development financial feasibility

DEVELOPMENT FINANCIAL FEASIBILITY

Summarizing an important real estate concept

DEVELOPMENT PROCESS

Ploutus Advisors, LLC

1

THE DEVELOPMENT ECOSYSTEM


Source: Graaskamp’s Real Estate Process

2

THE DEVELOPMENT MODEL

Pre-Development

Control

• Concept, Refinement, Due Diligence

• Contract Negotiation, Formal Commitment

Management

Development

• Property, Property, Asset, Portfolio

• Construction, Completion, Opening


3

THE DEVELOPMENT PROCESS

Marketing & Leasing

Planning / Design

Approvals

Construction

Operations

Financing SIMULTANEOUS PROCESSES

9 to 12 months Ploutus Advisors, LLC

30 to 36 months Source: Joseph O”Connor; ICFA

4

DEVELOPMENT FLOWCHART Project Concept

a e d I

g n i n n a l P

Site Selection

Preliminary ProForma

Research Properties

Project Defn.

Land Purchase Offer

Architect

Site Due Diligence

Conceptual Design & Est.

Agency

EIR

Schematic Design / Initial GMP Close Land

Eng. Consultants & Studies

Market Research

Financing Options

Bond

Equity

Planning & Zoning Approval Debt

Value Eng. & Agency Review Design Dev. / Final GMP

Constn. Docs

Bid & Subcontract

Building Constn.


Open for Use

n o i t u c e x E Source: Phelps Development

5

RISK VS. VALUE

Low Risk

High Risk

Low Cap Rate

High Cap Rate HIGH Property Value

LOW Property Value

Return on Investment is inversely correlated to probability of Return of Investment Ploutus Advisors, LLC

6

REAL E ST STA ATE DE VELOPMENT VS. RI SK $ t n e m t s e v n I e v i t a l u m u C

l e v e L k s i R

Cumulative Investment $ Risk Level

Very High

High Moderate Low

Time

Land Optioning, Assemblage, Permitting & Design


Construction Land Purchase

Lease-Up & Tenant Finishes

Operation & Stabilization

Shell Completion

Development Completion

Source: Geltner, et al, 2007

7

THE DEVELOPMENT CYCLE Land Banking

STAGE 1 sells

Developable Land

continue

Land Packaging

STAGE 2

sells

continue

Land Developer

STAGE 3

Land with Plans, Approvals & Studies

sells

Building, Lots, Pads

sells

Fully Constructed Building

sells

Building Needing Renovation & Re-Marketing

sells

Worn Out Property

continue

Building Developer

STAGE 4

continue continue

Building Operator

STAGE 5

continue

Building Renovation

STAGE 6

S T E G R E Y U B

continue

Redevelopment

STAGE 7

sells

Property Ready to be Redeveloped Ploutus Advisors, LLC

Source: D. Kohlhepp, Johns Hopkins

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8 CA CATEGOR TEGOR IES OF TASKS WITHIN EACH STAGE ST AGE OF DEVELOPME NT Acquisition

• Feasibility studies, underwriting requirements, contract negotiations, and closing conditions

Financing

• Financial projections, financial management and projections, and capital formation and accumulation

Market Studies & Marketing

• Projected economic conditions, market strategy, strategy, and advertising and promotion (the marketing mix)

Environmental

• Environmental studies (Phase I, II, III), LEED ratings, atmospheric surface and sub-surface conditions, cultural and historical conditions

Approvals & Permits

• 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)

Improvements Transportation Transportat ion & Accessibility Disposition Ploutus Advisors, LLC

• Planning and design, engineering, construction

• Off-site, on-site

• Seller’s due diligence, marketing, sales contract, development agreements

Source: D. Kohlhepp, Johns Hopkins

9

ECONOMIC FEASIBILIT FEASIBILITY Y


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FINANCIAL FEASIBILITY !

is a process where the developer hires consultants Feasibility is 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 financiall y 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)


11

MARKET RESEARCH

A m a r k e t s t u d y s h o u l d b e c o n d u c t e d t o i n c l u d e : ! ! ! ! ! !

Project description Site evaluation An A n a l y s i s o f m a r k e t a r e a – p r i m a r y a n d s e c o n d a r y An A n a l y s i s o f t h e a r e a e c o n o m y Market demographics Supply and demand analysis


12

DEVELOPMENT BUDGET ! !

!

Consists of all 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 BUDGET STAGES

Owner’s Estimate


Architect’s / Contractor’s Estimate

Contractor’s Bid

Construction Contract

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DEVELOPMENT BUDGET COST CATEGORIES 1. Land and Building Costs

7. Financing Fees and Expenses

2. Site Work 8. Soft Costs 3. Rehabilitation / New Construction 4. Contingency 5. Ar A r c h i t e c t a n d E n g i n e e r Fees

9. Syndication Costs 10. Developer’s Fees 11. Project Reserves

6. Interim Costs Ploutus Advisors, LLC

14

QUICK ANALYSIS


15

STATIC ANALYSIS


16

STATIC ANALYSIS


17

STATIC ANALYSIS


18

FRONTDOOR APPROACH ( L O A N - T O - C O S T R AT AT I O A P P R O A C H )


19

BACKDOOR APPROACH ( D E B T C O V E R R AT AT I O A P P R O A C H – L E N D E R ’ S P O I N T O F V I E W


20

BACKDOOR APPROACH (DEFAULT RATIO APPROACH – DEVELOPER’S POINT OF VIEW


21

DETAILE DET AILED D ANAL ANALYSIS YSIS


22

DETAILED DEVELOPMENT BUDGET


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26

MARKET ASSUMPTIONS


27

LAND IN FORMA FORMATION TION


28

AREA BREAKDOWN


29

CAPITALIZA CAPIT ALIZATION TION / S OURCES & U SES


30

PROFORMA


31

PROFORMA


32

RESULTS


33

SENSITIVITIES


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IN CONCLUSION - THE ROADMAP

Make A Qualified Decision Analyze

Gather Relevant Research

Involve All Parties Having A Stake

Plan


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CONTACT US For real estate consulting and advisory, advisory, please contact: Mr. Adnan Tapia Email: [email protected] 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.

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.


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development financial feasibility

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