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REAL ESTATE DEVELOPMENT BY CDCs: A SEMINAR FOR CDC EXECUTIVES AND SENIOR MANAGERS. Session 1 Scope and Stages of Real Estate Development Basic Analytical Tools March 9, 2012. The dimensions of neighborhood real estate development. USES/TENURE PROPERTY TYPE

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real estate development by cdcs a seminar for cdc executives and senior managers

REAL ESTATE DEVELOPMENT BY CDCs:A SEMINAR FOR CDC EXECUTIVES AND SENIOR MANAGERS

Session 1

Scope and Stages of Real Estate Development

Basic Analytical Tools

March 9, 2012

the dimensions of neighborhood real estate development
The dimensions of neighborhood real estate development

USES/TENURE PROPERTY TYPE

Rental Housing Multi family (apartment) bldg.

Ownership Housing 1-4 family houses

Non-residential (commercial) Commercial/institutional bldg.

land improvement

CONSTRUCTION SCOPE

New construction

Substantial Rehabilitation

Moderate Rehabilitation

the dimensions of neighborhood real estate development1
The dimensions of neighborhood real estate development

USERS/OCCUPANTS

HousingCommercial

Families, neighborhood scale retail

elderly anchor/large retailhomeless light manufacturing,

special needs institutional, office

community facilities

low-income start ups

mixed income established firms

“workforce” non-profit organizations

market rate institutions

the dimensions of neighborhood real estate development2
The dimensions of neighborhood real estate development

COMBINATIONS/HYBRIDS

Mixed use: rental + retail/commercial

New construction + substantial rehab

Co-op housing (rental and homeownership elements)

2-4 family homes (ownership + rental)

Demolition ( existing structure) and new construction ( on vacant land)

Adaptive re-use ( conversion of commercial or institutional buildings to housing)

portfolio and pipeline
Portfolio and Pipeline

SO WHAT???

  • Do the pictures match how the CDC is deploying its resources?
  • Data and presentation useful/necessary for fund-raising and PR
  • If picture of pipeline very different from picture of portfolio suggests some change may be needed in resources and competencies to succeed in pipeline implementation
constructing your cdc s portfolio and pipeline pictures
Constructing your CDC’s portfolio and pipeline pictures
  • Decide on your metric: housing unit equivalent, square feet, constant $ cost
  • On a spreadsheet list all of the projects: For each Dimension you want to represent create a column for each subcategory
  • Allocate your metrics of each project across all of the sub-categories in each dimension you are “mapping”
the life cycle of a real estate development project
The Life Cycle Of A Real Estate Development Project

Stages

Project Selection

Pre-development

Construction

Operation and Management = Asset Management

Re-finance and re-development

lenses for our life cycle journey
Lenses for our Life-Cycle Journey

Tasks that have to be accomplished

Necessary personnel: CDC staff, professional consultants

Funders, lenders and regulators

Interdepartmental issues and impacts within the CDC

the organization team working relationships
The Organization TeamWorking Relationships

Who is responsible for

Advising

Doing

Reviewing

Supervising

Deciding

the organization team working relationships1
The Organization TeamWorking Relationships

What to do now (or every so often)?

The Four “C”s

Construct/Craft/Create

Clarify

Codify

Carry on

overview of afternoon session
Overview of Afternoon Session
  • Basic analytic tools in real estate development
    • Development Budget
    • Operating Pro forma
    • Financing Gap Analysis
  • Affordability and market concepts
    • Housing affordability and affordable housing
development budget

DEVELOPMENT BUDGET

USES

Acquisition Property purchase carrying costs*

Hard Costs construction cost construction contingency

environmental remediation*

Soft Costs

Physical development: A&E geo-technical traffic studies

historic consultant environmental assessment construction inspection

Financing financing fees pre-development loan interest

construction loan interest other interest lender legal costs

Property appraisal operating expenses during development*, survey

Occupancy relocation marketing and rent-up lease up reserve*

Everything project attorney development consultant

*Use category may vary

development budget1
DEVELOPMENT BUDGET

USES (continued)

Capitalized reserves

Developer Overhead and Fee

Overhead = project management=developer’s project management cost

Fee = Profit

development budget2
DEVELOPMENT BUDGET

Sources

Equity

Financial Equity

By Developer or investor(s); requires a financial return

“Social” Equity

Grants, contributions; often converted to another Source type

Debt

Serviceable debt

Soft debt

operating pro forma
OPERATING PRO FORMA

Definitions

Projected operating budget generally for 10-20 years

“The term pro forma is used in the financial sense to denote financial projections or assumptions. In a business start-up budget, for example, the income and expenses must be assumed, since there is no previous record to use to determine what these numbers should be. A pro forma P&L is thus an estimate, not actual numbers based on past results.”

From About.com

operating pro forma cont1
OPERATING PRO FORMA (CONT.)

Calculating the Debt

NET OPERATING INCOME $82,250

Debt Service Coverage Ratio

1.15

Available to Support Debt $71,522

Mortgage amount Excel =PV function

$959,102

financing gap analysis connects development budget and operating pro forma
FINANCING GAP ANALYSISConnectsDevelopment Budget and Operating Pro Forma

Operating Pro Forma

Income

EGI…………………………….………$ IN,EGI

Disbursements

Operating Expenses………….($EE,EEE)

Reserve Deposits……………...($ R,PLC)

NOI $NN,NNN

DSCR 1.xx

Available for DS $DD,DDD

Supportable Debt/

Mortgage $MMM,MMM

Cash Flow: $NN,NNN - $DD,DDD

Development Budget

Uses

Acquisition

Hard Costs

Soft Costs

Capitalized Reserves

Dvlpr. OH and Fee ________

TOTAL USES $U,UUU,UUU

Sources

Financial Equity ?a? [gap]

Social Equity ?b? [gap]

Serviceable Debt $MMM,MMM

Soft Debt ?c? [gap]

Gap = $U,UUU,UUU - $MMM,MMM

financing gap not gaap
FINANCING GAP (not GAAP)

Development budgets have LOTS of assumptions that need to be continually and regularly updated as you go through the development process to make sure you’re on track

The fundamental question is:

Do the sources of funds equal the uses of funds?

If not, you have a gap– and a problem…

underwriting

Underwriting

the process that a large financial service provider (bank, insurer, investment house tax credit investor/syndciator) uses to assess the eligibility of a customer to receive their products (equity capital, insurance, mortgage or credit).

the art of project underwriting
The art of project underwriting

Real estate deal underwriting is about analyzing the likelihood of success vs. risk of failure for a project- it’shoping for the best, and preparing for the worst

Anyone who agrees to lend you $$ to develop a real estate project wants to be sure of two key facts:

  • Is there confidence that you can deliver on what you promise? Do you have a team that knows what they’re doing– both in the short-term development phase, and in long-term operations? Can you demonstrate this?
  • Does your organization have the financial and organizational capacity to respond if one or more bad things happen?
affordability and markets
Affordability and Markets
  • The financing gap in community development projects is largely filled with Gap Subsidy
  • Gap Subsidy: public funding required to cover all development costs that cannot be covered by (i) financially driven serviceable debt and (ii) equity receiving a return…even if the rents and returns are dictated by a particular sub-market (such as low income families)
  • Affordability subsidy is provided to households that are outside of the market that gap subsidy is addressing
  • Public financing programs targeted to specific income groups are typically gap subsidies rather than affordability subsidies.
affordable housing who is it for
Affordable Housing: Who is it for?

Some terms and definitions

  • Very Low Income: Household with income at or below 50 percent of the Area Median Family Income Area Median Income AMI Median Family Income MFI
  • Extremely Low Income ( ELI) Household with income at or below 30 percent of the Area Median Family Income – often characterized as homeless or at risk of homelessness
  • Tax Credit Rents: Rents calculated to be affordable to either Very Low Income Families or household with income at or below 60 percent of AMI.
  • Fair Market Rents (FMR):Maximum rent that a housing authority or other administrator of Section 8 vouchers may offer a landlord in a particular city or metropolitan area.
  • Low Income ( formerly “moderate income”) Households with income between 50 ( sometimes 60) percent and 80 percent of AMI. [not widely used at current time] Primarily for affordable homeownership