equity on return to the developer is less, becomes another payout in the waterfall distribution,
Multi-Phase Project
Allows certain financing to be released as the project progresses, pre-leasing or pre-selling is a huge aspect of this, allows for buyers or other stakeholders to prevent cherry-picking of certain more desirable lots/plats.
How to calculate Release Provisions?
Original Principal Balance/Property size= $/acre
- 1st Release Parcel size =150 acres
- Release Price = $/acre x parcel size x release formula (given)
What are good multi-family site characteristics?
- Good synergy with mixed use
- Demand generators near the site (shopping centers, schools, hospitals, large employers)
- Non conflicting uses of multifamily (no clubs, loud noises, factory smells)
- Favorable Site Characteristics
- Site Conditions
What are key benchmarks for RE
LIBOR and 10-Year Treasury Rates
The risk to the lender compared to the risk of the investor is…..
Less than the risk of the equity of the investor
Debt financing usually consists of ?
Construction and Permanent Financing
Who generally are Equity Financiers?
Owners and Investors usually expecting a larger return
Explain a capital stack?
Equity (1st) - 20-60% of the project costs and pays returns based on performance Mezz or Performing Debt (2nd) - Gap Financing to cover costs not supported by debt or equity Debt Financing (3rd)- 40-80% of the project costs, pays interest and secured by a lien
Where are loans generated?
The primary financial market
Who are the major providers of Permanent loans?
Long Term Loans- Life Insurance, Pension Funds, Conduits and CMBS
Where are loans bought and sold?
The secondary loan market.
What are risks of construction Loans?
Construction Delays, material shortages, bankruptcies of GC’s , Leasing and Sales risk if the development falls short of expectations
What do lenders do to mitigate risk of Construction Loans?
Recourse vs Non Recourse Loans
-Construction Loans are disbursed on a %complete and are verified by the Architect
Recourse v Non-Recourse Loans
Recourse- Lender will take it back, and require to personally guarantee the loan
Non-Recourse: Leaves the bank at risk , but have higher rates, usually never given out. The lender is only limited to the foreclosure of the property.
How to calculate “spread” and Construction Loan Interest
100 basis points= 1%, 200 basis points= 2%, etc.
- LIBOR rate=% + basis point spread = 3.08, Loan to Value
1) Loan to value* total development amount= loan amount
2) Loan amount* 50% outstanding balance= avg outstanding balance
3) avg outstanding balance x point spread calc= loan interest
Rule of Thumb for Calculating CL Interest Rates?
50% average outstanding balance
What is considered the benchmark yield?
10-Year Treasury Securities
Permanent Lending basis point spread?
Usually 300-400 basis points
Risks on Permanent Loans?
The long term mortgage on the completed project. The lender is more concerned with the property quality.
Are permanent loans recourse or non recourse?
Permanent loans are non recourse only because the property is stabilized or on its way.
Deed in Lieu of foreclosure v foreclosure
Giving the keys back v taking them back
Equity Funding is repaid from?
Cash flow after debt service
Seller Financing
Buyer become owner of record for the property but the seller holds the note allowing foreclosure to regain ownership upon default.
What are some favorable site characteristics?
- Good access and visibility
- Ease of Access (is it difficult to turn into or leave the property because of road/traffic issues)
- Drive times to major economic centers in the area
- Public Transportation
How can apartments offer more latitudes with other developments?
Apartment offer more latitude than other development because of building pad size and flexibility with internal road and parking.
Class A Office Space
Investment grade, highest rents, best location and complete amenities
Class B Office Space
Good location and still viable location but from an earlier generation
Class C Office Space
Substantially older with function obsolescence and less desirable location
Neighborhood Office
Professional Office Parks, serves the needs of local residents.
What is Gross Area?
Measured from the outside finished surface to the outer walls of a building
Rentable Area
The inside finish of the outer walls and all areas within the outside walls except vertical penetrations like elevators and stairs may include bathrooms and lobbies
Useable Area
Measured from the inside finish of the outer walls to the inside finish surface of the office side of the public corridor.
What is a load factor?
The rentable/usable area ratio, where tenants pay rent of their usable space plus a prorated portion of the common space (i.e., bathrooms, copy room, etc)
Gross Lease
Where the landlord pays for all operating expenses and assumes risk of rising costs.
Net Lease
Net Lease- Tenant pays a base rent + share of utilities and building expenses
Net- Net Lease
Same as net lease but the tenant also pays for maintenance
Triple Net Lease
Tenant pay for all the building’s expenses + capital improvement
Expense Stop Lease
Landlord pays a stated dollar amount for expenses and the tenant pays for any expenses above the amount. The stop is determine by an estimate of expenses for the 1st year.
Tenant Leasehold Improvements
Typical for the developer to plan for an allowance for tenant improvements. Covers the build out of the interior space and depends on the market conditions but about $5-$6 per year of the lease.
