505 Congress Street South Boston R E C REATE, LLC Tim Johnson, Jennifer Balkcom, Scott Nguyen,...

505 Congress StreetSouth Boston

RECREATE, LLCTim Johnson, Jennifer Balkcom, Scott Nguyen, Arvind Pai, Alison Novak, Charu Singh

Re-imagining the Boston Waterfront

Vision

Vision• Emerging urban neighborhood

complimented by near natural amenities• Dense living in a green building• Target young professionals

Product • Multi-family residential for rent with on-

demand office space

Create an innovative living space to take advantage of transitioning, well-located neighborhood.

Young development team seeking experience.

Team Goals

• Establish foothold in Boston real estate market & South Boston

• Gain development experience

• Build reputation

• Make money

Agenda

Site ContextMarket AnalysisRegulatory ProcessSite Design Construction TimelineCapital Budget Financial Analysis

SITE CONTEXT

8.8 million SF in development pipeline signals emerging market.

Context

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

T

T

T

Convention Center

Downtown

MARKET ANALYSIS

The Boston Economy

• Recovering from a period of negative growth• All demand drivers are stable• Vacancy rate is forecasted at less than 5%• Positive real rent growth projected• Leading growth industries

Stable economy.

Source: Torto-Wheaton Research 2005

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Supply

Limited existing supply Extensive projected development

2,600 residential unitsMostly for sale

High metro-area demand for residential

4.45% cap rate

Time project before market saturation but after pioneering projects.

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Market Area

The target population is well represented within a 5 mile radius of the site.

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Residential Target Market

Residential Target Group• $65,000-125,000 income range• Service-based employment• Upwardly mobile

Target underserved market segment

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Office Target Market

Site is well located to meet temporary office needs.

On-demand office space is ideal for companies who desire: Proximity to the convention center Location close to downtown Flexible office space

T

Convention Center

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

REGULATORY PROCESS

Regulatory Process

Article 80: BRA Review

• Large Project Review

• Boston Civic Design Commission

Area is slated for large-scale development, site use flexible

Article 27P

• Flexible open space and FAR requirements due to IPOD zoning

• Affordable housing and street improvement requirements

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Regulatory Analysis

Areas of concern

• Site coverage ratio relief may trigger exaction fee

• Meeting EPA & HUD standards for air quality and noise

• Unspecified fee schedule

Although FAR is by-right, the public process is unpredictable.

Strategies

• Foster relationships with relevant BRA staff, neighborhood groups, and environmental NGO

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

SITE DESIGN

505 Congress St. is well-located but has many challenging site conditions.

Opportunities & Challenges

Adjacent to Central Artery Tunnel

Vent Building

High Traffic FlowsOdd-shaped parcel

Shallow depth 100’

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Site Plan

Residential Tower

Service Area

Ingress

Egress Drop Off PointOffice-on-Demand

Retail Ground Floor Uses

Landscaped Park

Creative design optimizes this constrained site.

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Elevation

Mixed Use design.

Residential Tower12 stories117 units89,023 net rentable sf

Office-on-Demand1st Floor Podium19,843 net rentable sf

ParkingBelow grade structure77 parking spaces

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Lifestyle amenities compliment project.

Design Elements

Building Amenities• 24 hr. concierge• Landscaped roof garden• On-site parking garage• Zip-Car® available• Indoor bicycle storage• Coffee shop &

dry cleaning services

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Interior Finishes

Apartment Features• Energy Star®

appliances• Ceramic tiled floors

(kitchen & bath)• Non-toxic carpeting• FSC certified wood

cabinets• Designer hardware• Elegant, energy

efficient light fixtures• High speed Internet

access, cable TV, multiple phone lines

Modern & sustainable living space.

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

LEED Elements

LEED certified design.

Photovoltaic panels

Green roof

Low-E glass

Energy efficient systems

Energy Star appliances

Low VOC materials

Dual-flush toilets

Maximizing daylighting

Indoor air quality improvement systems

Indoor Technologies

Rainwater Collection System

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

LEED Elements

Cost NeutralSustainable Site Selection Urban RedevelopmentExterior Landscape DesignPublic TransportationBicycle StorageParking CapacityWater Efficient LandscapingWater Use Reduction (20%)Construction Waste

ManagementRecycled Content MaterialsRegional MaterialsLow VOC paints &

adhesives/sealantsDay-lighting

Cost Premium Roof Landscape DesignRain Collection SystemAdvanced HVAC SystemsLow-E GlassBuilding CommissioningHalon/HCFC-free fire

systemsPhotovoltaics PanelsCO2 MonitoringLow VOC Carpets

Many Cost Premium items will pay for themselves.

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

CONSTRUCTION TIMELINE

Construction Timeline

Month in Project Timeline:

Prep

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72

Weeks in Construction Timeline:

32 332622 2523 24

Interior (8)

1918 20 21 34 35

Site

30 31

Exterior (4)

Permit

Excav (2)Foundation (2)

Structural (3.5)

Elevator/Stairs (6)

36

Electrical (11)HVAC (11)

Plumbing (11)Fire Protection (6)

28 2927

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Construction Cost BreakdownCost Total Cost Duration[$/sf] [$] [months]

Site Prep 1 $126,740 0.5Site Excavation 3 $380,220 2

Site Improvements 2 $253,480 1TOTAL 6 $760,440Total Site Development Costs = $760,440

RESIDENTIALStructural Systems [SHELL]

Foundation 5 $494,570 2Structure (Steel & Concrete) 30 $2,967,420 3.5

Exterior Envelope (Façade & Roof) 40 $3,956,560 4Interior Finishes (Residential) 50 $4,945,700 9

Building Systems [CORE] $0Electrical 27 $2,670,678 11

HVAC 33 $3,264,162 11Plumbing 15 $1,483,710 11

Fire Protection 5 $494,570 6Elevators/Stairs 5 $494,570 6

RESIDENTIAL SUBTOTAL 210 $20,771,940OFFICE

Shell & Core (minus interior) 145 $3,309,770 15Interior Fit-Out 80 $1,826,080 8

OFFICE SUBTOTAL 225 $5,135,850Total Shell & Core Costs= $25,907,790

Green Building Premium (5%) = $1,295,390 15

[$/space]Parking Costs = 40000 $3,080,000 3

Total Construction Cost = $30,283,180

$31,043,620

CONSTRUCTION COSTS

SITE DEVELOPMENT

TOTAL =

SHELL & CORE

GREEN PREMIUM

PARKING

Construction Draw Schedule

$0.00

$1,000,000.00

$2,000,000.00

$3,000,000.00

$4,000,000.00

$5,000,000.00

$6,000,000.00

$7,000,000.00

$8,000,000.00

1 2 3 4 5 6

Construction Quarter

Construction Costs

Gross SF98914 Residential22826 Office126740 Total

77 Parking Spaces

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

CAPITAL BUDGET

Capital Budget

Total Development Cost is $280/sf.

Site Improvements/Site Prep $760,440Construction Cost $30,283,180Hard Cost Contingency 5.0% $1,552,181SUBTOTAL HARD COSTS = $32,595,800

A&E 5% $1,629,790FF&E 0.5% $162,979LEED Certification 0.5% $162,979Taxes/insurance/legal fees 3% $977,874Preconstruction Svcs 0.15% $48,894Project Manager 1.5% $488,937Rent-up, mktg 3% $977,874Developer's OH 2% $651,916Soft Cost Contingency 5% $255,062Construction Interest $1,531,303Prepaids $337,192Construction Guarantee $312,192Environmental Impact Guarantee 0.5% $162,979Balance Sheet Guarantee $780,480SUBTOTAL SOFT COSTS = $8,480,451

TAC $41,076,251

HARD COSTS

SOFT COSTS

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Project Timeline

Pre

Lease-up

Design/Pre-Construction

Permitting

Year

Construction

1 2 3 4

18 months

18 months

> 18 months

12 months

4 years until project stabilizes.

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Project Timeline

Early team formation facilitates integrated design.

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

FINANCIAL ANALYSIS

Assumptions

• Escalation for construction cost = 5% annually

• Absorption rates = one year (ReCreate market research)

• Rental growth = 4% (TWR Fall 2005 )

• Op Ex growth = inflation rate (new building)

• Vacancy = 5% apartments, 12.3% office (TWR Fall 2005 )

• Going in cap rate = 6.96% office, 4.45% residential (NCREIF Boston)

• Going in/out cap rate spread = 30bps office and 97 bps residential (Korpacz 2005)

Conservative Assumptions.

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Rental Assumptions

Unit Rent Sq. Feet DistributionStudio 1,450$ 500 20%1 BR 2,175$ 750 40%2 BR 2,610$ 900 40%

Mix of Market, Affordable and Office Components

Market Apartments: average rent $2,200/month

• Apartment Operating Expenses + Taxes are $10.5 PSF• Green building reduces expense on utilities – Lower effective rents to tenants• Parking Rent is $225 per spot (NNN)

Office Rents: $35 PSF Gross

• Office Operating Expense + Taxes are $17 PSF

Apartment Assumptions - Affordable - % of units 13%0-BR 1-BR 2-BR

# Occupants 1 1.5 22005 Income Limit 28,950$ 31,025$ 33,100$ Projected 2008 Limits 31,634$ 33,902$ 36,169$ Rent 791$ 848$ 904$ Apt distribution - affordable 3 6 6Avg Affordable Rent 859$

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Financing

Green financing allows lower equity returns.

Total Project Cost including land @ time 0: $46,400,000

Construction Loan: $33,400,000• Key Bank: 18 month term, 75% LTC, floating interest rate 6.54%Permanent Loan takes out construction loan• Deutsche Bank: 10 year balloon, 30 year amortization, 80% LTC, fixed interest rate 5.6%, Required DSCR 1.25Equity Partners• Key Bank, Investor’s Circle, ReCreate: 19.3% blended return

• Initial Hurdle: Pari passu up to 15%• 82 – 10 - 8 after 15% hurdle is achieved

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Returns

Hold Period NPV@19.3% OCC Project IRR

Upon Stabilization 2,400,000$ 16.10%

Sell upon stabilization.

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

• Project provides minimal positive NPV

• Proposed equity splits compensate developer after meeting 15% initial hurdle

EQUITY INVESTORS        

  Investor's Circle KeyBank Recreate Total Equity

Amount $ 2,000,000 $10,712,613 $ 300,000 13,012,613

Required Return (10 yr hold) 9.5% 15% 20% 14.3%

Required Return (Development) 15% 20% 25% 19.3%

% Of equity 15.4% 82.3% 2.3% 100.0%

Residual Splits 10.00% 82.00% 8.00%  

A very sensitive project but our numbers are conservative.

Sensitivity Analysis

Varying Rents - Constant Construction Cost

Monthly Rent Residual Land Value

2100 $ 192,000

2200 $ 2,400,000

2300 $ 4,600,000

Varying Construction Cost Escalation - Constant Rents

Escalation Residual Land Value

0% 5,000,000

5% 2,400,000

10% (181,000)

15% (2,800,000)

Varying rents with constant construction costs

Varying construction cost escalation with constant rents

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Mitigating Risk

Minimizing temporal uncertainty

• Pre-leasing office space

• Sale after stabilization will take advantage of low cap rates now and reduce future risk of unknown market in 10 years

Mitigating risk for construction

• Construction escalation of 5% built in until GMP

• GMP contract will mitigate further price increases

• Confirmed timeline feasibility

Built-in leeway for uncertainty.

CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Alternative Strategies

  Examined strategies for increasing returns

Considered:

• Extending construction loan to cover lease-up period?

• Whether rents were too conservative?

• Taking developer’s fee as return on equity instead of project cost?

• Getting land value contributed as equity?

• Reducing construction costs – How cheaply can we build? Which green building components can be achieved at lowest cost?

• Increasing FAR beyond as-of-right?

• Sale as condos (option valuation)CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL

Conclusion

$10 Million ≠ $2.4 Million

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THANK YOU.