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REAL ESTATE DEVELOPMENT BY CDCs:  A SEMINAR FOR CDC EXECUTIVES AND SENIOR MANAGERS. Session 3 Pre-development : Putting the Project Together April 13, 2012. Definition. Pre-development: all of the work that gets done before building happens “pre-development” = “pre-construction”

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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 3

Pre-development : Putting the Project Together

April 13, 2012

definition
Definition

Pre-development: all of the work that gets done before building happens

“pre-development” = “pre-construction”

This is Stage 2 of a real estate development

overview what gets done in this stage
Overview: What gets done in this stage?
  • Site control property acquisition
  • Design: concept precise details for builder
  • Financing and funding:

Acquisition/predevelopment  construction  permanent: (debt and equity)

  • Permitting, certification:

community review Zoning; use licenses; architectural barriers; affirmative fair housing marketing

  • Poised to build:

bidding, contractor selection, construction period financial closings

assembling the development team
Assembling the Development Team

Casting the Leads

CDC/Developer: Who will manage the project?

Development Consultant:

Is one needed?

Defacto project manager or focused specialist?

Architect

Fundamental questions

Due diligence in selection/hiring

Project Attorney

Partners?

assembling the development team1
Assembling the Development Team

The Supporting Cast

Engineering and Design crew

Environmental/ LSP; lead (paint) testing, asbestos testing/removal

Geotechnical consultant

Traffic and Transportation consultant, [civil engineer]

Greening and sustainability: engineers and energy modeling

Cost Estimator

Market and Value crew

Appraiser

Market study consultant

Marketing consultant/broker

assembling the development team2
Assembling the Development Team

Guest Appearances (Specialists):

Relocation

Historic Preservation

Leads in the Sequel

Property Manager

General Contractor

Pre-development cameos?

predevelopment work putting the project together
Predevelopment WorkPutting the Project Together

Site Control

Key terms of a purchase agreement

Price

Timing

Deposits

Contingencies

Form of site control: P&S vs Option vs. Lease

Who negotiates?

Bargain sales – an overlooked approach for non-profits

putting the project together
Putting the Project Together

Design

The multitude of architect responsibilities

Stages: [conceptual design] schematic drawingsdesign developmentconstruction contract documents

Design review: neighbors, civic organizations, public agencies, funders

Expanding scope of design: green design, universal design, Healthy Homes;

Contract documents, value engineering

slide10

Market analysis

Must build on feasibility-project selection analysis

Where/how to get market information

Residential market

Retail, office, commercial

Independent market analyst/consultant

Essential community, neighborhood issues to include in analysis:

amenities and services; crime rate; traffic and transportation access; planned major public or private investment… and timing of same.

predevelopment market analysis
Predevelopment: Market Analysis

Key issues for analysis and research

Rental Housing: Vacancy and turnover rate in nearby LIHTC projects; Section 8 voucher utilization in nearby LIHTC projects; market rents in typical nearby investor-owned properties… and in recnelty built/renovated properties

Homeownership: sale prices in very immediate area of the proposed project; market analysis for different property types (single family stand, alone; side by side; 2- and 3 family homes w rental units; condominiums); proximity and prevalence of foreclosed or at-risk of foreclosure properties.

Retail: Retail market analysis current? Leakage analysis; how project could attract businesses to ”plug” leakage

Other Commercial: market area much larger than neighborhood. Are there specific types of businesses, industries targeted? Industry-specific market analysis?

environmental review
Environmental Review

Environmental impacts and environmental hazards

Stages:

Environmental Assessment (NEPA) and “choice limiting actions”

21E Phase I ESA

21E Phase 2 ESA

Other assessments of hazards and contaminants

Remediation plans

Funding and Insurance

community review process
Community [review] process

Scope and Participants

Who will you meet with? When and how often?

What will they want to review?

Who manages the process?

CDC’s posture

Role of community organizing staff, Board, RE Committee

Politicians and bureaucrats

NIMBYism

Community review process and “official actions” and approvals

permitting
Permitting

Public approvals and permits

Planning Board/Redevelopment Agency approvals

Example: Boston Article 80

Relationship to zoning

Certifications

LEED or not?

zoning
Zoning

Scope of zoning

maps of zones/districts

permitted uses in zones

physical characteristics of buildings on a site:

Density ( FAR), height, setbacks from parcel boundaries

off-street parking

Types of Zoning Relief

Variances

Conditional Use Permits

zoning1
Zoning

The four fundamental facts about zoning variances

The only legal basis for a variance: unique, peculiar topographical issues of the site

If a ZBA- granted variance is challenged in court the variance is very likely to be overturned or voided

There is a short and firm time window for challenging a zoning variance

Only the owner(s) of property within 300 feet of the property issued a variance have the legal right to challenge a variance.

Ways around well organized zoning opposition

PDAs and chapter 121A

Zoning amendment or map change

contractor selection
Contractor Selection

How and When

Forms of general construction contracts

Competitive bidding requirements

Role of architect and development consultant

Construction labor costs and workers

Davis-Bacon, building trades unions, local/minority/women workers

Strategies on over-budget bids

Construction contract provisions to protect owner

Change order safeguards

Time for completion penalties and bonuses

Extended warranties

financing
FINANCING

Two big pre-development tasks

Arrange the permanent financing for the project*

Finance the pre-development work

….and a smaller one: line up construction financing*

*unless it is for homeownership development, in which case…

Important concepts and terms

Security Collateral

LTV = Loan-to-Value ratio

Recourse

Priority and Subordination

pre development financing
Pre-development Financing

Very limited number of sources

LISC; CEDAC; NeighborWorks Capital

CDC’s internal funds, NeighborWorks capital grants

Working capital lines of credit

Negotiating loan size and terms

Possible/typical security, recourse and priority terms from lenders

Pre-development budget, milestones, and cash flow

acquisition financing
Acquisition Financing

How it differs from pre-development financing

Acquisition lenders

A few more CD lenders than offer predevelopment loans

+

Banks, seller financing

Purchase Price, Appraised Value, Loan Amount

Strategies for LTV gap

Loan interest:

financed (by which loan?),

deferred to construction loan closing?

permanent financing the sources
Permanent financing (the “Sources”)

Assembling permanent financing is tied to almost every pre-development activity and task.

A community development project could have between 3 and 15 sources of financing; 7-8 is very typical

  • Securing Senior Debt (“Lead Lender”) important but not the most challenging, time consuming, or risk-laden task
  • Typically over 50 percent of a project's financing will be equity or grants… most of which will be secured through highly competitive marathons or “beauty contests” and not necessarily awarded primarily on the strengths/merits of of the project.
construction loan
Construction Loan

You’re not finished with pre-development until this is in place

The commitments with all conditions of all permanent funding sources must be in place to secure and close a construction loan

Shopping for construction lender and construction loan terms: come to Session 4

pre development process variations
Pre-development process variations

Affordable Rental Housing: much more routinized and prescribed process; much more shared information about project proposals among lenders and funders; greater difficulty introducing new players and new ways of putting a deal together Proceed very much driven by the subsidy funding cycle.

Economic Development/ Commercial: Funding and financing – pre-development, acquisition and permanent -- difficult to assemble. Lingering view among funders that neighborhood locations and non-profit developers make these infeasible, or at least very risky projects. Initial feasibility analysis needs to be very strong to overcome these views. Pre-development needs to build on a very solid feassibility stage analysis.

pre development process variations1
Pre-development process variations

Community facilities: Pre-development loans may be especially hard to secure and therefore capital campaign proceeds may need to be used to cover pre-development period expenses.

Homeownership development: It’s been > 4 years since homeownership development has been approved for subsidy in Mass. and will probably be several more years before this happens. When market and the CD funders are again ready to support new homeownership, pre-development process, systems, protocols relationships will need to be re-invented.