Representing the Real Estate Developer (Series: REAL ESTATE LAW DUMBED DOWN)

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  1. 1. Representing the Real Estate Developer SERIES: REAL ESTATE LAW DUMBED DOWN Premiere Date: April 20, 2017 This webinar is sponsored by: EisnerAmper 1
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  5. 5. 5 MODERATOR Tal Izraeli Levenfeld Pearlstein, Chicago PANELISTS Michael Hobbs PahRoo Appraisal & Consultancy, Chicago Max Kanter Bronson & Kahn, Chicago MichaelWeis Williams, Bax & Saltzman, Chicago MEET THE FACULTY
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  7. 7. 7 ABOUT THIS WEBINAR This webinar provides a broad overview of the legal and business basics of real estate development, both in the construction and development context. Among the issues covered are: mitigation of risks, different types of developments, due diligence, land acquisition, financing, due diligence and contract considerations.
  8. 8. 8 ABOUT THIS SERIES Whether you are a direct owner or investor in real estate, or a business owner who requires a lease or ownership of a property to house your business, it is a good idea to have some basic knowledge of real estate law. Likewise, if you are general practitioner, you must be able to issue spot and respond to general questions your clients may have. Either way, this webinar series provides important basic knowledge and insight into the most fundamental and common of real estate transactions. Each episode is delivered in Plain English understandable to business owners and executives without much background in these areas. Yet, each episode is proven to be valuable to seasoned professionals. As with all Financial PoiseWebinars, each episode in the series brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. And, as with all Financial PoiseWebinars, each episode in the series is designed to be viewed independently of the other episodes, so that participants will enhance their knowledge of this area whether they attend one, some, or all of the episodes.
  9. 9. 9 EPISODES IN THIS SERIES EPISODE #1 Representing the Commercial Landlord 2/2/2017 EPISODE #2 The Landlord/Leasing Relationship 2/13/2017 EPISODE #3 Representing the CommercialTenant 3/9/2017 EPISODE #4 Representing the Real Estate Developer 4/20/2017 EPISODE #5 Representing Buyers and Sellers of 5/18/2017 Commercial Real Property Dates shown are premiere dates;all webinars will be available on demand after premiere date
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  11. 11. Different Types of Real Estate Development Build-to-Suit: is where a developer develops a property to suit a specific tenant. Typically, this is done with a lease in place that specifies the terms and conditions for the development. Tenants for build to-suits are typically regarded as high credit tenants. The credit of the tenant is what typically makes these deals desirable for both developers and lenders. Speculative (or Spec): is a project where a developer has few if any lease commitments before commencing construction. A spec project is often done because a developer recognizes a specific real estate need (i.e., retail, office, industrial) that is not being served in an area. As the spec project proceeds, the expectation is that leasing commitments will be found. 11
  12. 12. Third Parties Involved In Typical Real Estate Development Architects and Engineers Lender (there is an acquisition loan, construction loan and take out/permanent loan, this may be the same lender or three separate lenders depending on the project) Title Company Surveyor General Contractor Zoning and Land Use Counsel and Consultants Environmental Consultant Tenant(s) 12
  13. 13. Stages of Real Estate Development The stages listed below are common in most development projects, it is also common that many stages must be addressed simultaneously and often out of sequence. Gaining control of the Property Government approvals, zoning, entitlements and incentives Capitalizing and forming the project (both equity and debt) Securing acquisition and construction financing (sometimes same lender) 13
  14. 14. Stages of Real Estate Development (Contd) Closing on land acquisition Construction agreements must be entered into with contractors Design and construct the project Negotiate lease(s) with tenant(s) Complete construction; Obtain conventional financing for stabilized project 14
  15. 15. Typical Contingencies in Real Estate Development The contingencies below are typical in most development deals and should be incorporated to the extent applicable and possible into the purchase and sale agreement. Zoning and municipal approvals Due Diligence (including environmental, engineering, title and survey, infrastructure and utilities) Financing (typically this is obtained during due diligence period) Leasing (typically commitments and leases are negotiated during due diligence period) Equity for Development (typically during due diligence period) 15
  16. 16. Financing/Lender Requirements Most development loans are for both the initial land acquisition and construction (sometimes these are separate loans). Lenders typically look at the following factors when underwriting a development loan: Credit of the guarantor(s) Track record of the sponsor/borrower Business plan for the development (in a spec deal) Credit of the tenant or tenants (i.e., in a build-to-suit) and leases to the extent they are available Timing to execute plan 16
  17. 17. Build to-Suit Risks Credit of tenant (may change prior to completion of project) Lease contingencies (i.e., zoning or approvals required from municipality) in lease may give the tenant an out prior to the completion of the project. Business environment may change during construction process. 17
  18. 18. Speculative Development Risks Securing tenants and negotiating and finalizing leases. Financing the project (both debt and equity) Municipal approvals and zoning Execution of developers business plan. 18
  19. 19. Alternatives to Gaining Control of the Land It is often the case that a developer would like to lock up the land while he or she assesses the viability of the project and takes (at least) the initial steps in executing its business plan. The key most often is to minimize the developers exposure for as long as possible while the various contingencies for the project are addressed. One way to do this is to build all of the contingencies into the purchase and sale agreement while minimizing the developers at risk capital (i.e., the developer would only be out the costs of its due diligence but all earnest money to lock up the property should be refundable). Another way to tie up the land for a developer is by using an option. An option can be a simple option to purchase land or in the form of a right of first refusal or right or first offer. If a form of option is used, it is important to have counsel structure the option in a way that conforms to state law and, in general, prepare a memorandum of the option to record against the property so that third parties have notice of the option. 19
  20. 20. Entity Considerations in Real Estate Development The type of entity utilized by the developer is often dictated by the developers expectations for the project. Typically, this entails an entity that limits the developers personal liability, allows the developer to retain decision making control, allows for outside investors if that is what the developer seeks, and of course, is tax efficient. There are many decisions that need to be made during this stage that are project specific. It is however, imperative that the documents which create the entity must also conform to the requirements of the lender(s), investors and take into consideration the exit plan of the developer. 20
  21. 21. Vertical Subdivision Typically, a developer subdivides a large parcel of land into smaller parcels (i.e., a horizontal subdivision). A vertical subdivision is the same concept applied to lots which are located on top of one another (i.e., a multi-story building). This structure is an alternative to a condominium structure. Depending on the project and the developers business plan, a vertical subdivision may be an alternative structure which allows portions of the same building to be owned (and possibly developed) by different parties without having to deal with governance issues common in condominium/association structures . The governing document is typically a subdivision declaration which creates the various easements, obligations and restrictions which apply to the building. When properly done, the vertical subdivision enables multiple parties to own separate portions of the same building and in doing so unlock additional value in each portion of the building. 21
  22. 22. Loan Considerations for Real Estate Developers Financing options will vary depending on the type of development (build-to-suit vs. speculative). Since the property will not produce any income for a period of time, the lender must be very confident in both the developer and the business plan for the development. For construction loan, in addition to securing the real estate and a full payment guaranty, lenders typically require a completion guaranty. The guaranties are typically highly negotiated however, it is more common than not that until a property is stabilized, the guarantors exposure is going to be higher in a construction loan. Accordingly, it is important to clearly identify the obligations of the guarantor(s). Acquisition and construction loans must also conform to the exit plan of the developer. In other words, once the project is stabilized and more financing options presumably exist, the construction loan documents must allow for repayment of the loan without significant fees and costs. 22
  23. 23. Recourse Guaranty Since construction loans are riskier, it is common for guaranties to be full recourse during t


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