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High level overview of how commercial real estate projects are financed.
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SEPTEMBER 28, 2005
Real Estate Finance 101
SEPTEMBER 28, 2005
Real Estate Finance 101
Basic Theory: Creating Value
Elementary Theory: Time, Quality, Money
Advanced Theory: Sources of Capital and “The Developer’s Creed”
SEPTEMBER 28, 2005
Early Construction Loan
SEPTEMBER 28, 2005
Early Construction Loan: Draw Meeting
SEPTEMBER 28, 2005
Creating Value
• Create Value by finding a need in the market
• Create cash flows through SALES or through RENTS
• Create Value by Product Types:– Office– Retail– Residential– Special Purpose (Government, Religious, Single
Purpose structures)
SEPTEMBER 28, 2005
Time, Quality, Money
Time the Market (who will we compete with?)
Sales Period (how long will be renting or selling?)
Time to develop the Property• Entitlement• Design• Construction• Marketing and Sales
SEPTEMBER 28, 2005
Quality
Quality• To meet the clients needs and market
demands• Special tenant needs for IT, HVAC, structural,
LEED, etc.
• To satisfy generic building, life safety, energy, accessibility codes, and industry standards
for quality
SEPTEMBER 28, 2005
Money
Sources:• Equity• Debt
Construction Period (Short Term) Funds
Term Period (Long Term) Funds
SEPTEMBER 28, 2005
Time, Quality, Money Analysis
Impacts of Quality and Time on Money• Right Product for the Market (design)• Inflation (Cost of construction, money)• Market appetite for Real Estate as alternative
investment to Stock Market combined with low interest rates
• Geo Political (Oil Crisis, Desert Storm, 9/11, Second Gulf War)
• Acts of God (Hurricane Katrina)• Political (Evanston deal: 28 months for entitlement)
SEPTEMBER 28, 2005
Sources of Capital
Equity – First Money at Risk• Individual investors• Syndicates / Partnerships• Funds (Pensions, Endowments)• Institutions (Life companies, REITS)• Commercial Equity Sources• Mezzanine Lenders
SEPTEMBER 28, 2005
Sources of Capital
Debt – Next level of financial risk• Banks (shareholders)• Life Companies (policy holders)• Pensions funds (pensioners)• Commercial Credit Companies (shareholders)• Bonds issued by Governments, Industry, and
Institutions (museums, schools) (investors)
SEPTEMBER 28, 2005
Developer’s Creed
• A dollar borrowed is a dollar earned.
• A dollar renewed is a dollar saved.
• A dollar repaid is lost forever.
SEPTEMBER 28, 2005
Review Project Budget for Construction Loan
Sources and Uses Statement
• Accounts for all project costs
• Is accurate for the project and contemplated time through sell out or lease up
• Spreading this will create a Project Cash Flow schedule (a.k.a. Pro Forma)
SEPTEMBER 28, 2005
Review Bank Underwriting Criteria
Property Types readily Financed• Homes• Apartments• Condos• Offices (with tenants)• Warehouses• Owner-occupied commercial buildings including
special purpose
SEPTEMBER 28, 2005
Review Bank Underwriting Criteria
Commercial Property Types needing special underwriting:
• Hotels• Nursing Homes• Single purpose buildings (freezers, auditoriums,
religious structures)• Water Parks• Marinas• Country clubs
SEPTEMBER 28, 2005
Review Bank Underwriting Criteria
• Internal Loan Limits• Concept of Loan to Value Limits (equity)• Debt Coverage Ratio (ability to service debt)
• Development Risk• Repayment Risk / Market Risk• Operating Risk• Development Team Risk
SEPTEMBER 28, 2005
Review Bank Underwriting Criteria
Other factors banks look at:• Capital Markets (interest rate sensitivity, investor
appetite for real estate, investor appetite for this product)
• Developer’s motivation to do the deal
• Project design
• Construction Risk
SEPTEMBER 28, 2005
Real Estate Finance 101
TQM
Equity and Debt
Sources and Uses
What Banks and Developers must consider Questions?
SEPTEMBER 28, 2005