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Session Objectives Define Developer Define Development Understand how Developers Think Understand How Developers Make Money Understand How Developers Break Down the Deal To Give You a Better Understanding of Developers and How You Can Work Better With Them.
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Project Title
• Project detail
12/09/11
HOW DO DEVELOPERS THINK?
Session Objectives
• Define Developer• Define Development• Understand how Developers Think• Understand How Developers Make Money• Understand How Developers Break Down the
Deal• To Give You a Better Understanding of Developers
and How You Can Work Better With Them.
One who actually brings a projects vision to reality by managing and coordinating the various components of a project.
Compare a Developer to an Orchestra Conducter
Don’t Play the Instruments – Just Directs the Performance.
What is A Developer?
A FOUR LETTER WORD!
What is Development?
R – I – S – K !!!AND LOTS OF IT!!!
What is Development?
• Problem; Challenge; Opportunity= IDEA?• Market definition (how much do you know?)• Site.. Planning & Product Design Issues• Cash Flow Analysis – Stage 1: SWAG• Determine Value• Determine Supportable Debt• Determine Project Cost• Financing Gap / Feasibility is Conventional• Resource Availability• Are my deal assumptions realistic?
How Do Developers Think?
10 Unit Deal
Acquisition $ 200,000
Construction $ 600,000
Soft Cost $ 240,000
Total Project Cost $1,040,000
Project Cost
• Revenue: # units x proposed “Street Rent”• Less Vacancy Allowance (Use 5%)• Equals Effective Gross Revenue• Minus Operating Cost (%EGR; PUPA)• Equals Net Operating Income (NOI)• Loan to Value Ratio versus Debt Coverage Ratio (LTV or
DCR)• Supportable Debt• Project Cost• Required Equity
Breaking Down the Deal!
• 10 Units @ $600/mth- 10% required investor return
Gross Rental Income $72,000Less Vacancy (5%) (3,600)Effective Gross Income $68,400Less Operating Cost (30,000)Net Operating Income $38,400Debt Coverage Ratio 1.15Available for Debt $ 33,391Cash Flow Before Taxes $ 5,009
Project Financials
Project Cost $1,040,000Less Supported Debt $ 375,908Required Equity $ 664,092Justified Equity $ 50,090*Financing Gap $ 614,002**
* Justified Equity = cash flow divided by investor desired return
Project Financials Con’t-
Feasibility Defined:A project that produces enough revenue so that it pays its operating cost, debt service and produces cash flow.
How do Developers Make Money?
• Cash Flow (From Cash Flow)• Cash Flow (From Tax Benefits)• Cash Flow (From Appreciation)
• Debt From Lenders– Understand how lenders evaluate risk– Figure out how to reduce risk of default and
foreclosure• Equity From Investors– Understand how Investors measure ROI– Be able to manipulate variables affecting project
cost, revenue and cash flow
Two Kinds of Money Needed
• Maximize economic benefits and minimize equity investment• Invest in projects yielding the highest ROI
Investor problems with community development deals• CD projects tend to offer low ROI
– Returns are low relative to cost• Lower Rents / Sales Price• Project Cost same as in higher rent areas• Higher Vacancy• Higher Operating Costs• Uncertain appreciation
- May require higher equity investment because of lenders perception of higher risk
Investor Needs?
• Lenders are risk limiters, not profit maximizers• Lending is a low-margin, high volume business• No “upside” for lenders; fixed returns
Lenders problems with Community Development Deals?• They see CD deals as “risky” due to:
– Pioneering project (nobody has done a deal like this before)– Unproven Market– Questions about what people are willing to pay if subsidies are unavailable: “That’s a
low income market, you can’t build this kind of development there..”– Unfamiliar locations
Lenders Needs!
Create Plans to Address Lenders and Investors Concerns:
• Investors see inadequate return on investment
• Lenders see unacceptable levels of risk
What can You Do?
• Remember that RFP’s are Proposals• Terms of Proposal can be Negotiated – Intent
can remain the same• Development Evolves it is not Static• Due Diligence is the Life Blood of a Deal• We are a team of ONE!
Take Aways
Government can provide incentives to investors or enhance the comfort level of debt and equity providers through guarantees, subsidies, POLICY CHANGES and HOW CAN WE CREATE A WIN – WIN FOR THE COMMUNITY!
How?
Leadership
Eric L. Haynes is the CEO of Inner Urban Holdings, LLC.- Mr. Haynes is a licensed general contractor with extensive experience in construction and development and an in depth knowledge of building codes and project delivery methods. In the public arena, Eric L. Haynes served as a commissioner in the City of Lauderdale Lakes, Florida; Chairman of the Lauderdale Lakes Community Redevelopment Agency (CRA); member of the ICSC and as a member of the board of directors of the Florida Redevelopment Association, experiences which have given me an in-depth
Mr. Haynes was first elected to the city commission in 2002 and has been a resident of the City of Lauderdale Lakes since 1994. Mr. Haynes is a lifelong resident of Broward County, Florida where he attended public schools and graduated from Boyd Anderson High School located in the City of Lauderdale Lakes in 1988. After being honorably discharged from the United States Army after two years of service, he attended Florida A&M University where he majored in Business Economics.
Our Services
• Development– Urban Infill Development
• General Contracting– Residential (New & Additions)– Commercial (up to 20,000 sf)
• Residential Asset Management– Portfolio Management– Real Estate Brokerage– Property Management