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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