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www.affordableownership.org © Cornerstone Partnership 2015
Keeping Homes Affordable & Communities Strong
An Overview of Residential Development
Financing and Process
www.affordableownership.org © Cornerstone Partnership 2014
A program of the
Community Solutions
Group, LLC, a Subsidiary of
We support inclusionary housing and
homeownership programs to preserve
long-term affordability and community stability.
3www.affordableownership.org
Key Questions
• How does a developer think?
• What determines if a project is
profitable?
• Do affordable housing or
community benefit requirements
hinder new development?
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What Is a Real Estate Developer’s Job?
• Make money?
• Keep lenders and investors
happy?
• Build new projects that meet
community needs?
• Manage Risk!
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Overview of Development Process
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Developer Partners
• Lenders
• Equity Investors
• Architects, Engineers and Other
Consultants
• Local Government
• The Community
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Financial Feasibility Analysis
• Back of the Envelope Analysis (Does it Pencil?)
• Land Residuals (Does the Proposed Development
Create Positive Land Value?)
• Simple Static Pro Formas with Baseline Measures
of Profitability (Profit as a % of Development
Costs, etc.)
• Full Multi-Year Cash Flows with Projected Internal
Rates of Return (IRR) or Other Dynamic
Profitability Measures
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Development Costs: Hard Costs
• Construction Costs
– Single-family home and townhouses
– WWood-frame multifamily over podium parking
– Mid-rise multifamily (steel frame/concrete )
– High-rise multifamily (steel frame)
• Parking (surface, podium, structured, lifts)
• On/Off-site Costs
• Costs vary according to size of builder, availability of
construction materials, need for prevailing wage,
availability of contractors, etc.
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Development Costs: Soft Costs
• Financing
– Construction loan
– “Take-out” loan/Permanent Financing
• Permit Fees
– Plan check, mapping, others
• Impact Fees
– Schools
– Parks
– Affordable Housing
– Traffic
– Water and Sewer
• Taxes
• Architecture and Engineering
• Legal and Insurance
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Example Pro-Forma
Example Mixed-Use Pro Forma: For-Sale Condos + Ground Floor Retail Space
PROJECT CHARACTERISTICS COST ASSUMPTIONS DEVELOPMENT COST SUMMARY
Site Characteristics Hard Costs Hard Costs
Site Area, Sq. Ft. 141,570 Residential Construction Costs (per sq. ft.) $190 Residential Construction Costs $37,164,000
Site Area, Acres 3.25 Commercial Construction Costs (per sq. ft.) $150 Commercial Construction Costs $1,500,000
DU/Acre 56 On & Off-Site Improvements (per acre) $100,000 On & Off-Site Improvements $325,000
Units 183 Tenant Improvement Allowances (per GLA) $50 Tenant Improvement Allowances $500,000
Cost/Parking Space Parking Costs $5,526,000
Residential Component Surface $2,000
Total Units Market Rate BMR Structured $30,000 Soft Costs
Number of Units 183 165 18 Residential Impact Fees $3,660,000
Loft 28 25 3 Soft Costs Commercial Impact Fees $7,500,000
1BR 78 70 8 Residential Impact Fees (per unit) $20,000 Condo "Wrap" Insurance $1,830,000
2BR 77 70 7 Commercial Impact Fees (per sq. ft.) $750 Other Soft Costs $9,003,000
BMR % 10% Condo "Wrap" Insurance (per unit) $10,000
Unit Size (Sq. Ft.) Other Soft Costs (as % of hard costs) 20% Financing Costs
Loft 1,100 Interest on Construction Loan $3,377,203
1BR 750 Requited Profit (% of total development costs) 12% Points on Construction Loan $938,112
2BR 1,000
Common Area % 15% Land Cost (per acre) $1,500,000 Land Costs $8,558,798
Total Residential Sq. Ft. 195,600
Total Development Cost $79,882,113
Commercial Component TDC Per Unit $436,514
Commercial Sq. Ft. 10,000
Leasable % 90% FINANCING ASSUMPTIONS PROFIT ANALYSIS
Leasable Area 9,000
Construction Financing Gross Residential Sales Revenue $89,087,500
Parking Interest Rate 6.0% Less Commissions/Marketing 5% ($4,454,375)
Number of Parking Spaces Ratio 201 Period of Initial Loan (Months) 24 Net Residential Sales Revenue $84,633,125
Surface (per 1,000 retail sq. ft.) 2 18 Initial Construction Loan Fee (Points) 2.0%
Structured Parking (per unit) 1 183 Average Outstanding Balance 60.0% Gross Commercial Revenue $189,000
Loan to Cost Ratio 70.0% Less Operating Costs 2% ($3,780)
Hard & Soft Costs, Site Costs $67,008,000 Less Vacancy 5% ($9,450)
Amount of Loan $46,905,600 Commercial NOI $175,770
REVENUE ASSUMPTIONS Capitalized Commercial Value $2,197,125
Sales Price Market Rate BMR Total Project Value $86,830,250
Loft $650,000 $325,000 Less TDC $79,882,113
1BR $400,000 $200,000
2BR $575,000 $287,500 Total Profit $6,948,137
Profit as % of Development Costs 8.7%
Lease Rate (Monthly/Sq. Ft. NNN) $1.75
Cap Rate 8.00%
Source: Peninger Consulting, 2013.
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Affordable Housing Finance Resources
Policy Link
Nonprofit Housing Association of
Northern California
Enterprise
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Contact Information
@ http://affordableownership.org/
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