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Real Estate Development Financial Feasibility
The document outlines the real estate development process, emphasizing financial feasibility, market research, and project execution stages. Key components include concept development, construction, and management, alongside considerations for risk and investment return. It also highlights the need for thorough planning, legal due diligence, and collaboration among stakeholders to ensure project success.
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Real Estate Development Financial Feasibility
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- 2. Ploutus Advisors, LLC1 DEVELOPMENT PROCESS
- 3. THE DEVELOPMENT ECOSYSTEM PloutusAdvisors, LLC 2Source: Graaskamp’s Real Estate Process
- 4. THE DEVELOPMENT MODEL PloutusAdvisors, LLC 3 Pre-Development • Concept, Refinement, Due Diligence Control • Contract Negotiation, Formal Commitment Development • Construction, Completion, Opening Management • Property, Asset, Portfolio
- 5. THE DEVELOPMENT PROCESS PloutusAdvisors, LLC 4 Planning / Design Construction Operations Approvals Financing Marketing & Leasing 9 to 12 months 30 to 36 months SIMULTANEOUS PROCESSES Source: Joseph O”Connor; ICFA
- 6. DEVELOPMENT FLOWCHART Ploutus Advisors,LLC 5 Project Concept Site Selection Research Properties Land Purchase Offer Site Due Diligence Close Land Preliminary ProForma Project Defn. Architect Conceptual Design & Est. Schematic Design / Initial GMP Value Eng. & Agency Review Design Dev. / Final GMP Constn. Docs Bid & Subcontract Building Constn. Open for Use Agency EIR Planning & Zoning Approval Eng. Consultants & Studies Market Research Financing Options Bond Equity Debt IdeaPlanning Execution Source: Phelps Development
- 7. RISK VS. VALUE PloutusAdvisors, LLC 6 HIGH Property Value Low Cap Rate Low Risk LOW Property Value High Cap Rate High Risk Return on Investment is inversely correlated to probability of Return of Investment
- 8. REAL ESTATE DEVELOPMENTVS. RISK Ploutus Advisors, LLC 7Source: Geltner, et al, 2007 CumulativeInvestment$ RiskLevel Time Land Optioning, Assemblage, Permitting & Design Construction Lease-Up & Tenant Finishes Operation & Stabilization Land Purchase Shell Completion Development Completion Very High High Moderate Low Cumulative Investment $ Risk Level
- 9. THE DEVELOPMENT CYCLE PloutusAdvisors, LLC 8Source: D. Kohlhepp, Johns Hopkins Land Banking Land Packaging Land Developer Building Developer Building Operator Building Renovation Redevelopment Property Ready to be Redeveloped Developable Land Land with Plans, Approvals & Studies Building, Lots, Pads Fully Constructed Building Building Needing Renovation & Re-Marketing Worn Out Property sells sells sells sells sells sells sells continue continue continue continue continue continue continue STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5 STAGE 6 STAGE 7 BUYERGETS
- 10. 8 CATEGORIES OFTASKS WITHIN EACH STAGE OF DEVELOPMENT Ploutus Advisors, LLC 9 • Feasibility studies, underwriting requirements, contract negotiations, and closing conditionsAcquisition • Financial projections, financial management and projections, and capital formation and accumulationFinancing • Projected economic conditions, market strategy, and advertising and promotion (the marketing mix)Market Studies & Marketing • Environmental studies (Phase I, II, III), LEED ratings, atmospheric surface and sub-surface conditions, cultural and historical conditionsEnvironmental • Federal (EPA, DOD, DOT), state (DES, DOT, Fish & Wildlife), regional & intergovernmental (bay / watershed authority), local (zoning, building code, police & fire), private (easements, boundary disputes, crane agreements) Approvals & Permits • Planning and design, engineering, constructionImprovements • Off-site, on-siteTransportation & Accessibility • Seller’s due diligence, marketing, sales contract, development agreementsDisposition Source: D. Kohlhepp, Johns Hopkins
- 11. Ploutus Advisors, LLC10 ECONOMIC FEASIBILITY
- 12. FINANCIAL FEASIBILITY Ploutus Advisors,LLC 11 ¡ Feasibility is a process where the developer hires consultants to conduct legal due diligence, study the market and conduct marketability research, initiate a design process, initiate the entitlement process, arrange for equity and debt, and evaluate project costs and returns ¡ Project is considered financially feasible when the return on the project (or investment) equals or exceeds the required return of the developer (or investor) ¡ Few measures of financial success: § Internal rate of return (IRR) via discounted cash flow (DCF) analysis § Cash on cash yield § Equity multiple § Debt service coverage (DSCR)
- 13. MARKET RESEARCH Ploutus Advisors,LLC 12 A market study should be conducted to include: ¡ Project description ¡ Site evaluation ¡ Analysis of market area – primary and secondary ¡ Analysis of the area economy ¡ Market demographics ¡ Supply and demand analysis
- 14. ¡ Consists ofall costs necessary to build the project ¡ Fluid number that becomes more precise as the time of construction approaches ¡ Budget should be finalized before construction starts Ploutus Advisors, LLC 13 DEVELOPMENT BUDGET Owner’s Estimate Architect’s / Contractor’s Estimate Contractor’s Bid Construction Contract BUDGET STAGES
- 15. 1. Land andBuilding Costs 2. Site Work 3. Rehabilitation / New Construction 4. Contingency 5. Architect and Engineer Fees 6. Interim Costs Ploutus Advisors, LLC 14 DEVELOPMENT BUDGET COST CATEGORIES 7. Financing Fees and Expenses 8. Soft Costs 9. Syndication Costs 10. Developer’s Fees 11. Project Reserves
- 16. Ploutus Advisors, LLC15 QUICK ANALYSIS
- 17. Ploutus Advisors, LLC16 STATIC ANALYSIS
- 18. Ploutus Advisors, LLC17 STATIC ANALYSIS
- 19. Ploutus Advisors, LLC18 STATIC ANALYSIS
- 20. Ploutus Advisors, LLC19 FRONTDOOR APPROACH (LOAN-TO-COST RATIO APPROACH)
- 21. Ploutus Advisors, LLC20 BACKDOOR APPROACH (DEBT COVER RATIO APPROACH – LENDER’S POINT OF VIEW
- 22. Ploutus Advisors, LLC21 BACKDOOR APPROACH (DEFAULT RATIO APPROACH – DEVELOPER’S POINT OF VIEW
- 23. Ploutus Advisors, LLC22 DETAILED ANALYSIS
- 24. Ploutus Advisors, LLC23 DETAILED DEVELOPMENT BUDGET
- 25. Ploutus Advisors, LLC24 DETAILED DEVELOPMENT BUDGET
- 26. Ploutus Advisors, LLC25 DETAILED DEVELOPMENT BUDGET
- 27. Ploutus Advisors, LLC26 DETAILED DEVELOPMENT BUDGET
- 28. Ploutus Advisors, LLC27 MARKET ASSUMPTIONS
- 29. Ploutus Advisors, LLC28 LAND INFORMATION
- 30. Ploutus Advisors, LLC29 AREA BREAKDOWN
- 31. Ploutus Advisors, LLC30 CAPITALIZATION / SOURCES & USES
- 32. Ploutus Advisors, LLC31 PROFORMA
- 33. Ploutus Advisors, LLC32 PROFORMA
- 34. Ploutus Advisors, LLC33 RESULTS
- 35. Ploutus Advisors, LLC34 SENSITIVITIES
- 36. IN CONCLUSION -THE ROADMAP Ploutus Advisors, LLC 35 Plan Gather Relevant Research Involve All Parties Having A Stake Analyze Make A Qualified Decision
- 37. CONTACT US Ploutus Advisors,LLC 36 Disclaimer: The information contained herein may be subject to errors, omissions, changes in assumptions and, other factors. We do not provide any guarantees, express or implied, and/or make any representations as to the accuracy of the assumptions used and/or other information contained herein. All information contained herein is only for purposes of illustration, and should be independently verified by the user. The analysis represents our interpretation and is NOT intended to replace information received from tax and/or accounting professionals. The user is advised to conduct their own due diligence and consult with their advisors prior to making any decision. For real estate consulting and advisory, please contact: Mr. Adnan Tapia Email: atapia@ploutusadvisors.com Tel: +1.424.274.3561 Ploutus Advisors, LLC 1875 Century Park East, Suite 700 Century City CA 90067 Adnan is a Principal at Ploutus Advisors, LLC; a boutique real estate investment and advisory firm based in Los Angeles, California. Over a period of 18 years, Adnan has worked on 16+ million square feet or US$2.5 billion worth of US and India focused real estate transactions across several product types (office, industrial, retail, residential, hospitality, mixed-use, land) and life cycles in areas such as real estate private equity, financial consulting, acquisitions and development. Adnan graduated with a MBA in Banking and Finance from Case Western Reserve University, Ohio, and was nominated to The Honor Society of Beta Gamma Sigma. He also holds a Master in Engineering from Cornell University, New York, and Bachelor in Civil Engineering from University of Pune, India. In addition, he holds a California Real Estate Broker’s license and is a member of ULI, NAIOP and the Cornell Real Estate Council.