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Real Estate Finance For Non Real Estate Professionals2005


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High level overview of how commercial real estate projects are financed.

High level overview of how commercial real estate projects are financed.

Published in: Economy & Finance

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  • 1. Real Estate Finance 101
  • 2. Real Estate Finance 101
    • Basic Theory: Creating Value
    • Elementary Theory: Time, Quality, Money
    • Advanced Theory: Sources of Capital and “The Developer’s Creed”
  • 3. Early Construction Loan
  • 4. Early Construction Loan: Draw Meeting
  • 5. 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)
  • 6. 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
  • 7. 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
  • 8. Money
    • Sources:
    • Equity
    • Debt
    • Construction Period (Short Term) Funds
    • Term Period (Long Term) Funds
  • 9. 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)
  • 10. Sources of Capital
    • Equity – First Money at Risk
    • Individual investors
    • Syndicates / Partnerships
    • Funds (Pensions, Endowments)
    • Institutions (Life companies, REITS)
    • Commercial Equity Sources
    • Mezzanine Lenders
  • 11. 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)
  • 12. Developer’s Creed
    • A dollar borrowed is a dollar earned.
    • A dollar renewed is a dollar saved.
    • A dollar repaid is lost forever.
  • 13. 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)
  • 14. Review Bank Underwriting Criteria
    • Property Types readily Financed
    • Homes
    • Apartments
    • Condos
    • Offices (with tenants)
    • Warehouses
    • Owner-occupied commercial buildings including special purpose
  • 15. 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
  • 16. 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
  • 17. 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
  • 18. Real Estate Finance 101
    • TQM
    • Equity and Debt
    • Sources and Uses
    • What Banks and Developers must consider
  • 19.