MODULE 10

Basic Premises

Risk/Return analysis is critical to establish project feasibility

Financial and ownership structures affect participants’ risks and returns

Analysis of Alternative Structures

Importance of “Structuring”

The Relative Attraction of Investment in Real Estate

The Basic Flow of Every Real Estate Transaction

Capital Structure: The Provision of funds• Equity and Debt

Cash Flow• Return Of and On Capital from Operations

Appreciation Upon Sale or Reversion• Return on Risk Capital

Opportunities in Real Estate: The Ultimate Inefficient Market

Risk/Return tradeoffs

Successful projects rely on monopoly – and it’s legal

Legal Forms of Organization

Individual Co-ownership (3 types of tenancy) Group Ownership:

• Syndication• Partnerships and Joint Ventures• Corporations

• “C” Corporation• “S” Corporation• LLC

REITs

Financial and Ownership Structures

Real Estate

• Debt

• Equity

• Hybrid

Corporation

• Bonds

• Stocks

• Preferred Stock

Alternative Financial Structures

All-Equity Leveraged Equity

• With First Mortgage• With Subordinated Mortgage(s)

Hybrids• With Participating Mortgage(s)• Convertible Debt

Alternative Ownership Structures

Fee Simple• Sole Ownership• Joint Venture (including partnerships)

Leasehold• Ground Leasing• Improvements Leasing• Master Leasing

Hybrids

Participating Debt

Equity Kicker• Percentage of Appreciation (upon sale/refinancing)

Cash Flow Kicker• Percentage of Operating Cash Flow (OCF)

• Percentage of Effective Gross Income (EGI)

• And/or

• Net Operating Income (NOI)

Lump Sum(s) at predetermined time(s)

Convertible Debt

Conversion of all or part of loan balance to equity at predetermined time or event

Real Estate Investment Trusts (REITs)

Equity REITs Mortgage REITs Hybrid REITs

Equity(Part I)

Sole Ownership Joint Ventures

• All-Cash by Investor; carried interest by developer

• Debt and Equity JV• Interim JV (less the 5 years)• Credit Enhancement

Key Issues in Joint Ventures

Equity(Part II)

Partnerships• General partnership• Limited partnership

Other Shared Risk/Reward Arrangements

Presale Arrangements Participating Management Agreements

Ownership

Fee Simple

Leasehold

Valuing Fee and Leasehold Interests

Leased fee interest = PV of lease payments + PV of residual (the reversion)

Leasehold Interest = PV of NOI (-) lease payments

Leased fee interest + leasehold interest = value of the fee simple

Lease & Leasehold Financing(Part I)

Ground Leases• Developer (Lessee)

• Advantages

• Disadvantages

• Land Owner (Lessor)• Advantages

• Disadvantages

• Subordination

Lease & Leasehold Financing (Part II)

Participating Ground Leases:• Base Ground Rent• Participation in Effective Gross Rents• Participation in Cash Flow• Participation in Refinance or Sale Proceeds

Lease & Leasehold Financing (Part III)

Equity Leases (Landlords/Tenants)• Landlord

• Advantages

• Disadvantages

• Tenants• Advantages

• Disadvantages

• Critical provisions

Lease & Leasehold Financing (Part IV)

Sales/Leasebacks• The “Synthetic Lease”

Master Leases

Recap: Financing the Project through its Life Stages

Land Acquisition Land Development Off-sites On-sites Vertical Construction Sales/Lease-up Holding (Income properties) Final Sale