Real Estate Development and Reuse Flashcards
What are the steps in the basic real estate development process?
phase 1: Predevelopment
phase 2: market, financial, and political feasibility
phase 3: site and engineering analysis
phase 4: financing
phase 5: contractor negotiations and public approvals
phase 6: construction
phase 7: marketing
phase 8: building occupancy and management
What are the four primary types of development and re-development?
build-to-suit: business retains a contractor or developer to build a customized structure.
speculative development: when a facility is built prior to securing a tenant. “spec”
greenfield development: takes place on large tracts of previously undeveloped land in rural and suburban areas.
redevelopment/reuse: taking previously developed property to a higher, more productive use.
What are the five components to any quality market study?
subject site analysis economic and demographic analysis competitive supply analysis demand analysis development recommendations
residual land value
what would a private developer pay for this land underneath my project if it was developed as proposed?
discounted cash flows
what is the present value of this project, taking into account the cost of borrowing money today and the recognition of income for years down the road
rates of return
there are multiple ways to measure the relationship between dollars spent and dollars received
facilitator role
efforts include public agencies or non-profits facilitating regulatory approvals, providing infrastructure, improving streetscapes
initiator role
the EDO acquires or owns the property for development. In order for the EDO to initiate development there needs to be a strong need to develop a specific property, political will, agency with expertise and resources to develop the property
A consultant can be selected through what three processes?
- Sole-source: selected without a formal competitive process.
- List of pre-qualified candidates: there is no official announcement. They ask candidates to submit a statement and interview them.
- RFP: advertise it and explains the project specifications.
RFPs: What are the steps to finding a developer?
- First you formulate the project concept, goals and objectives, market analysis, conceptual design, financial analysis and funding options.
- Form the solicitation document. Solicit developers, issue the RFP
- Market the solicitation document
- Evaluate and select the developer
- Developer negotiations
What is the two stage process for developer negotiations?
- draft a memorandum of understanding (MOU). Purpose is to clarify early on both parties’ intentions. Be approved by board.
- disposition and development agreement is drafted. This refines previous agreements, and defines and establishes a schedule for subsequent contracts required for development.
What does a market study provide?
Provides a determination for highest and best use of the development site;
determines the overall mix and quantity of uses viable on the site;
confirm or establish the market value of the projects in terms of land value;
achievable rents and/or achievable prices for occupied assets;
project out phasing and absorption of the project in the competitive marketplace;
establish key competitive and strategic guidelines
Primary market area
the area from which 80% of the demand at the subject site is likely to emanate
Competitive market area
the area in which the subject site will most actively compete for market share
What recommendations come out of a market study?
highest and best land use orientation and target consumer market positioning pricing construction type features and amenities absorption/sales profitability
What two components does the community involvement strategy include?
- goals for the process
2. an assessment of the community (area history, affected parties, community leadership and vision)
How should an EDO run a community meeting?
promote the meeting targeted choose a convenient location provide written materials before the meeting take notes during meeting support staff should attend meeting build consensus provide food and refreshments follow up publicize and promote success
What are the three conflict resolution techniques?
Facilitation
Mediation
Arbitration
job multiplier
the total increase in jobs for all industries per new job created in the given industry.
economic and fiscal impact analysis are influenced by what?
timing type of job if indirect, induced, and dynamic impacts are measured jurisdictional boundaries land use incentives
What are two commonly used fiscal impact measures?
- cost per job; the cost to the public sector for creating a job.
- leverage; the amount of private-sector funds that are invested per dollar of public investment.
common financial projections
development costs;
sources and uses of funds;
operating pro forma;
supportable debt & equity.
hard costs
costs which include labor and materials; “brick and mortar” costs.
i.e. site preparation, building construction, tenant allowance
soft costs
include professional fees for engineering and architecture services, taxes, interest, permitting fees, insurance, etc.
How is total capital requirements calculated?
development costs + land acquisition
dev. costs (hard costs, soft costs, contingency)
tenant improvements
costs of finishing out the building; includes carpeting, lighting, floorboards, etc.
operating pro forma
the standard format that shows projected revenues, expenses, and cash flows to be generated by a project.
debt service
the money needed to meet the current payments of principal and interest on an amortized loan.
calculated by taking the stabilized year operating income and dividing it by a factor or coverage ratio that the lender determines.
What are the three approaches appraisers use to value a property?
- cost approach: based on the rationale that no one would pay more for a property than it would cost to buy the land and built the structure that occupies it.
- market or sales comparison: “comp” compares a property with similar properties recently sold
- income capitalization: based on rationale that investors will pay a price that reflects the value of the stream of income the property would produce.
capitalization
based on the rationale that at any given time, a property will be valued according to its current net operating income.
capitalized value: net operating income / capitalization rate
cap rate
NOI / Property’s sale price
operating capital
short-term financing to fund predevelopment activities including site assessments, legal fees, etc.
construction loans
short- or medium-term financing to cover construction costs during construction
long-term financing
major source for project financing. Also called permanent financing. Generally issued after construction is complete.
payment structure on mortgage loans
fully amortizing: systematic payments
partially amortized mortgage “balloon mortgage”: short-term loan with a final payment due at the end of the term.
interest-only loan: does not include repayment of any principal for a given time period. only interest.
zero coupon: interest accrues over term of the loan and becomes principal. none is repaid until the property is sold.
Financing process from developers perspective
- developer contracts to purchase land and prepares development plan
- secures long-term, fixed interest rate mortgage
- go to commercial bank to secure short-term loan for construction or operating capital
- construction loans are drawn down as construction proceeds. once construction is complete, long-term capital is used to pay off the construction loan
- developer may prearrange a budget for the asset once it is completed and operating in a stable manner
what are the four general classes of transaction structures?
front-end assistance without offsetting guarantee
front-end assistance with guarantee
performance-oriented assistance with initial explicit denomination
performance-oriented assistance without formal denomination
gap financing
required when the financial resources necessary to complete a real estate development project do not fully cover the cost of understanding the project.
tools include TIF, tax abatements, industrial revenue bonds, etc.
public private contracts
public private development agreements
easements, right-of-way, and utility agreements
contracts among private participants
joint venture agreements
land acquisition contracts
architecture contracts
engineer contract
contractor contract
environmental engineer contract
lender commitments and contracts
commitment letters allow the borrower to start organizing a development team and negotiating contracts and leases.
final lender agreements conclude with promissory notes, deeds of trust, etc.
three types of construction contracts
traditional design-bid/award-build
construction management - CM advisor or constractor
design/build: process avoids developers having to coordinate the activities of architects or engineers and contractors.
turnkey
the design/build provides financing and/or land acquisition/development to turn the project over to the owner when construction is complete
build-leaseback
the D/B entity retains ownership of the project, leasing it back to the client who commissioned the project initially.
build-operate-transfer
the D/B entity retains ownership of the project, operates it and receives fees from client during it and then transfers ownership to the client at a specified future date.
What is one risk control strategy?
diligent team assembly is a primary strategy in controlling and mediating the risks a developed can be exposed to
Summary of developer process for building a project
potential need is identified
feasibility study and market analysis is completed
contract negotiations and approval are sought
developer creates a budget and hires an architect to draw up blueprints
general contractor is hired
construction and marketing begins the process of finding a buyer or lessee.
simultaneously, a marketing and sales component works to locate a buyer or entities to lease space in the project
the 4 P’s of marketing
promotion
price
product
place
leasehold improvements
improvements made to a leased property by the lessee, are generally tax-depreciable by the lessee.
what are the two common tax abatements
sales and property taxes
business improvement districts do what?
market and promote maintenance and cleaning security policy advocacy small-scale capital improvements
BIDs are authorized through
state legislation
primary startup and operational funding for BIDs derive from what
either an assessment charged to district property owners or a licensing fee gathered from businesses within the BID
public agencies can acquire land by
negotiating with willing seller eminent domain tax foreclosures land swaps foreclosure on demolition liens
Straw brokers
real estate brokers who acquire property on behalf of the agency without the seller knowing the identity of the ultimate buyer
land banking
the public acquisition and reservations of land for future use.
air rights
air rights transfer is the transfer of the rights to develop above or below a piece of public land while maintaining public rights to the ground level and/or underground.
rail transit agencies.
strength: no direct cash outlays
weakness: community gives up other potential public uses
land write-down
the public sale of land for less than its market value. the sale price is effectively a subsidy, an incentive, for developers.
zoning incentives
density bonus
overlay zoning
mixed use zoning
504 small business loan -SBA
provides long-term fixed-rate financing to small businesses for major fixed assets such as land, buildings and equipment
7(a) regular loan program -SBA
SBA’s general business loan program. Businesses go to participating banks to apply.
Small businesses are eligible if they meet the following:
good character demonstrated record for success good credit rating sufficient funds to operate the business at profit pledged personal and/or business assets meet SBA size standards
What types of loans are offered under the 7 (a) loan program?
Express Loan Program: expedited review process. (community express loans: up to $25k in HUBZones and patriot express loans: loans made to military members; veterans, active duty. offer most competitive interest rates)
export working capital program: designated to provide financial assistance to export-ready companies
CapLines: umbrella program for short-term and cyclical working capital needs.
what are the five distinct working capital loan programs
seasonal line: designed to assist businesses that experience fluctuations during peak seasons
contract line: finance direct labor and material costs associated with performing assignable contracts
builders line: “ “ for small general contractors and builders
standard asset-based line: assist businesses unable to meet long-term credit standards
small-asset based line: up to $200k
Surety bond guarantee
program assists small and emerging contractors to obtain bonding otherwise unavailable to them
what are the steps to brownfield site cleanup?
- site assessment and reuse (phase I and phase II)
- know about your state voluntary clean up programs
- identify what other individuals and organizations should be involved in the brownfield redevelopment project
- can the project be completed without including the brownfield?
- prepare preliminary estimate for the cost of remediation. “back of the envelope”
- negotiate and structure. i.e. remediation agreement
- making the deal to purchase/sell
- cleanup
- monitoring contamination
The USDA offers loans?
Yes, for those in rural communities
Export-Import Bank of the U.S.
Official export credit agency. offer working capital financing, export credit insurance, etc.
Phase 1 environmental assessment
identify past owners and uses, review government records, examine the site, perform tests for contamination in structures
phase 2 environmental assessment
verifies the character of any contaminants that may exist on site. typically concludes with a report that recommends a clean up approach
what does a preliminary include when dealing with a contaminated property?
how site assessment and remediation expenses will be funded. project feasibility including consultants and tests, legal costs, etc.
indemnification
the seller will repay the buyer for any damages associated with activities of the seller
what loans help practioners close the financing gap
SBA section 7(a) and low-doc programs
SBA microloans
EDA title IX
EPA brownfields Program
supports clean up and redevelopment by 1) technical and financial resources for assessment and clean up; and 2) partnerships to protect human health and the environment.
build to suit development
business retains a contractor or developer to build a customized structure
speculative development
a facility is built prior to securing a tenant
greenfield development
takes place on large tracts of previously undeveloped land in rural and suburban areas
redevelopment and reuse
taking previously developed property or areas to a higher, more productive use
debt capital
money loaned to be paid back in fixed installments on a fixed schedule
equity
an ownership investment into a project with no predetermined schedule for payback
