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Real Estate Development Modeling Basics


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Learn the fundamentals of real estate financial modeling for development transactions.

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Real Estate Development Modeling Basics

  1. 1. Real Estate Development Modeling Basics Real Estate Financial Modeling
  2. 2. Goals 1. Build your confidence in your modeling capabilities 2. Enable you to analyze potential investments better 3. Increase your credibility with potential partners, lenders and investors 4. Make you more knowledgeable and valuable as a student or real estate professional
  3. 3. What is Financial Modeling? Forecasting of future financial outcomes based on current assumptions .
  4. 4. “ Cardinal Rules” of Financial Modeling <ul><li>Garbage in, garbage out </li></ul><ul><li>Do your assumptions have current and reliable bases? </li></ul><ul><li>2. Annotate as much as you can bear ( Alt+I+M ) </li></ul><ul><li>Change is the only constant – keep a running record </li></ul><ul><li>3. Learn and use keyboard shortcuts </li></ul><ul><li>4. Save multiple copies of all models </li></ul><ul><li>5. Always sanity check your outputs </li></ul><ul><li>Ask yourself out loud: Do my numbers make sense? </li></ul><ul><li>6. &quot;Pay now or pay later&quot; </li></ul>
  5. 5. Modeling Fundamentals
  6. 6. Modeling Fundamentals
  7. 7. Modeling Fundamentals
  8. 8. What Makes Ground-Up Development Different?
  9. 9. So Why Bother Developing? <ul><li>Shortage of high-quality real estate </li></ul><ul><li>2. Capital seeking long-term investment opportunities </li></ul><ul><li>3. Ability to spur economic and neighborhood development </li></ul><ul><li>4. You can create and reap a lot of value </li></ul><ul><li>It's fun and you can put your thumbprint on the landscape </li></ul>
  10. 10. Development Project Timeline – Office Tower with Below-Grade Parking
  11. 11. Development Pro-Forma Components <ul><li>Sources and Uses </li></ul><ul><ul><li>Hard Cost Bell Curve Lookup Table </li></ul></ul><ul><li>2. Cash Flow and Returns </li></ul><ul><li>3. Stabilized Net Operating Income/Capitalized Value </li></ul><ul><li>4. Supporting sheets for the above </li></ul>
  12. 12. Sources and Uses – Uses are Input First
  13. 13. Land and Transfer Costs
  14. 14. Land and Transfer Costs Push Closing out as far into the future as possible (unless you cannot get building permits as the land’s “Contract Purchaser”)
  15. 15. Hard Costs <ul><li>Generally modeled as a bell curve. These don't start until you have a building permit in </li></ul><ul><li>hand and you have put a shovel in the ground. </li></ul><ul><li>Items, in rough chronological order: </li></ul><ul><ul><li>Utilities </li></ul></ul><ul><ul><li>Excavation </li></ul></ul><ul><ul><li>Environmental Cleanup/Abatement </li></ul></ul><ul><ul><li>Foundation </li></ul></ul><ul><ul><li>Underground Parking Structure </li></ul></ul><ul><ul><li>Tower </li></ul></ul><ul><ul><li>Skin and Windows </li></ul></ul><ul><ul><li>Public Spaces </li></ul></ul><ul><ul><li>Tenant Improvements (modeled based on lease-up assumptions; will cause a plateau and a spike at the end) </li></ul></ul><ul><ul><li>Contingency (10% excluding Tenant Improvements) </li></ul></ul>
  16. 16. Hard Costs
  17. 17. Soft Costs <ul><li>Incurred throughout the entire project. </li></ul><ul><ul><li>Developer Fee (potentially not until construction) </li></ul></ul><ul><ul><li>Equity Fees </li></ul></ul><ul><ul><li>Accounting, Insurance, Letter of Credit, Bonding </li></ul></ul><ul><ul><li>Real Estate Taxes </li></ul></ul><ul><ul><li>Impact Taxes/Proffers </li></ul></ul><ul><ul><li>Utility Hookup and Usage Fees </li></ul></ul><ul><ul><li>Legal </li></ul></ul><ul><ul><li>Design </li></ul></ul><ul><ul><li>Consultants, Testing and Inspection </li></ul></ul><ul><ul><li>Permit fees </li></ul></ul><ul><ul><li>Marketing and Miscellaneous </li></ul></ul><ul><ul><li>Leasing Commissions </li></ul></ul><ul><ul><li>Contingency (10%) </li></ul></ul>
  18. 18. Soft Costs
  19. 19. Hard Costs vs. Soft Costs
  20. 20. Furniture, Fixtures & Equipment (FF&E) Near the very end of construction. Remember, we are dealing with physical space and logistics.
  21. 21. Furniture, Fixtures & Equipment (FF&E)
  22. 22. Financing Costs <ul><li>Typical loans associated with development, in order of funding: </li></ul><ul><ul><li>Land Loan </li></ul></ul><ul><ul><li>Mezzanine Construction Loan </li></ul></ul><ul><ul><li>Senior Construction Loan </li></ul></ul><ul><ul><li>Permanent Take-Out Loan </li></ul></ul><ul><li>Once your equity is all invested , you draw down your loan(s). Costs include: </li></ul><ul><ul><li>Broker Fees </li></ul></ul><ul><ul><li>Loan Fees and Origination Costs (Points) </li></ul></ul><ul><ul><li>Loan Interest </li></ul></ul><ul><ul><li>Mortgage Recording Taxes </li></ul></ul><ul><ul><li>Lender Expenses/Legal </li></ul></ul><ul><ul><li>Capitalized Interest Through Certificate of Occupancy </li></ul></ul><ul><ul><li>Operating Deficit </li></ul></ul>
  23. 23. Financing Costs
  24. 24. Total Development Costs (i.e., Total Uses of Funds)
  25. 25. Total Development Costs (i.e., Total Uses of Funds)