Real Estate Finance For Non Real Estate Professionals2005


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

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Real Estate Finance For Non Real Estate Professionals2005

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