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.

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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/