Real Estate Development Flashcards
Development process, team, Feasible analysis (front door back door method)
.Development Real Estate
Adds to the supply side of real estate market
Developers must have a vision to see opportunities. The market is always evolving and changing – new opportunities are emerging
The Development Process
Pre-development
Construction Phase
Project Completion
Pre Development Questions
is there demand for my project?
is my idea feasible?
What can I build on this site?
Construction Phase
Most important thing during this stage is to make sure construction work is on schedule and within budget
RISK RECIEVERSHIP
legal process where a neural third party (receiver) is appointed by court to oversee and manage properties facing financial challenges
- THE goal is to recover remaining funds from defaults borrower
Project Completion
At this stage you will find a buyer or tenant(if not done earlier)
- introduce property management team
- Complete any required documentation
East Harbour
- 60 acre site
- largest commercial project currently planned in Canada
Who Is involved in the development Process?
1)1)Designers, Architects, Urban Designers
2)Engineers and Environmental Consultants
3)Land Planners and Transportation Consultants
4)Market Researchers
5)Finance (including institutions like banks, credit unions…)
6)Legal
7)Leasing or brokers
8)Construction
9)Appraisers
10)Marketing and public relations consultants
Feasibility Analysis
Used to determine and document a projects viability. The result of this analysis are used to decide whether or not to proceed with the project
Loan to value ratio formula
loan amount / cost of project x 100%
Loan to value ratio
is an assessment tool that lenders use to determine how risky the project is. High LVR ratios are considered higher risk loans. Resulting in higher interest rates
Debt Coverage Ratio Formula
Net Operating Income / Annual Loan
Debt Cover Ratio
measures your ability to pay back the loan. Lenders use this ratio to determine whether the property will generate enough income to retire the loan (pay it off)
-The higher the ratio, the greater the ability you can pay back the loan
- 1 or higher is good DCR can pay annual debt
Net Operating Income
Revenue after subtracting operating expenses.
NOI =(Gross Operating Income + Other Income) – Operating Expenses.
USE Front Door Approach when
1) You find a site and wonder if it would work for a certain project
2) You know how much it costs for development
3) You want to figure out what the bottom- line is
**If actual market rent > bottom – line rent, then GO. Otherwise STOP**
Front Door Formula
Site Acquisition Cost
+ Construction Cost
=Total Cost
x Loan to value ratio (loan amount /cost of project) x 100%
=Loan
xAnnualized mortgage constant
= Required annual loan payment
x DeBT COVER RATIO (NOI/annual loan)
= Required NOI
+ Estimated operating expenses
= Required effective gross income
/ Expected Occupancy rate
= Required gross income
/ leasable square feet
= Rent require per square feet
USE Back Door Approach when:
1) you know what you want to build, but require a site
2) you can reasonably estimate the rent the the use can generate
3) Determine the max cost we can put into the development
If actual cost, budget, then go. otherwise stop
Back Door Approach Formula
Expected Rent per square foot
x total leasable square foot
=Expected Gross Income
- expected vacancy cost
=Expected effective gross Income
- projected operating expenses
=Expected NOI
/ Debt Coverage ratio
=Annual Loan Payments
/Annualized mortgage constant
= Total Loan Size
/ Loan to value ratio
=Maximum supportable total project costs(Total budget)
-estimated construction costs
=Maximum Supportable Site Cost (budget for land)
