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SEPTEMBER 28, 2005 Real Estate Finance 101

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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Page 1: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Real Estate Finance 101

Page 2: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Real Estate Finance 101

Basic Theory: Creating Value

Elementary Theory: Time, Quality, Money

Advanced Theory: Sources of Capital and “The Developer’s Creed”

Page 3: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Early Construction Loan

Page 4: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Early Construction Loan: Draw Meeting

Page 5: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Creating Value

• Create Value by finding a need in the market

• Create cash flows through SALES or through RENTS

• Create Value by Product Types:– Office– Retail– Residential– Special Purpose (Government, Religious, Single

Purpose structures)

Page 6: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Time, Quality, Money

Time the Market (who will we compete with?)

Sales Period (how long will be renting or selling?)

Time to develop the Property• Entitlement• Design• Construction• Marketing and Sales

Page 7: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Quality

Quality• To meet the clients needs and market

demands• Special tenant needs for IT, HVAC, structural,

LEED, etc.

• To satisfy generic building, life safety, energy, accessibility codes, and industry standards

for quality

Page 8: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Money

Sources:• Equity• Debt

Construction Period (Short Term) Funds

Term Period (Long Term) Funds

Page 9: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Time, Quality, Money Analysis

Impacts of Quality and Time on Money• Right Product for the Market (design)• Inflation (Cost of construction, money)• Market appetite for Real Estate as alternative

investment to Stock Market combined with low interest rates

• Geo Political (Oil Crisis, Desert Storm, 9/11, Second Gulf War)

• Acts of God (Hurricane Katrina)• Political (Evanston deal: 28 months for entitlement)

Page 10: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Sources of Capital

Equity – First Money at Risk• Individual investors• Syndicates / Partnerships• Funds (Pensions, Endowments)• Institutions (Life companies, REITS)• Commercial Equity Sources• Mezzanine Lenders

Page 11: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Sources of Capital

Debt – Next level of financial risk• Banks (shareholders)• Life Companies (policy holders)• Pensions funds (pensioners)• Commercial Credit Companies (shareholders)• Bonds issued by Governments, Industry, and

Institutions (museums, schools) (investors)

Page 12: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Developer’s Creed

• A dollar borrowed is a dollar earned.

• A dollar renewed is a dollar saved.

• A dollar repaid is lost forever.

Page 13: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Review Project Budget for Construction Loan

Sources and Uses Statement

• Accounts for all project costs

• Is accurate for the project and contemplated time through sell out or lease up

• Spreading this will create a Project Cash Flow schedule (a.k.a. Pro Forma)

Page 14: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Review Bank Underwriting Criteria

Property Types readily Financed• Homes• Apartments• Condos• Offices (with tenants)• Warehouses• Owner-occupied commercial buildings including

special purpose

Page 15: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Review Bank Underwriting Criteria

Commercial Property Types needing special underwriting:

• Hotels• Nursing Homes• Single purpose buildings (freezers, auditoriums,

religious structures)• Water Parks• Marinas• Country clubs

Page 16: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Review Bank Underwriting Criteria

• Internal Loan Limits• Concept of Loan to Value Limits (equity)• Debt Coverage Ratio (ability to service debt)

• Development Risk• Repayment Risk / Market Risk• Operating Risk• Development Team Risk

Page 17: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Review Bank Underwriting Criteria

Other factors banks look at:• Capital Markets (interest rate sensitivity, investor

appetite for real estate, investor appetite for this product)

• Developer’s motivation to do the deal

• Project design

• Construction Risk

Page 18: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005

Real Estate Finance 101

TQM

Equity and Debt

Sources and Uses

What Banks and Developers must consider Questions?

Page 19: Real Estate Finance For Non Real Estate Professionals2005

SEPTEMBER 28, 2005