DEVELOPMENT 101:
BEHIND THE NUMBERS
URBAN DEVELOPMENT INSTITUTE – FRASER VALLEY CHAPTER
HUGH CARTER
MARCH 10, 2016
OVERVIEW
The Development Process
Managing the Risk
Evaluating a Site
Behind the Numbers : A
Case Study
Finance
Conclusions
THE DEVELOPMENT PROCESS
1. Pre-development Concept
2. Land Assembly
3. Financing
4. Evaluating a Site
5. Planning and Approvals
6. Construction
7. Marketing and Sales
8. Post Construction
MANAGING THE RISK
I. Planning & Rezoning Risk
II. Construction Risk
III. Market Risk
IV. Financing Risk
THE PRE-DEVELOPMENT CONCEPT
Get the initial concept for the project created – to start the process.
Goal of development?
Staying in business for the long run?
Personal legacy?
Company expertise?
How does this fit with our team?
How does it fit with our partners?
Expected type and market viability?
Scale?
LAND ASSEMBLY
Study RGS (Metro Vancouver),OCP’s, Neighbourhood Plans,and Zoning
Preliminary Meetings with Municipal Planners and Engineers (Plans and Strategies)
Keep in Touch with Brokers andPotential Vendors
Brainstorming and Blue SkyThinking
Preparing an Offer
Due Diligence Period (SubjectPeriod)
Making the Call and Going Firm (Subject Removal)
LAND ASSEMBLY (CONT.)
Negotiation elements
Price
Deposits (Refundable, Non-
Refundable, Applicable)
Accommodate financing and equity
Timing – Deposits and Closing
Subject Conditions
Right to examine title
Permits / approvals that are
prerequisites (Third Reading)
Reps. and Warranties
Assignment
Back of the Napkin Analysis
Be prepared to accept that
sometimes “you win by losing”
MUNICIPAL COSTS AND LAND VALUE
Municipal costs
Development Cost Charges
Amenity Fees
School and Park
Storm Detention
New Policies and Specifications
Land costs
Rarely goes down
Patient
Speculative
Development costs are relatively fixed and movewith market conditions:
Costs of materials
Costs of labour
Costs of management
Minimum return on investment necessary to secure financing.
Development
costs and
margin
Land costs
Land
Municipal
Fees &
Charges
FINANCING STRATEGY
What is the development strategy (scale, mix, phasing, marketing) ?
What are the sources of financing to be used ?
Your money
Equity partners – large or small?
Land / development partners
Banks / institutional lenders
How to structure the risk and reward?
What guarantees will you offer?
When to give payouts to equity/joint venture partners?
Sources of Financing?
Banks and Credit Unions
Brokers
Business associates, friends, and family
35%
SECURING THE FINANCING
Financing Considerations Developer’s experience / track record
Financial strength of the developer (Company Balance Sheet / Cashflow)
Financial strength of the guarantors to service and fund overruns
Project Dynamics – market / absorption / presales / prelease, etc.
Site Conditions (Geotechnical, Phase 1 Environmental)
Appraisal / Feasibility Study
Equity (Real vs. Appraisal Surplus)
Cost Control
The Financing Process Application
Discussion Paper (Terms/Conditions)
Commitment Letter
Conditions Precedent
Quantity Surveyor (Budget Confirmation)
Loan Documentation
Recourse (Corporate/Personal Guarantors)
Funding
Repayment
PRO FORMA ANALYSIS
What is the highest and best use of
the site?
Market Study (Pricing, Competition,
Absorption)
Land Uses and Unit mix
Preliminary site plan(s)
Servicing Costs (Off-site and On-Site)
Building Costs
Pro Forma
Sensitivity Analysis
THE FINANCIAL MODEL
Pro Forma
Revenues
Price Point
Costs
Land, servicing, municipal, finishing,
approvals, marketing, financing, etc…
Margin
Return to equity partners and investors
PRO FORMA STAGES
Pro Forma Stages:
Land Acquisition (Secure Land)
Due Diligence (Remove Subjects)
Financing (Secure Lender)
Development Permit Proforma (Municipal Approvals)
Building Permit Proforma (Construction Start)
THE FINANCIAL CASHFLOW MODEL
~ A PROFORMA OVER TIME
Cash Flow:
Models the Pro Forma Revenues, Costs and Return Over the Length of the Project
Used for internal monitoring
Used for financial reporting purposes
Requirement of Lender
FINANCIAL TERMINOLOGY
PROPERTY METRICS
ROC - Return on Cost
ROR - Gross Sales Margin
ROE - Return on Equity
IRR - Internal Rate of Return
BEHIND THE NUMBERS : A CASE STUDY
Base Pro Forma
Sensitivity Analysis
1. Delayed Approvals (18 Mos.)
and 5 % Cost Escalation
2. Delayed Approvals (18 Mos.)
and 5 % Price Reduction
BASE CASE PRO FORMA
18 MONTH DELAY AND 5% COST ESCALATION
18 MONTH DELAY AND 5% PRICE REDUCTION
UDI DEVELOPMENT 101 DELAY BY 18 MOS. AND AVERAGE PRICE DECLINE BY 5 %
TOWNHOUSE PRO FORMASouth Surrey
REVENUE Price per Unit # of Units Total $ per SqFt
Sale - A 453,962$ 34 15,434,717$ 299.25$
Sale - Single B1 384,617$ 41 15,769,297$ 294.50$
Total Revenue 416,054$ 75 31,204,014$ 296.83$
COSTS Total Per Unit
Total Sales Costs 973,620$ 12,982$
Total Land 7,682,700$ 102,436$
Total Servicing Costs 1,343,835$ 17,918$
Total Construction Costs 12,818,940$ 170,919$
Total Municipal Fees 1,968,322$ 26,244$
Total Soft Costs 2,100,532$ 28,007$
Total Finance Costs 2,086,305$ 27,817$
TOTAL COSTS 28,974,255$ 386,323$
PROFIT 2,229,759$ 29,730$
Percent of Costs 7.7% 7.7%
Percent of Revenue 7.1% 7.1%
BASE CASE
PROFIT 4,479,084$ 59,721$
Return on Costs 15.8% 15.8%
Return on Revenue 13.6% 13.6%
VARIANCE (NEW VS. BASE CASE)
PROFIT 2,249,326-$ 29,991-$
-50.2%
Return on Costs -8.1% -8.1%
Return on Revenue -6.5% -6.5%
SUMMARY
CONCLUSION
To quote another major developer on the development process:
“Okay – we have a pro forma. Now all we need is some land, a site plan, issued for
construction drawings, municipal approvals, buyers, all the building materials, a
schedule, sales brochures, signage, ads, a web site, sales contracts, a disclosure
statement, a sales office and the market to hold together for the next three years.”
SOME FINAL THOUGHTS
1. As demonstrated, development is capital intensive and entails
considerable risk but with thoughtful planning the end product
can be rewarding for both the investors and the community.
2. Developers and their investors are seeking an environment of
“certainty” as financial commitments are made on the basis of
approved neighbourhood plans and municipal fees, charges,
policies and bylaws in place at the time of land acquisition. Be
financially realistic and responsible.
3. Respect your community vision and neighbourhood plans while
not being overly prescriptive regarding land use planning policies,
which limits creativity and meaningful urban design solutions.
4. Try to create a culture of fairness, respect and understanding that
allows municipal staff to work with developers in a common
sense, solutions-based way.
5. Encourage diversity and flexibility in land uses.
6. Have a clear approvals process and internal leadership.
CONCLUSION – WORKING TOGETHER
THANK YOU