Real Estate Development & Reuse Flashcards
Why is Real Estate Development important?
Provides local jobs
Increases investment
Sustains the tax base
Serve as a catalyst to revitalize urban & rural areas
What are the 3 basic strategic approaches to economic development?
1- Business-Oriented approach - focuses on direct assistance to business
2- Place-Oriented approach - focuses on the community’s physical resources
3- Resident-Oriented approach - focuses on helping local residents participate & advance in the workforce
the goals of real estate development
Creating & retaining jobs
Attracting & creating new or expanding businesses
Enhancing the local tax base
Stimulating nearby real estate improvement
Improving the appearance of a neighborhood
What are the major factors driving industrial development?
Price Location Available financing Supply Demand
What is Smart Growth?
Development that serves the economy. Answers the question of ‘how’ & ‘where’ new developments should be accommodated.
Mixed Use Development refers to
Combining multiple land uses in a single district or multiple uses in a single building
Common tenants of mixed use development are
Inclusion of office, hotel, retail, housing space
Inclusion of desired urban conveniences in a pedestrian friendly environment
Promotion of vertical vs, horizontal development
Consideration i]of environmental costs/gas prices
Incorporation of multiple forms of movement into a single development (autos, walking, biking, transit)
What impacts have the technical revolution had on development?
Companies can locate where land & office space is cheapest
Increased greenfield & suburban development
Moving operations overseas to access lower wages & highly skilled labor
Brought new jobs in computing, network-building, information technology
What drives the growth of Green Buildings?
Environmental awareness
Bottom line of building costs (energy savings)
Increasing cost of nonrenewable resources
Local incentives to spur growth of green building industry
Greener workplaces attract talent
Lower occupancy operating costs
What are the 4 primary types of Development & Redevelopment?
Build-to-suit
Speculative development
Greenfield development
Redevelopment/Reuse
Build-to-Suit
Business retains a contractor or developer to build a customized structure; the needs of the end user guide the design of the facility
Speculative development
When a facility is built prior to securing a tenant; provides a marketing tool
Greenfield development
Occurs on large tracts of previously undeveloped land in rural & suburban areas; I.e. industrial parks, technology parks, commercial development at highway interchanges
Redevelopment & Reuse
Processes for taking previously developed property or areas to a higher, more productive use
What are the 8 phases of Real Estate Development?
Predevelopment Market, Financial & Political feasibility Site & engineering analysis Financing Contractor negotiations & public approvals Construction Marketing Building occupancy & management
Phase I. Predevelopment
Developer / Business considers possible sites or building sizes & uses; quick analysis of fatal flaws; if favorable site is secured.
Phase II. Market, Financial & Political feasibility concerns
Sufficient market demand
Sufficient return on financial investment
Public sector approval
This phase determines the feasibility of a project - its costs, risks and benefits - before any major investment is made.
Market feasibility does what?
Identifies development opportunities
Forms a realistic development plan
Determines if project will satisfy lenders to provide loan
What questions does market feasibility answer?
What products are appropriate for this market?
What will tomorrow’s customers demand?
What is the appropriate timing & phasing for this project?
What is the appropriate quantity & mix of uses for this project?
Are there financial considerations that the market alone will not bear?
How can this project be best positioned in the competitive marketplace?
What are the key components to any quality market analysis?
Subject Site Analysis Economic & Demographic Analysis Competitive Supply Analysis Demand Analysis Development Recommendations
Financial feasibility addresses
Questions directly related to the level of investment that a project is likely to receive, or the variety of metrics that real estate investors use to evaluate multiple real estate deals against each other
What are 3 financial feasibility testing models?
Residual Land Value
Discounted Cash Flow
Rates of Return
What’s the purpose of political feasibility?
To determine if the public sector will approve a viable project in a reasonable amount of time
Phase III - Site & Engineering Analysis is intended to
Result in a development plan that can be discussed with or officially submitted to appropriate planning agencies.
What topics are considered in site & engineering analysis?
General - visibility, access, surrounding property
On-site - natural conditions & contamination
On-site - road issues
Off-site - site access infrastructure
Off-site - planning & development
On-site / Off-site - utilities
What is the purpose of a shovel-ready site?
Identify sites that are ready for development
Take risk & time out of the site selection process
Provide information upfront about potential obstacles to development
Phase IV - Financing affects
What gets built, where, when & by whom
Real estate financing is challenging because
Magnitude of capital investment required are greater than the assets of the developer or investor
Risky nature of real estate investments are long term & relatively illiquid
Unique nature of land & buildings - land is considered a durable asset; buildings are a depreciable asset
What is capital stacking?
Multiple sources of financing put together to make a deal viable
Debt capital
Money loaned to be paid back in fixed installments on a fixed schedule; it reduces the amount of equity & increases the variability of return on equity investment (leverage)
Equity capital
Developer / Owner investment in a project
Phase V - Contractor Negotiations & Public Approvals involves
Setting up joint venture or public / private development agreements
Getting final permit approvals
Securing financial commitments including permanent financing & construction loans
Setting up construction contracts
Negotiating pre-lease agreements
Public approvals include
Zoning
Subdivision
Site plan review
Building permits
Private development agreements involved in real estate development projects include what types of agreements?
Joint venture agreements Land acquisition contracts Lender commitments Architect & engineering agreements Construction contracts Lease/Sale contracts Insurance agreements
Phase VI - Construction involves
Actual development or construction of the site / facility; it includes Environmental remediation Demolition Infrastructure development Building construction Tenant improvements Preleasing
Phase VII - Marketing begins when & involves what?
Begins prior to construction
Involves discounted pricing to tenants / buyers who make a deposit to reserve land / space prior to construction
Phase VIII - Building Occupancy & Management begins when & includes what?
Begins once development is completed & the building is occupied
Involves property management (marketing, leasing & maintenance) & asset management (capital improvements, refinancing & the sale of the property)
Public participation in development (especially in providing incentives) is generally based on the __________ test
But-for - the development would not happen ‘but for’ the use of the incentive
3 types of public projects
Type I - projects for which there exists neither current market support, nor the likelihood of future adequate support to justify the cost (i.e. low income housing)
Type II - projects for which current market support is inadequate to justify development, but for which there exists some reasonable probability that if developed, the property will generate sufficient income to repay partial or total costs (i.e. industrial parks, hotels, spec buildings)
Type III - projects for which the public sector controls a property parcel or development rights that is uniquely valuable to the developer (impetus is to generate money or meet economic development objective)
Private sector players in real estate development include
Developers Equity investors Business owners Lenders Architects/Engineers/Contractors/Attorneys Propermanagers Tenants
Public-Private Partnership is
a working agreement between both public & private sectors in projects that involve the use of public resources to promote local economic development;
Public entity provides financing or infrastructure improvements
Private entity provides capital investments, jobs, development expertise or assumes financial risk
Public sector roles in real estate development include
Regulators - planning/zoning departments, public works, building inspectors, fire marshals - establishes the rules (based on police power & protect health, safety & welfare of citizens)
Facilitators - Community Development Corporation, Special Improvement Districts, non-profit organizations
Initiators - local government is the central initiator of economic development through public spending, regulatory powers, policy objectives; EDOs initiate development through acquisition of property or conducting Predevelopment studies on owned property, market the property & contracts with a developer
What are the 3 ways to select a consultant / developer?
Sole-source - without a formal competitive process
Pre-qualified candidate list - chooses several from list to submit a statement
Request for Proposals - most rigorous; submits proposal to be considered
What is an RFP?
Explains the project or service specifications
Introduces the site concept
Describes the development opportunity, parameters & objectives
Details all proposal requirements, the process for proposed selection & criteria for evaluation
Acts as a marketing tool
Means of introducing competition into a development project
Why would you submit an RFQ before an RFP?
RFQ (Request for Qualifications) will provide an initial evaluation to create a smaller pool of potential developers to respond to an RFP.
Is it appropriate for a prospective developer to contact City officials or EDC Board Members?
Policies and procedures on contacting staff or other members of the RFP process, or how Q&A will be addressed, should be established & specified in the RFP.
What information should an RFP include?
Project concept/background Market study/summary Suggested deal structure Operational relationship Preliminary financial analysis Schedule for project/developer selection Rules for contacting agency/leadership Submission requirements Confidentiality statement
What is included in the RFP submission requirements?
Corporate qualifications Project Team organization/resumes Developer understanding Proposed development program Public-sector responsibilities Private-sector responsibilities Conceptual site plan Capital costs & financial deal Financial credentials
What are the 2 components in assessing a development project?
Site - the physical characteristics, access and basic infrastructure
Location - the relative spatial position - proximity to customers, goods/services, transportation thoroughfares or mass transit
Why are site and location important in real estate?
They are unique assets.
A building is fixed in its location and therefore, it’s value is subject to its surroundings.
Why is a market study conducted? What information does it provide or what questions does it answer?
- The highest and best use of the property
- Overall mix and quantity of uses viable
- It establishes market value of the project
- It projects out phasing and absorption in the competitive marketplace
- It establishes key competitive and strategic guidelines to ensure project success against competition
All methodologies include 5 key components of a quality market study - what are they?
- Subject Site Analysis - where is the site located?
- Economic & Demographic Analysis - what’s the regional forecast for jobs & household growth?
- Competitive Supply Analysis - What are the competing projects?
- Demand Analysis - Is demand increasing/decreasing?
- Development Recommendations - How do the factors above shape the recommendation of the project?
What is one of the most important things to remember when looking at the real estate market?
No project is bigger than the market.
If the market doesn’t exist to support a project, there is no way the project can be done.
Subject Site Analysis includes:
- Size, topography, layout & constraints
- Surrounding land uses
- Proximity to employment & services
- Area prestige/reputation
- Access, visibility & frontage
- Planned infrastructure improvements
What is the importance of Economic and Demographic Analysis?
Accurately interpreting/projecting economic and demographic data is key to understanding a project’s viability.
What is the regional forecast for job & household growth? What impact will that growth / decline have on the project?
It will show if there is a mis-match between existing real estate assets and consumer preferences.
Why is the Competitive Supply Analysis critical to understanding real estate project performance?
Knowing why projects success or fail can yield keys to unforeseen market challenges.
It suggests competitive positioning, market niches & informs feasible timing/phasing.
It provides an understanding of future supply conditions.
It determines the Primary Market Area (where 80% of the demand will come from)
It determines Competitive Market Area (where the site will most actively compete for market share)
What’s the difference b/w the Primary Market Area and the Competitive Market Area?
Primary Market Area is where 80% of the demand at the subject site is likely to come from.
Competitive Market Area is where the subject site will most actively compete for market share.
What does Demand Analysis / Modeling address?
The overall level of potential market support.
It identifies underserved markets where demand may exist.
It quantifies a potential pool of customers.
It determines the likely amount, type and pace of market capture that a project is likely to experience.
What is included in Development Recommendations?
- Highest & Best Use - What land uses provide the greatest level of economic value today & tomorrow?
- Orientation and Target Consumer - Who is the customer for this project & what are their needs?
- Market Positioning - How should this project be positioned in the marketplace to differentiate it from the competition?
- Pricing - What are the achievable rents / prices that this project can achieve & do they justify the cost of construction?
- Construction Type - What type of construction do the prices justify, based on financial modeling, and do these construction types deliver the type of project envisioned?
- Features & Amenities - What features & amenities will the project deliver in order to be successful? How do they impact the overall cost of the project?
- Absorption / Sales - How quickly will this project sell in the marketplace & will this time period be in-line with the financing secured?
- Profitability - Does the developer or EDO make a profit? If not, what incentives must be offered to generate a profit?
While a proposed project may meet market and financial tests, it is not truly feasible unless it has __________ and _____________ support.
Political and Community Support
According to the Mortgage Bankers Association of America, this term is defined as a property status indicating that 1) the property has been surrendered and is not being maintained, and 2) the property is not offered for sale or rent with a broker.
Abandonment of Property
This is the rate at which space is leased or sold.
Absorption Rate
A process of converting a structure constructed for one purpose (i.e. warehouse, mfg facility) to a different use (i.e. restaurant, marketplace).
Adaptive Reuse
Zoning that protects agricultural land from development, by restricting the lot size, formulating design criteria, etc.
Agricultural Zoning
Air Rights
The right to ownership of space above and/or below the physical surface of a parcel of land.
The largest tenant in a shopping center, an office building, industrial park, etc. The strength of this tenant affects the availability of financing.
Anchor Tenant
An opinion of the monetary value of a specific property, as of a specific date, supported by relevant and factual data.
Appraisal
Appreciation
An increase in value; opposite of depreciation.
The value assigned to real or personal property by the local gov’t for property tax purposes. This value is usually less than the market value of the property. The relationship b/w assessed value and market value of a property varies widely depending on the location and the jurisdiction. State statutes generally specify which assessment method is allowable in a particular state.
Assessed Value
Includes ongoing, big picture management activities such as capital improvements, refinancing, and the sale of property.
Asset Management
The dollar amount that the IRS attributes to an asset. It’s used for a variety of tax purposes, including determining annual depreciation and the gain or loss on the sale of a property. It’s derived by adding the costs of acquiring a property to the value of any capital improvements, minus any depreciation on that property.
Basis
A large-format store, typically one that has a plain, box-like exterior. They are typically stand-alone or in power centers, locate near highway interchanges or exits, and are support by vase surface parking areas.
Big Box
What does an economic impact analysis measure?
The overall impact of a project’s jobs, business sales & personal income on the economy.
What does a fiscal impact analysis measure?
A project’s associated impact on government revenues and expenditures.
True or False
The amount of estimated project impact typically increases if indirect, induced and dynamic impacts are measured.
True
What is a job multiplier?
The total increase in jobs for all industries per new job created in the given industry.
Give an example of a job multiplier.
If a newly created manufacturing firm orders parts from a local vendor, which is an indirect impact often resulting in additional jobs. If employees from that same firm spend money at the local tavern, those expenditures help to support additional jobs at the tavern. These secondary expenditures are known as indirect and induced impacts.
What is leverage in measuring fiscal impact?
Leverage is the amount of private-sector funds that are invested per dollar of public investment.
When is a real estate project considered viable?
When the net income generated from the sale or rental of the project provides the developer / investor with a return that is in proportion to the associated risks.
What is an opportunity cost?
Anytime an investment is made, there is a foregone opportunity to make a return in an alternative investment.
What is the hurdle rate or discount rate?
An investor’s minimum threshold return on an investment.
How are financial projections used by:
1) Developers
2) Lenders
3) Public Sector?
1) Developers use projections to determine the rate of return on a project, compared to their hurdle rate and whether it’s worth the risk of investment
2) Lender use projections to assess a project’s financing needs and whether or not it will generate sufficient revenue to meet debt service
3) Public Sector uses projections to determine the financing needs of the developer and whether or not to provide incentives
What is an absorption rate?
The rate at which space is leased or sold.
How is Net Operating Income calculated?
Gross revenue minus expenses.
What is debt service?
The $$ needed to meet the current payments of principal and interest on an amortized loan.
How is debt service calculated?
Operating Income divided by a factor or coverage ratio determined by the lender.
What is the minimum debt coverage ratio lenders generally want to see?
1.2
However, the higher the risk of a project, the higher the required debt coverage ratio will be.
How is a capitalization rate determined?
Net Operating Income (NOI) divided by the sales price. and expressed as a %
List the 5 tests to calculate investment returns.
1) Payback Period - length of time to recover the initial investment.
2) Unleveraged Cash-on-Cash Return - cash flow from operations divided by total capital requirement.
3) Cash-on-Cash Return - Cash flow divided by equity investment.
4) Net Present Value - present value for a given discount rate less initial investment.
5) Internal Rate of Return - Net present value = 0, solve for the discount rate.
What is meant by the time value of money?
The value of a dollar today is worth more than a dollar in the future. The difference is a result of opportunity costs.
Real Property, the expansion, redevelopment or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant or contaminant.
Brownfields
Development in which, a business retains a contractor or developer to build a customized structure. Typically the business secures long-term financing and owns and manages the building. The needs of the end-user guide the design of the facility as opposed to anticipated real estate market needs.
Build-to-Suit Development
The ratio b/w net square feet (or gross leasable area) and gross square feet.
Building Efficiency
A rate of return used to calculate the value of a property based on the relationship b/w income and sale prices of comparable properties. For the comparable properties, it is the first stabilized year net operating income (NOI) divided by a property’s market value or sales price.
Capitalization / Cap Rate
Stores that offer tremendous selection in a particular merchandise category at low prices.
Category Killers
The amount of income remaining after expenses and other obligations have been paid. Depreciation and other non-cash charges are not counted in this. It represents internally generated long-term funds available to a company or developer.
Cash Flows
Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state of the art systems, exceptional accessibility and a definite market presence.
Class A Office Space
Buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair to good for the area and systems are adequate, but the building does not compete with Class at the same price.
Class B Office Space
Buildings competing for tenants requiring functional space at rents below the average for the area.
Class C Office Space
Various Expenses and fees charged to both the buyer and the seller of real estate at the time of the property transfer. Costs can include brokerage commissions, lender discount points, deed recording fees, inspection and appraisal fees and attorney fees.
Closing Costs
What are the main on-site planning & development issues to be addressed in site and engineering analysis?
- Building footprint
- Parking requirements
- Circulation & open space requirements
- Special constraints & requirements
- Boundary, Topography & Legal Surveys
- Geotechnical / soil survey
- Environmental contamination
- Historical / archeological surveys
What is one of the greatest challenges of urban development?
Parking
What are the primary regulatory instruments for planning, design, engineering and construction projects?
Building / Construction, Zoning & Development Codes and Ordinances by local, state & federal lawmakers
Real or personal property pledged by a borrower to protect a lender against default. In real estate lending, it usually refers to the property pledged or mortgaged by a borrower to a lender to secure the loan.
Collateral
Charges that office, retail and warehouse tenants and condominium owners often pay, on a proportionate basis, to collectively reimburse the landlord for certain agreed upon expenses that relate to such items as maintenance, servicing of common areas, management and in case of retail centers, advertising and promotion.
Common Area Maintenance (CAM)
Aka Superfund: a 1980 federal act that has several objectives: 1) to provide a means of identifying and ranking hazardous wast sites; 2) to create a source of funds to finance site clean up; and 3) to establish liability for both damage caused and cleanup among site owners, businesses generating the waste, waste haulers and waste disposal operations.
Comprehensive Environmental Response, Compensation & Liability Act (CERCLA)
A plan that describes the desirable ways in which a community should develop over a 10 - 20 year period. It includes a set of written development goals & policies, supplemented by maps. It may be advisory or legally binding depending on state enabling statutes.
Comprehensive Plan
A legal process that permits a city to acquire title to property for a public purpose, including the elimination of blight, for just compensation. It is sometimes used for economic development for job creation purposes without designation of blight. This process is also used for assuming property for the construction of a roadway, sewer line, etc.
Condemnation
A short-term loan that enables a developer to pay contractor’s fees and other expenses incurred before and during the construction period. Usually 1 - 2 year loans with higher interest rates. They are repaid with the mortgage or permanent loan as the project is completed.
Construction Loan
Costs of construction, which relate to the work performed on the construction site. This is different from work done in the general contractor’s main office, for example.
Cost of the Work
A building contract, setting the builder’s profit at a set percentage of the actual cost of labor, materials and an agreed upon overhead.
Cost plus Contract
Money loaned to be paid back in fixed installments on a fixed schedule. It reduces the amount of equity and thus magnifies or leverages the rate of return on equity investment.
Debt Capital
A security instrument used in place of a mortgage in some states. It transfers the title to the real estate to a third party who acts as the trustee. The trustee holds the real estate as collateral security for the debt, with the condition that the trustee shall reconvey the property to the debtor / owner upon the full payment of the debt. The trustee has the ability to sell the property and pay the debt in the even of a default by the debtor.
Deed of Trust
What is a deferred loan?
Where the principal and interest payments are delayed until construction or permanent financing.
When is a bridge loan used?
During the predevelopment stage, after key development hurdles have been overcome, a bridge loan can fund the last pieces of predevelopment work until construction or later-stage financing is secured.
For example, a developer may need a bridge loan to complete site acquisition if an option agreement will expire before the construction loan is secured.
What are some of the sources of private equity capital?
- Private investors
- Limited partnership
- Limited Liability Corporation (LLC)
- Real Estate Corporation
- Real Estate Investment Trusts (REIT)
- Pension Fund
- Insurance Companies
- Foreign Investors
- Endowments
What are the typical financing procedures for a real estate project?
1) Contract to purchase property and prepare the development plan
2) Secure long-term, fixed-interest rate mortgage from lender (developer provides equity for %; developer often obtains letter of intent from anchor tenant when construction is complete; letter of intent used for long-term financing)
3) Short-term loan for construction or operating capital
4) Once construction is complete, long-term capital used to pay off the construction loan
5) Prearrange a budget once completed and operating
What is gap financing?
When financing resources necessary to complete a real estate development project do not fully cover the cost of the project.
What is the purpose of Gap Financing Analysis?
1) to ensure the project truly needs every public dollar support
2) to ensure the project furthers other private development that shouldn’t need gap financing now that a ‘market’ has been established
Clearance or removal of a structure in order to carry out redevelopment.
Demolition
It’s used to alter height and bulk (density) regulations to encourage certain land uses and project features. Typically, it’s used to obtain public health benefits such as ground floor retail, affordable housing, open space, transit connections and art / cultural amenities in exchange for greater density.
Density Bonus
The loss of value in real property resulting from age, physical deterioration, or functional or economic obsolescence.
Depreciation
What’s the difference b/w zoning and subdivision?
Zoning is the regulation of use, shape and bulk restriction on development.
Subdivision is related to dividing land into 2 or more parcels.
What’s the difference b/w easements and right or ways?
Easement is the legal right to use the land of another for a specific purpose other than the right to possess that land.
Right-of-way is one such right that can be granted / acquired through an easement, giving the right to pass over the land in question (utilities and railroads)
Aka Builder Fees. Monies charged by the developer for development services.
Development Fees.
Part of zoning code, dealing with measurable constraints such as density, building heights, setbacks and parking spaces.
Development Standards
Publicity about the project from the news media.
Earned Media
It’s the legal right to use the land of another for a specific purpose, other than the right to possess that land.
Easement
The actual dollars collected over term of the lease divided by the number of months.
Effective Rent
A municipality’s authority to ‘take’ private property for a public use or purpose, provided it compensates the owner fairly.
Eminent Domain
What is the difference b/w eminent domain and condemnation?
Eminent Domain is the authority to ‘take’ property.
Condemnation is the act of using Eminent Domain.
A detailed report that documents the impacts and consequences of a development or project on the environment to satisfy the requirements of the National Environmental Policy Act.
Environmental Impact Statement (EIS)
An area designated by a city and certified by the state to receive various tax incentives and other benefits to stimulate economic growth.
Enterprise Zone
The local tax rate multiplied by the ratio of the assessed value to the market value of real property.
Equalized Tax Rate
It’s an ownership investment ratio into a project with no predetermined schedule for payback. It bridges the gap b/w debt financing and the cost of the project. It is subordinate to debt financing (i.e. if the project performs poorly or fails, proceeds go to pay off the lenders first).
Equity Capital
Conditions to development approval. They may take the form of mandatory dedications of land for roads, schools or parks as a condition to play approval, fees in lieu of mandatory dedication, water or sewer connection fees, and development impact fees.
Exactions
Use of debt to decrease equity investment and increase the expected return on equity.
Financial Leverage
It stipulates a fixed price in the contract, which includes, the contractors’ fees, overhead and profits, independent to the final cost of the project. The contractor is not liable for costs for other items such as labor and materials.
Fixed Price / Lump-sum contract
The ratio of permitted gross floor area of a building in relation to the size of the lot.
Floor Area Ratio (FAR)
A legal proceeding or action taken by one party to take possession of a property owned by another. This process is typically associated with lenders taking possession of collateral pledged to secure a loan or mortgage as a result of a loan default.
Foreclosure
Zoning that restricts development based on a generic description of design without regard to use. Example: building must go to front lot line with setbacks of 20 feet.
Form-based Zoning
The firm or individual, required in most states to be licensed, responsible to the owner for the overall coordination and administration of the building process.
General Contractor
Public use bonds backed by the full faith and credit of a gov’t entity. These bonds may be repaid with general revenue or from borrowing or axing proceeds collected by the issuer.
General Obligation Bonds
The individual on the general contractor’s payroll who oversees multiple projects and job sites.
General Superintendent
Buildings (& construction practices) that significantly reduce or eliminate the negative impacts on the environment and occupants in five areas: Sustainable site planning, safeguarding water and sewer efficiency, energy efficiency and renewable energy, conservation of materials and resources and indoor environmental quality
Green Buildings
Development that takes place on large tracts of previously undeveloped land in rural and suburban areas. Examples of this type of development include industrial parks, technology parks, and commercial development at highway intersections.
Greenfield Development
Rent potential prior to any deductions for vacancy and operating expenses
Gross Rent
What are the 3 primary types of construction contracts?
1) Traditional Design-Bid/Award-Build (Construct) (most common)
2) Construction Management (CM)
- CM as Project Manager and advisor to owner
- CM as General Contractor or constructor
3) Design Build
Name some of the risks that the construction of a development project can be exposed to?
- Project scope changes
- Completion schedule overruns (weather delays, labor union disputes, delivery delays)
- Design / Engineering errors and omissions
- Licensing and permitting delays or denials
- General contractor or subcontractor default
- Construction cost overruns
- Off-site public infrastructure development delays
- Finding unknown contamination
Usually refers to gross area of a building by measuring from the outside of its exterior walls and including all vertical penetrations such as elevator shafts. It also includes basement space.
Gross Square Feet
A financing tool in which the lessee such as a developer or business, obtains use of a parcel of land from a lessor, such as a municipality, in return for periodic rent payments. If there is an improvement on the property, the lease is generally based on that portion of value attributable to the land. At the end of the lease, the land and improvements never to the landowner.
Ground Leases
Its similar to a cost-plus contract, but here the contractor guarantees that the final cost of the project will not exceed a maximum amount, except in case of changes desired by the owner/developer.
Guaranteed Maximum Price (GMP)
Development costs, which include labor and materials; these costs are often referred to as ‘bricks and mortar’ costs.
Hard Costs
Infrastructure development and site preparation.
Horizontal Development
What questions does the ‘marketing story’ answer?
WHO is the target market?
WHAT is the real estate project and overall goals?
WHEN should you begin marketing?
WHERE is the competition for your product?
WHY is marketing important?
What are the 4 ‘P’s’ of marketing?
Promotion
Price
Product
Place
Define Merchandising and identify the 3 primary categories of merchandising.
Merchandising is any act promoting the sale of goods or commodities.
3 Primary categories:
1) Tangible Materials
2) Product Itself
3) Sales Conduits
What are 4 ways an EDO can help facilitate redevelopment?
1) Reduce the development costs (lowers a developer’s front-end costs and reduces the amount that has to be financed);
2) Reduce mortgage financing costs (lowers the debt service a project);
3) Reduce operating costs (improves the cash flow of a project);
4) Facilitate the process of redevelopment through programs and policies (improves the speed to market for a project)
Differentiate between a public use bond and a private activity bond.
Public Use Bonds are used for public purposes such as highways, schools, bridges, jails, schools, etc. They are intended to address ‘essential gov’t functions’. Most are backed by the full faith and credit of the public entity issuer.
- They typically have low interest rate; exempt from federal income tax; have a higher degree of security
Private Activity Bonds are used for projects that do NOT fit the definition of a public use project. They are issued by gov’t and used for private purpose benefitting individuals or entities.
- They can be either tax exempt or taxable.
List the strengths and weaknesses of a Revolving Loan Fund.
Strengths:
- flexible loan eligibility criteria, assistance and repayment
- provide capital to businesses in support of local development goals
- offer favorable interest rates and loan terms
- reduce risk of a loan by guaranteeing a specific %
Weaknesses:
- stop lending when they run out of funds
- large amount of capital necessary to establish the fund
- sophisticated administration required
- if federal funds are used, there are restrictions
Name 5 types of Tax Credits programs.
Business Facility (credits for new jobs & new investment) Capital Investment (credits for investment in small business in distressed areas) Enterprise Zone (credit for developments that provide new jobs or investment within the zone) Community Bank (credits for investment in a community bank) Historic (credits for reuse of historic structures) New Market (credit for revitalization efforts of low-income and impoverished communities) Distressed Community (credit for individuals or businesses within a defined 'distressed community' Low Income Housing (credits for development and leasing of units below market rents)
What are the strengths and weaknesses of a Tax Increment Financing (TIF) program?
Strengths:
- property owners pay the normal tax burden
- property tax increment is eventually returned to the tax roles
- TIF bonds are not typically counted against a debt cap
- public funds are not required
- incremental tax revenues are reinvested back into the redevelopment area
- can be used as a performance based benefit if developer is returned the amount of the increment
Weaknesses:
- in areas of low property taxes, the impact of a tax increase may be minimal
- TIF is costly and complex to administer
- project might fail or property values don’t increase
- TIF freezes the tax base for agencies required to provide services (education, police, public transport)
- political fallout from school districts is a potential
List the services of Special / Business Improvement Districts.
1) Marketing / Promotion
2) Security
3) Maintenance / Cleaning
4) Policy Advocacy
5) Small Scale Capital Improvements
How are Special / Business Improvement Districts typically funded?
1) assessing property owners (most common)
2) gathering a licensing fee from businesses within the district
What are some ways public agencies can assemble land for redevelopment purposes?
1) Negotiated purchase
2) Condemnation
3) Land Banking
What are the pros and cons of land assembly by a public agency?
Pros:
- allows property to be used for public interest and economic use, support redevelopment efforts & mitigate blight
- encourages private investment by avoiding wasted time on the part of the developer
- allows abandoned lots w/o clear title to be assembled
- deals with speculative property owners who are holding out the sale of their property
Cons:
- condemnation is politically controversial
- condemnation can be expensive and time-consuming
- restrictions on property to be sold to a private entity
- purchase costs are higher due to relocation
What are the 3 public purposes for which land assembly is allowed?
1) elimination of blight
2) housing for low & moderate income
3) economic development including job creation
What’s the difference b/w Eminent Domain and Condemnation?
Eminent domain grants a government the right to take over a property.
Condemnation is the actual act of taking it over.
What is Land Banking and how is it used for economic development purposes?
Land Banking is the public acquisition and reservation of land for future use. It’s an inventory of municipally owned properties.
Land Banking is strategic and based on targeted investment. The properties can be used for redevelopment opportunities within a community.
Define Zoning and list the 3 primary types of zoning incentives for redevelopment projects.
Zoning is the regulation of use, shape and bulk restrictions on development.
Density Bonus (alter bulk and height - density - regulations to encourage certain land uses and project features)
Overlay Zoning (relaxes / modifies existing land use provisions for particular land tracts while maintaining overall city limits)
Mixed Use Zoning (permits use of real estate for more than 1 purpose - both horizontal and vertical uses)
A source of funding available to municipalities, state, and in certain cases, development agencies to finance the construction or purchase of industrial, commercial or manufacturing facilities and /or equipment for private use. They are backed by the credit of the private user and generally are not considered liabilities of the gov’t entity that issued the bond. The authorization to issue them is provided by state statute.
Industrial Development Bonds / Industrial Revenue Bonds / IDBs
Financial contributions imposed by communities on developers or buildings to pay for capital improvements within the community, which are necessary to service / accommodate the new development.
Impact Fees
Zoning that encourages affordable housing, often through a density bonus. To get the additional density, new construction must include a set percentage of affordable housing units (or make a payment into a fund to support the development of nearby affordable housing).
Inclusionary Zoning
A written agreement in which a party agrees to reimburse a second party for any loss, expense or damage.
Indemnity
The true annual rate of earnings on an investment. It equates the value of cash returns with cash invested. It solves for the rate in which the present value of cash out-flows equals the present value of cash in-flows.
It’s the annual rate of growth an investment is expected to generate.
Internal Rate of Return
The public acquisition and reservation of land for future use.
Land Banking
The public sale of land for less than its market value. The difference b/w the land’s actual value and its sale price is effectively a subsidy, an incentive for developers.
Land Write-Downs
A legal claim of 1 person on another person’s property for security against repayment of a debt or obligation for services.
Lien
Most often located near affluent residential neighborhoods, this caters to the retail needs and lifestyle pursuits of consumers in its trading area. It has an open-air configuration and includes space occupied by upscale national chain specialty stores. Other elements help make it serve as a multi-purpose leisure-time destination, including restaurants and entertainment, design ambience and amenities such as fountains and street furniture that are conducive to casual browsing.
Lifestyle Center (i.e. Village Point in Omaha)
The major source for project financing, often called permanent financing. It typically comes in the form of a conventional mortgage loan with maturity of 25-40 years.
Long-Term Financing
Developer that manages overall property development process, conveying parcels to other developers to do more site-specific development.
Master Developer (i.e. Mike Rader)
3 or more different but complimentary land uses that are developed as part of one synchronized / comprehensive project.
Mixed Use Development
A nonconforming use is a lot or improvement that was present prior to adoption of the zoning ordinance but doesn’t conform to that ordinance. Modifications may be allowed if the modification doesn’t impose any greater negative impact than it already does.
Modification to a Legal Nonconforming Use
The National Environmental Policy Act of 1969. The act sets provisions for federal actions that have an impact on the environment. The intent of the law is to protect the environment from some of the major impacts, which federal projects have had in the past.
NEPA
The square feet available for direct lease to tenants after deducting common areas (elevator shafts, lobbies, restrooms) from gross square feet.
Net Square Feet
The National Priority List of CERCLA that lists highly contaminated sites that are eligible for CERCLA funding to help remediate the property.
NPL
The cash remaining in a real estate project after deducting annual operating expenses and expected losses in revenue from vacancies and uncollected rents from gross revenues.
It’s used to analyze profitability of income-generating real estate investments.
Net Operating Income (NOI)
Short-term resources often needed for predevelopment activities including site assessments, feasibility studies, legal fees and other out-of-pocket expenses until the project starts producing income.
Operating Capital
An up-front fee charged by the lender. The fee is based on points or percentages of the total principal amount of the loan; a single point is equal to 1%. A 3-point loan origination fee on a $100K loan would be $3K (100,000 x 3)
Origination Fee
A zoning incentive / constraint that subjects existing zoning districts to an additional layer of development standards. Examples: mixed-use, historic districts, floodplains.
Overlay Zoning
The ratio of parking spaces to gross building area. For example, a suburban office building may have 4 spaces per 1000 sq. ft.
Parking Ratio
Relaxes zoning restrictions for a designated tract of land. It’s often done to allow clustering of development on one part of a site with another part set aside for open space.
Planned Unit Development (PUD)
Overall management of a number of investments or properties
Portfolio Management
A center dominated by several large anchors, including discount department stores, off-price stores, warehouse clubs, or category killers. It typically consist of several freestanding (unconnected) anchors and only a minimum amount of small specialty tenants.
Power Center
The amount of debt, exclusive of interest owned.
Principal
Bonds issues by the gov’t and used for a private purpose benefitting individuals or entities.
Private Activity Bond
Projected financial statements. Generally conducted as multi-year financial projections of a project or business’ operating income, expenses, and cash flow. They are used to determine the economic viability of a project.
Pro Formas
Describe the SBA 504 loan program.
SBA 504 program provides long-term, fixed rate financing for major fixed assets (buildings, land, equipment).
It includes:
- a loan secured with a senior lien from a private sector lender that covers up to 50% of the project costs
- a loan secured with the junior lien from the CDC (backed by a 100% SBA-guaranteed debenture bond) covering up to 40% of the project costs
- a contribution of at least 10% equity from the business.
- loan is provided by the CDC
- CDC raises capital by selling SBA-guaranteed bonds in the private market
- SBA guarantee increases attractiveness to investors
Describe the SBA 7a loan program.
- SBA 7a is the general business loan program
- It’s a 0 subsidy loan program financed through fee income to SBA from borrowers and lenders
- small businesses apply directly through banks for SBA 7a loans
- It offers extended repayment terms
- It can be used for working capital or fixed assets
- Negotiable interest rates b/w borrower and lender
- SBA Eligibility includes:
Good Character
Demonstrated record for success
Good credit rating
Sufficient funds to operate the business at a profit
Pledged personal and / or business assets
Meet SBA size standards - Lender eligibility may also include:
Opportunities in the market place
Business’ reputation
Strength of the business
Financial statements
Projections
Who is the target audience for the SBA Express Loan Program?
Small businesses in communities that qualify as Historically Underutilized Business Zones (HUBZones) or as distressed communities according to the Community Reinvestment Act.
Made to encourage small business start-ups in those communities.
Who is the target audience for the SBA Export Working Capital Program?
Export-ready companies.
Provides up to a 90% guarantee to lenders on an export loan so that they will open up working capital for export businesses.
CBDG funds may be used for a variety of projects that meet one of 3 criteria. What are they?
- Benefit low and moderate income people
- Aid in elimination or prevention of slum or blight
- Meet a serious & immediate community health or welfare need
List 5 USDA programs to assist in economic development efforts.
- Business & Industry Direct Loans
- Business & Industry Guaranteed Loans
- Rural Energy for America Guaranteed Loan Program
- Intermediary Relending Program
- Rural Economic Development Loans (Utilities)
- Rural Business Enterprise Grants
- Rural Business Opportunity Grants
- Value-Added Producer Grants
- Rural Economic Area Partnership Zones
What is the role of the US Export-Import Bank?
Help generate domestic job growth by helping to finance the export of US goods and services to international markets.
It assumes credit and country risks that the private sector is unable or unwilling to accept.
It provides: Working Capital Guarantees Export Credit Insurance Loan Guarantees Direct Loans
The total cost of the development, including hard and soft costs, direct and indirect costs (i.e. legal fees and interest on borrowed funds)
Project Costs
The amount of tax that a property owner pays on the value of his or her property. The tax is calculated by multiplying the assessed value of a property by the tax rate.
Property Tax
Also referred to as gov’t bonds. They are used for public purposes such as highways, schools, bridges, sewers, jails, parks and gov’t buildings.
Public Use Bonds
Bonds that are payable solely from the earnings of a particular project or facility acquired or constructed with the issued bonds.
Public Use Revenue Bonds
Land and anything permanently affixed to it, including buildings, fences and other items attached to the structure.
Real Estate
Land and any permanent fixtures on it, including buildings, trees and minerals.
Real Property
Converts a previously developed property into a higher, more productive use or improves an area through renovation or rehabilitation of existing buildings or properties.
Redevelopment
A pool of capital in which the funding is recycled to provide future financing.
Revolving Loan Fund (RLF)
The relationship (expressed as a %) b/w the annual net income that is generated by a business and the invested capital (or appraised value or gross income) of the business. It is the % yield to the investor based on the property’s production of income.
Rate of Return
The cleanup of environmentally contaminated property.
Remediation
Regulates generation, transportation, store, treatment and disposal of hazardous waste for active operations.
Resource Conservation and Recovery Act (RCRA)
A type of easement, which implies that the owner through the easement gives another the right to pass over the land or put and maintain a transport route such as needed for utilities or railroads.
Right-of-Way
The variability of investment return. It depends primarily on factors such as market demand, competitive strengths, type of development, construction challenges, regulatory climate and liquidity.
Risk
One party purchases land from a second party and leases it back to the second party. Often, the public sector purchases an asset from a development and then leases it back to the developer. The cash secured by the developer for the sale of the property can be used for redevelopment purposes.
Sale / Lease Backs
Arrangement where a public agency leases a property from one party and then subleases that same property to a noncredit tenant (i.e. farmer’s market)
Sandwich Lease
It focuses on a manageable area (a section of a community) and considers the land use, transportation, environmental and infrastructure needs unique to that portion of the community. It avoids both the generalities of a comprehensive plan and a single-issue, narrow planning outlook.
Sector Plan / Small Area Plan
A comprehensive development strategy that makes efficient use of land, utilizes existing services and infrastructure and promotes a variety of transportation and housing options.
Smart Growth
Development costs, which include professional fees for engineering and architectural services, taxes, interest and other loan related fees, permitting fees, insurance, advertising and promotion. These costs typically include a developer fee or payment for the developer’s professional time.
Soft Costs
Uses that require special review, (i.e. an electric-utility transformer in a residential neighborhood). Typically reviewed by a zoning board.
Special Exception
It’s a limited geographic area, primarily commercial in nature, designated to receive a range of enhanced services to improve the local business climate. This process is managed by an organization of local businesses. It coordinates and directly enacts specific activities and programs, such as marketing / promotion, maintenance, security, policy advocacy, and small-scale capital improvements.
Special Improvement District / Business Improvement District / Business Improvement Zone
Uses allowed by zoning subject to special use permit: churches, theaters, etc. If limited in number, these uses are appropriate for a given zoning classification.
Special Uses
Development that occurs when a facility is built prior to securing a tenant. It provides a marketing tool that can appeal to tenants needing space in the short-term.
Speculative Development
True or False
Contamination, whether real or perceived, is a major reason why many properties are not being used to their highest and best use.
True
List the steps in cleaning up a brownfield site.
Step 1 - Site Assessment an Reuse (Phase I and possibly Phase II Environmental Assessments)
Step 2 - State VCP (voluntary cleanup programs to promote redevelopment of contaminated sites)
Step 3 - Identify Other Interested Parties (collaboration of those with a vested interest in clean up)
Step 4 - Consider Brownfield Exclusion (can project be completed without including the brownfield - i.e. parking lot cap?)
Step 5 - Preliminary Cost Estimates (determines if project is feasible; how project will be funded)
Step 6 - Negotiation and Structure (identifies responsibility for clean-up & liability)
Step 7 - Purchase / Sell (structure the deal either by option or sell; secure financing)
Step 8 - Clean-up (with the goal of minimizing costs subject to state approval, win market acceptance and provide for banker’s comfort)
Step 9 - Monitoring (maintain integrity of the Covenant Not to Sue or No Further Action)
What is the purpose of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA)?
1) Establish a trust fund to pay for remediation (NPL sites only)
2) Provide EPA with enforcement authority to ensure those who caused the pollution pay for the clean-up
EPA supports cleanup and redevelopment by 1) offering technical and financial resources and 2) partnering to protect human health and the environment. What are the 4 areas for their grant assistance?
1) Assessment Grants
2) Cleanup Revolving Loan Funds
3) Cleanup Grants
4) Job-training Grants
A stormwater system that delays the downstream progress of stormwater runoff in a controlled manner, typically by using temporary storage areas and a metered outlet device.
Stormwater Detention
The amount of precipitation on a drainage area that does not escape as runoff. It is the difference b/w total precipitation and total runoff.
Stormwater Retention
When a party (i.e. gov’t) closes a street. A property owner can add the vacated or unused street to his or her existing commercial / residential property, increasing the value and size of the property.
Street Vacation
The process wherein land is subdivided into 2 or more parcels for lease or sale. This process is also referred to as ‘platting’ and the subdivision map is called a ‘plat’ or ‘plat map’.
Subdivision
Exemption or reduction of local taxes for a specified period of time.
Tax Abatement
A mechanism to capture the future tax benefits of real estate improvements to pay the present cost of those improvements. A local jurisdiction does this by freezing property tax assessments at a base year. In future years, all the tax revenue up to the base year assessment continues to go to the taxing jurisdictions (city, county, schools, etc.). However, incremental tax revenue collected from rising property values is allocated to the district through its governing agency.
Tax Increment Financing
A form of tax incentive that allows the recipient to reduce the amount of tax obligation by the credit amount.
Tax Credit
The cost of finishing out the building; these costs include carpeting, lighting, floorboards, etc.
Tenant Improvements
Generally refers to the requirement for the lessee to pay for its share of the property’s taxes, insurance and operating expenses.
Triple Net Lease
Development that tends to offer a combination of entertainment, dining and retail within an appealing pedestrian, often open-air, environment. In addition, these centers usually attract a large number of tourists. 2 key components are cinemas and restaurants.
Urban Entertainment Centers
Modifications to development standards (part of zoning ordinance that deals with measurable requirements for development: height limits, setbacks, seating capacity, etc.) They typically are used to address unique situations related to lot size, shape or topography.
Variances
State programs that address obstacles in developing brownfields, recognizing that public health must coexist with economic development. They promote brownfield redevelopment by integrating issues involving legal liability, technical requirements and economic incentives.
Voluntary Cleanup Program (VCP)
The regulation of use, shape and bulk restrictions on development
Zoning
