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Financing Project

Development

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Financing Project DevelopmentFinancing Project Development

Developer Challenges

National and local economies

Competition among developers

Changes in tenant preferences

Project Development

Finance land acquisition with intent of

developing it and selling it

Development is impacted by the regulatory

environment

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Financing Project DevelopmentFinancing Project Development

Permitting

Application

Site

Location

Preliminary Design

Zoning

If in compliance, then permitted If not in compliance, then appeals process

City planning department input

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Financing Project DevelopmentFinancing Project Development

Developer Phases

Land acquisition

Development and construction

Completion and occupancy

Management after completion

Eventual Sale

Economic success and value creation

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Developer Business StrategiesDeveloper Business Strategies

Develop, own, manage, and lease projectsfor many years

Leasing and management are major

components of the business model

Develop, own, lease-up to normaloccupancy, then sell

Buyers: insurance companies, syndicates

Sometimes continue to manage the propertyafter sale

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Developer Business StrategiesDeveloper Business Strategies

Develop land and buildings in a master-

planned development

Business parks and industrial parks

Some build to suit a single tenant

Some developers specialize in specific

development phases

Most developers will consider a serious

offer to purchase at any time

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Risks & FeasibilityRisks & Feasibility

Risk begins with acquisition

Seasoned Property

Leasing Prior to Completion Demand Factors

Vacancy rates, rent levels, predevelopment

leasing commitments Post-development competition

What do end users want?

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Risks & FeasibilityRisks & Feasibility

Project Risks

Site Location

Value increases with tenant perception

More valuable sites result in higher-qualitydevelopments

Density increases with value perception

Specific Component Risk How design features and amenities are

valued by potential tenants

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Project Development FinancingProject Development Financing

Equity investment

Developer

Partnership

Construction (Interim) loan

Appraised value of completed development

Hard costs

Materials and labor Soft costs

Planning, leasing and management costs

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Project Development FinancingProject Development Financing

Loan Structures

Short-term financing if the intent is to sell the

property after completion and lease-up

Permanent loan and construction loan if the

developer retains ownership as part of their

business model

Construction financing followed by extendedfinancing if the developer might own the

property for a short while

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Project Development FinancingProject Development Financing

Complications

In multi-loan financing, a permanent loan

must be in place first.

If a sale is planned, market conditions may

require a committed buyer in place.

Excess speculative and open-ended lending

may lead to overbuilding

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Lender RequirementsLender Requirements

Loan submission information

Detailed description of development andmarket analysis

Requirements become complicated whenmultiple lenders are needed

Permanent commitment Binding agreement between developer and

permanent lender

Permanent lender take out commitmenttakes out the construction lender

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Lender RequirementsLender Requirements

Standby commitments

Binding agreement, but low expectation of

being used

Used when:

Developer does not want to pay fees for apermanent loan

Expectation of securing a better permanent loanlater

Plans to sell the project and permanent loan is notneeded

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Lender RequirementsLender Requirements

Permanent lender common contingencies:

Time limit to acquire a construction loan

Completion data for construction

Minimum leasing requirements and approval

of main leases

Gap financing provision

Expiration date

Approval of design and material changes

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Lender RequirementsLender Requirements

Construction or Interim Loan

Usually local lenders who

Know the local market

Monitor construction progress

Disburse funds as phases are completed

Mini perm loan

Monthly draw method

Floating interest rate

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Lender RequirementsLender Requirements

Closing the Interim Loan

Assignment of commitment letter

Create obligation between interim and permanentlenders

Triparty buy-sell agreement

Create obligation between all three parties

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Lender RequirementsLender Requirements

Permanent Loan Closing

Lender confirms that contingencies are met

Nonrecourse Clause Restrict lenders claim in default

Increase emphasis on property quality

Credit enhancements

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Project CostsProject Costs

Cost per square foot of gross building area

Compare with comparable property

Loans to cover improvement costs only 20% equity investment

Holdbacks

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ProfitabilityProfitability

Before-Tax Cash Flows and After-Tax

Cash Flows

Net Present Value Internal Rate of Return

Sensitivity Analysis

Feasibility Analysis