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Real Estate 101 for public officials. June 15, 2012. Urban Land Institute Prince George’s County . Topics we plan to cover. The challenges of contemporary development (infill, TOD, value-add conversions) (30 minutes) The development process and project viability (40 minutes) - PowerPoint PPT Presentation
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Urban Land Institute Real Estate 101 for public officials
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Real Estate 101 for public officials
June 15, 2012
Urban Land InstitutePrince George’s County
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Topics we plan to coverI. The challenges of contemporary development (infill, TOD,
value-add conversions) (30 minutes)
II. The development process and project viability (40 minutes)
III. Real estate finance (30 minutes)
A.The market
B.Capital sources and rates of return
C.The capital stack
IV. Using public-private tools (40 minutes)
V. Round table discussion (30 minutes)
Urban Land Institute Real Estate 101 for public officials
Learning Objectives:
1. Obtaining the best outcomes for the community based on understanding how real estate development works.
2. Connecting the entitlement process to the development process to achieve community goals.
3. Standards for deals that are fair and defensible to the public.
4. New ways of thinking about how to create better projects that meet community goals within the parameters of the real estate financial requirements.
Urban Land Institute Real Estate 101 for public officials
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• Charles A. Long• Charles A. Long Properties, LLC
[email protected]• Developer specializing mixed use development in California, US• Consultant on redevelopment, capital finance and economic
development• Instructor for ULI Real Estate School on development process,
public-private partnerships and sustainable development• Former city manager of Fairfield and interim manager in
Mammoth Lakes, Hercules and Pinole, CA• Author of “Finance for Real Estate Development “ published April
2011• Served on 14 ULI advisory panels, chairing panels in Salem OR,
Boise, ID and Dallas, TX. • Masters in Public Policy, UC Berkeley; platoon sergeant, US
Army
Urban Land Institute Real Estate 101 for public officials
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Finance for Real Estate Development
published by ULIApril 2011
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Introductions
• Your objectives from this course
Urban Land Institute Real Estate 101 for public officials
The challenges of contemporary development
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East 14th St., San Leandro, CA
Urban Land Institute Real Estate 101 for public officials
“Transformation from a car-dominated tangle of offices, malls and auto
dealers into a livable city”
Development today is more complicated physically and economically
Urban Land Institute Real Estate 101 for public officials
• More urban and mixed use• Public benefits more important• More complicated economics• More conversions from old uses• Less leverage and no “value add” financing• Density confusion
Appleton Mills, Lowell, MA
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Lakeside Steel Plant, Chicago
West End Commons, Oakland, CA
Urban Land Institute Real Estate 101 for public officials
Private sector needs help Obsolescence Barriers—Southwest Center Mall
Market for retail too weak to reposition the center for retail.
Development plan to create Town Center project with 600 residential units and plaza. • New circulation. • New parcelization.
Five property ownersPoor circulation
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Urban Land Institute Real Estate 101 for public officials
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Walkable, sustainable places are more valuable
Urban Land Institute Real Estate 101 for public officials
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Community acceptance and entitlement risk
Sector differences in market strength
Parking costs and layout
Resizing the infrastructure
Financing challenges
Conflicts among uses
Getting the density right
Mixed use is hard to do
Silver Spring Town Center
Urban Land Institute Real Estate 101 for public officials
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Mixed use financing challenges• Cost of capital for unitary
development configuration• Longer absorption period for retail• Valuing income and for-sale• Federal pre-sale requirements for
condo projects• Liability on for-sale residential• Interconnected parking and operations
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Entitlement process now is more challenging
• More public involvement
• More review steps• Skepticism about
density.• Development impacts
must be funded• Pre-development risk
results in missed opportunities.
Urban Land Institute Real Estate 101 for public officials
Alameda NAS, Alameda, CA
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The Great Recession has changed the capital stack
Urban Land Institute Real Estate 101 for public officials
DebtMuch lower debt: now 65% or less
EquityMuch higher equity: now 35% or more—recourse provisions tighter
Disappearance of "Gap" financing to pay for “value-add” conversions
Mezzanine or performing debt
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The result of the changes to the capital stack
Urban Land Institute Real Estate 101 for public officials
OVERALL PROJECT RETURNS MUST BE HIGHER TO ATTRACT
CAPITAL
Development today is inherently public private
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Uptown, Oakland, CA
• 665 rental units; 25 percent affordable
• New, one half acre park• $160 million private
cost• $50 million public
investment
Mission BaySan Francisco, CA
• $400 million of infrastructure
• Cleanup of site• Public transit links• 41 acres of open space• Financed with “land
secured” bonds
Inherently public/private because:
1. Insures capture of public benefits in the entitlement process.
2. Addresses greater economic risks and physical complexity.
3. Integrates service costs into project economics4. Brings non-project related resources to
enhance private project viability5. Aids in site assembly6. Enhances co-development opportunities
Public Private Partnerships for Transit Oriented Development
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• Public: – Weak understanding of the private real estate process and
economics– Unrealistic, irresponsible or constraint-driven deal making– Inconsistent and unreliable performance on commitments.
• Private sector: – Uncertain about how to craft a partnership with a public
entity. – Frustration with process and constraints– Failure to capture opportunities
And yet, neither sector fully understands the other
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Ultimately, this is about governance
• Have a shared vision for the future---build a community consensus.
• Set clear, predictable and high development standards.
• Develop the competence to understand constraints and opportunities in real estate economics.
• Build partnerships with the private sector based on fiduciary principles that protect the public interest.
• Have strong leaders and committed citizens
It’s about leadership
• With a focus on transit-oriented development,
redevelopment, revenue creation and smart
growth, the Council is encouraging a more
business-friendly Prince George’s County by
expanding economic opportunities and
commercial development.
• Excerpt from Prince George’s County Annual Report
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It’s about competing effectively as a quality place to live.
Prince George’s County has tremendous potential
15 Transit Stations
2,200 acres of vacant land within ½ mile of stations.
Source: Andrew Scott, Maryland Department of Transportation
What makes great communities?
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Knowledge you need
• Risk Profile of the development process• Development finance• Project viability• Deal standards• How to use the tools
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Organizational norms you need
• Leadership• Community vision• Collaborative decision-making across
departments• Delegation of authority to carry out the
mission.
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Group discussion
1. What challenges do you perceive that Prince George’s County faces in achieving high quality development?
2. Got examples?
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The Development Process and Project Viability
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Development is…a separate self financing enterprise that goes from small to large.
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officials
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The Development Process has three phases
Urban Land Institute Real Estate 101 for public officials
80% to 90% of project value is created in the pre-development phase
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Acquisition, design, entitlement, financing, risk management
Project Value
Pre-development work manages risk for all phases
By the start of construction, risks should be reduced to factors that have already been addressed and are controlled through good management.
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Pre-development can be expensive and time consuming ($100 million project)
Item CostDue diligence on land purchase $100,000Market analysis and marketing $200,000Project design $2,000,000Environmental analysis and entitlement process
$1,000,000
Pre-construction services $250,000TOTAL $3,500,000
Urban Land Institute Real Estate 101 for public officials
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Questions1. Why do developers have the highest risk of
losing money before construction starts?
2. What implications does this risk profile have for developers in Prince George’s County?
3. What measures has Prince George’s County taken that address this risk profile?
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Project viability
and residual land
value
Three elements to evaluate project viability:
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1. Project Value: based on either total sales or on valuation of the stream of income
2. The Hurdle Rate: The minimum rate reflecting the cost of capital and time that the capital is used.
3. Project Costs: A valid estimate.
–Developer profit
A Project is “viable” if
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VALUE minus COSTSis sufficient to pay:
–Cost of Capital
–Income projects (retail, office, apartments, etc.): INCOME DIVIDED BY A “CAP RATE”.
PROJECT VALUE BASED THE MARKET
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–For Sale Project: (primarily residential) Gross sales less marketing
How to value an “income” project.
Urban Land Institute Real Estate 101 for public officials
• Income project produce annual income from rent, maintenance charges and other sources.
• Apartments, offices, retail stores, business parks are all, usually, income projects.
• The income after expenses is called “Net Operating Income” of NOI. It is the same as annual profit.
• The market values the NOI using something called a “capitalization rate”.
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A capitalization rate is simply an shorthand indicator of market strength.
Urban Land Institute Real Estate 101 for public officials
Cap Rate=Net Operating Income (NOI)
Project Value
Project Value=NOI
Cap Rate
High cap rate indicates market weakness and low cap rate indicates market strength.
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Cap rates reflect market sentiment
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Cap rate P/E Ratio2% 503% 33
4% 25 5% 20 6% 16.7
Cap rate is the inverse of the P/E ratio used in the stock market
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Average S&P stocks 15.5General Electric 14.31Microsoft 19.96Starbucks 45.22Whole Foods Mkt.32.18
Some stock P/E ratios
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What does a high P/E (or low cap rate) signal about expectations of growth in income?
Pop quiz 1What is the project value?
NOI Cap Rate$3,000,000 5% $3,000,000 6%$2,000,000 4%$2,000,000 5%
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Web sites where you can obtain current market data
Urban Land Institute Real Estate 101 for public officials
• Real Estate Research Corporation www.rerc.com
• Real Capital Analytics http://global.rcanalytics.com/
• National Council of Real Estate Investment Fiduciaries (NCREIF) http://www.ncreif.com
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DETERMINING THE HURDLEThe cost of capital is the blended cost of
equity and debt over the time to construct. Example
Cost of equity: 20% per year (30% of costs) = 6%
Cost of debt: 5% per year (70% of costs) = 3.5%
TOTAL ANNUAL COST OF CAPITAL = 9.5% If a project takes 2 years to construct, cost of capital is: 9.5% per year or a total of about 20%.
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Typical hurdle rates based on duration of development period
1-year: about 10%2-years: about 20%3-years: about 30%
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Hurdle rates for other capital structures and construction periods
Months to achieve project value
Debt Equity
Hurdle Rate% funding
Interest % funding
Annual return
36 75% 6.00% 25% 20% 31%
36 80% 6.00% 20% 20% 29%
24 75% 6.00% 25% 20% 20%
24 80% 6.00% 20% 20% 18%
12 80% 6.00% 20% 20% 9%
Urban Land Institute Real Estate 101 for public officials
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THE COSTS: A realistic cost estimate includes:
1. Building costs2. Site Development (demolition, grading, utilities and landscaping)3. Parking (may be included in building for some types of projects)4. Connection and impact fees5. Offsite costs such as traffic signals or road improvements6. Design (architecture, engineering, consultants, etc)7. Marketing (brokers, advertising, etc.)8. Construction management9. Financing /legal/administrative10. Taxes during construction
11.Contingency: 10-15% in early stagesDO NOT LUMP COSTS
YOU CANNOT CUT THE BOARD LONGER
OK. Once you have Project Value and Hurdle Rate, then you can determine how much you can afford to spend on a project compared to what it is estimated to cost.
Urban Land Institute Real Estate 101 for public officials
Maximum supported investment
=Project Value
1 + hurdle rate
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If estimated project costs exceed the Maximum Supported Investment then the project is not viable and the developer will abandon the project.
Pop quiz 2What is the maximum supported investment?
Project Value Hurdle Rate$36,000,000 20% $39,000,000 30%$50,000,000 25%$60,000,000 25%
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The return on a project pays:• Cost of debt: interest on a construction loan
(4%-6%)• Return on equity: return to investors (15% to
20%)• Developer profit: based on project
performance after paying costs of capital.
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Developer profit comes from:• Fees: Developer fee of 2-4% of cost with incentive
bonuses. • Co-investment: Developer is an equity investor in
10-15% of equity requirement. • Sharing of success:
– Participation in profits over the “preferred return” of 8-12%
– Higher participation in profits over a target of 15-18%.
If the costs of development change, the developer risks a loss because the land price has already been
determined.
Residual Land Value is:The price the project can afford after accounting for the other costs of development.
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Obtaining site control by tying up the land is the first major decision a developer makes and is based
on market and costs.
Residual land value is the land component of supported investment.
Urban Land Institute Real Estate 101 for public officials
MINUSCosts without land
=Residual land value
Project Value
1 + hurdle rateSupported investment
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Pop quiz 2What is the project residual land value?
Project Value Project Cost (w/o land) Hurdle Rate$36,000,000 $25,000,000 20% $39,000,000 $25,000,000 30%$50,000,000 $35,000,000 25%$60,000,000 $43,000,000 25%
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Cash-on-cash hurdle rate allows quick evaluation early in project
Once a property is tied up, do a more detailed analysis based on more
accurate information
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Urban Land Institute Real Estate 101 for public officials
Example on 3 acresScenario 1: -80 townhomes.
-net sales of $24 million -costs (before land) of $16,000,000.-land value at 20% hurdle is $4.0 million.
Scenario 2: -210 apartments in podium configuration. -NOI at $30/sf rent is 3.3 million. -Project value is $65.5 million at 5% cap-costs (before land) of $42 million.-land value at 30% hurdle is $8.4 million.
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Land Value Changes with Use.
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$250,000 $250,000
Construction
Design, finance, management,
marketing
$65,000$65,000$60,000 $60,000
$25,000 $50,000Agency requirements
$75,000$100,000 Residual Land Value
Sale price of house #1: $500,000 Sale price of house #2: $500,000
Profit
An example using Agency requirements
How should an agency establish its requirements?
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But, make the requirements clear and consistent over time so that land prices can
adjust to reflect what a project can afford based on the market and other costs of development.
Make the requirements as high as possible because quality development produces value
for the community.
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High quality, consistent standards are less risky and produce high value
" Simplify the process for developers. By streamlining permitting and construction processes, getting departments to work together to promote infill, and ensuring requirements are consistent, cities can smooth the way for good development." --Bay Area Greenbelt AllianceBackground material\Smartinfill executive summary.pdf
• Developers prefer to compete on value, not cost.
• Policies may cost more but make the community more valuable.
• First, create a great place to live: education, parks, transportation and the long term value will pay for the costs.
• The entitlement is long and costly?• The public agency suddenly changes the
development conditions?• The public agency’s development
conditions are uncertain? • The cost of development conditions
causes total costs to exceed project value?
What happens to a project’s financial viability if: :
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Questions1. What are the implications of basic real estate
economics for establishing development standards in Prince George’s County?
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Real estate finance
65Urban Land Institute Real Estate 101 for public officials
$4.575 trillion invested in U. S. private real estate in 2007 (2008 Emerging Trends)28.1% was Equity 71.9% was Debt
Private investors 44.1%REITs
32.3%Pension funds 12.9%
Foreign Investors 4.1%
Banks 56.9%CMBS
22.5%
Life insurance 8.8%
REIT unsec. 6.3%
Public >0%
Life Insurance 2.5%Public Co. 3.5% Private financial .6%
Govt. credit 3.5% REIT sec .8%
THE REAL ESTATE___________
Political / Physical / EconomicOpportunities & Constraints
CAPITAL
THE MARKET___________
USERS
DEBT SOURCE:Lenders
EQUITY SOURCE:Owners and
Investors
PUBLIC SECTORAGENCIES
DEVELOPER__________
OPERATOR
FUNDSFUNDS
Basic Financing Structure Involving Debt and Equity
PUBLIC PARTICIPATION
COMMODITY AND/OR VALUE
SALE, LEASE, OR OCCUPANCY $
ENTITLEMENT
TAXES AND FEES
DEBT SERVICE RETURN
RETURN
VISION, SKILLSPRE-DEVELOPMENT,
REQUIRED CO-INVESTMENT
CONSTRUCTION AND PERMANENT DEBT FINANCING
PRE-DEVELOPMENT AND PERMANENT EQUITY FINANCING
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67Urban Land Institute Real Estate 101 for public officials
Financing terminology does not always mean the same thing to everyone—lenders and investment
firms talk funny, make them explain! • Interest rate
Swap• Lock• Promote• Recourse• Non-recourse• IRR• Preferred return• Waterfall
• Mezzanine• Bridge• LTC/LTV/DCR• Pre-buys• Participating
debt• Deed of trust• Credit Spread• LIBOR
• Promotional interest• Bankable takeouts• Pari Passu• Inter-creditor
agreements• Capital Event• Notional principal• Leverage
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Stacking the capital
Urban Land Institute Real Estate 101 for public officials
Debt• DCR• LTV• LTC
Equity
• Developer co-invests• Preferred and promotional return• Target return and upside
The value-add playPays out based on value creation
Performance guarantees with recourse for:• Project completion• Cost estimates• Lease up
Mezzanine or performing debt
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Typical return requirements
Urban Land Institute Real Estate 101 for public officials
Debt15-25 year amortization2-15 balloon4.5% to 8% interest
Equity
• Preferred 9%-12%• Target 15%-20%• Total potential 25% or greater
Projected 20% or greater Mezzanine or performing debt
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Application
Urban Land Institute Real Estate 101 for public officials
DebtConstruction and permanent
finance only—NO PRE-DEVELOPMENT.
EquityPre-development after project viability has been confirmed IF entitlement risk is low.
Value add play on project with existing cash flow.
Mezzanine or performing debt
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80% leverage on a project that costs $10 million and produces $12 million in valuation after 2 year construction
Urban Land Institute Real Estate 101 for public officials
Debt$8.0 million
Equity$2.0
million
Repay bank loan plus interest: $8,560,0002 year construction
effective loan period 1 year
Investor/developer Distribution$3,440,000
31.1% Leveraged rate of return
Costs
Sales or Value
80% Leverage
Unleveraged rate of return=9.5%
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60% leverage on a project that costs $10 million and produces $12 million in valuation after 2 year construction
Urban Land Institute Real Estate 101 for public officials
Debt$6.0 million
Equity$4.0 million
Repay bank loan plus interest: $6,420,0002 year construction
effective loan period 1 year
Investor/developer Distribution$5,580,000
18.11% Leveraged rate of return
Costs
Sales or Value
60% Leverage
Unleveraged rate of return=9.54%
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The Waterfall
Urban Land Institute Real Estate 101 for public officials
Cash Flow after paying loans and costs
Return of principal
Preferred return (including developer co-investment)
Promotional return parri pasu to investment dollars to meet target total returns
Some percentage distribution to developer
Larger percentage return to developer
Ongoing small percentage distribution to investors
1st Dollars out
2nd Dollars out
3d Dollars out
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How about the developer's profit?
There is not just one way:• Equity investors require developer's interest
to be aligned with theirs. • Profits to developer will be paid after
preferred return to investors• Developer's share of profits increases with
profits. • Some developers take some profits from
"fees"
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TYPICAL FINANCIAL STRUTURE
Capitalization Leverage 65-80% depending on guarantees Equity (20-35%) contributions
90% Investors group10% Co-investment from Developer
Distributions Cash flow to equity participants, usually with preferred
return to equity and waterfall distribution to investors and Developer
"Capital" event – success to Developer and Investor Group after hurdle return based on IRR
Urban Land Institute Real Estate 101 for public officials
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Typical deal structure Financings are about relationships. Recognize that “who”
you partner with is just as important as the property you buy. The trustworthiness and reliability of the developer is just as important as the merits of the particular project.
Equity and debt partners invest through a joint venture agreement allowing major decisions to be made jointly and insuring alignment of interest!
Developer must co-invest in the project
Developer guarantees hard and soft costs and completion
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Typical deal structure (continued)
You spend 95% of the time negotiating 5% of the issues that never occur.
Take profits when they are available.
Provide for a 3 to 7 year holding period. Sell when business plan is completed – win, lose or draw.
• Provide success fees to the developer and investor group on sale or refinance after meeting the required IRR hurdle.
• Allow the developer to take market rate fees for services (property management, construction, etc.)
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Fiduciary parameters• Validate all the assumptions: especially the market
and the costs.
• Are the developer’s financial transactions open and transparent to the outside investors?
• Include provisions in the joint venture agreement allowing removal of the developer for cause.
• Create a “buy-sell” provision, but don’t rely upon it to solve all the problems.
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Questions
1. How will familiarity with private real estate finance help you achieve higher quality development in Prince George’s County?
Urban Land Institute Real Estate 101 for public officials
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Using public private tools
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7 Tools you need to understand1. Developer selection and negotiations2. Community planning/Entitlements3. Site assembly and cleanup4. Creating a development entity5. Municipal financing6. Equity investment tools (including tax
credits)7. Co-investment opportunities
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The 10 principles1. Properly Prepare for Public/Private
Partnerships
2. Create a shared vision
3. Understand your partners and key players
4. Be clear on the risks and rewards for all parties
5. Document a clear and rational decision-making process
6. All parties must do their homework
7. Secure consistent and coordinated leadership
8. Communicate early and often
9. Negotiate a fair deal structure
10. Build trust as a core value• 82
COMPETENCE
Steps in the process (publicly initiated)
• Public agency creates a vision through a community-based decision process.
• Involve the property owners!• Solicits developer through RFP, RFEI, RFQ • Selects and executes an ENA or Sole Source
Agreement. • Negotiates and executes a DDABuild trust while conducting due diligence on
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Steps in the process (privately initiated)
• Public agency creates a vision through a community-based decision process (HOPEFULLY)
• Developer approaches public agency• Agency and developer agree to negotiate leading
to an agreement. Build trust while conducting due diligence on
the project and on each other
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Negotiation is about problem-solving
• Don’t treat the process as a hard bargaining situation
• Know your project economics and don’t make concessions you can’t afford.
• Build the relationship of trust • Build community ownership
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• Understand the local public information laws. • Disclose to an outside 3d party consultant• Recognize that the final deal must meet the
open book requirement. • Don’t be ashamed about return requirements
Sharing Proprietary information
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Community planning reduces entitlement risk
Principles• Include all stakeholders• Base the plan on the market• Analyze all the impacts• Develop implementation tools• Identify public infrastructure
needs• Imbed flexibility• Develop knowledge/skill in real
estate• Use the RFQ
Walnut Creek, CA downtown plan
Livermore, CA downtown specific plan
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Site assembly challenges
• AVOID USING EMINENT DOMAIN.
• Few property owners understand the real estate.
• Long term owners. • Mistrust of developers and city. • Fear of limiting options by
choosing one. • Potential for gaming the process.
Urban Land Institute Real Estate 101 for public officials
Morgan Hill, CA Downtown Opportunity Sites
–Cleanup will increase land value by up to $130 million–4 property owners: concerned about distribution of costs, value and cooperation. –Agency can force clean up and bill owners–Agency to use TIF and land secured bonds to equalize costs and fund infrastructure for access and circulation.
Newark, CA150 acre industrial site conversion to
TOD
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• Cities and counties protect “health and safety”.• Land sales by competitive bid only, not economic use.
• Need authority to invest in and subsidize projects based on economic merit. – Redevelopment agency– Economic development corporation– Business improvement district– Land Development Corporation
Create a development entity
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Base Assessed Value=
Value of project area
when formed
Incremental Assessed Value =
Value created from new
investment
Property Tax $
Tax Increment $
CITY/COUNTY
Redevelopment Agency
Invest in project area
Provide Services
Redevelopment finances investment from increased value
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• Pre-development costs• Land acquisition• Public Facilities• Financing gap• Incentive payments• Backup guarantees
Use the development entity
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Tax exempt financing lowers cost and increases leverage
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• Public financing takes many forms
• Land secured financing for infrastructure/cleanup
• Housing revenue bonds
• Lease revenue financing for facilities
• Revenue and general obligation bonds
• Federal regulations limit use to public purpose and require compliance with IRS regulations for use of funds.
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Berkeley Reparatory Theater
Land Secured Bonds: assessment bonds are the primary means of financing infrastructure and
cleanup
Urban Land Institute Real Estate 101 for public officials
• Assessment or annual tax levy can be passed on to users
• Delinquencies result in tax lien and foreclosure
• BE CAREFUL! ESTABLISH FINANCING STANDARDS.
•Private financing subordinates to public financing.
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Mission Bay
Hunters Point
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New Public Incentives Paradigm– Important layer in capital stack– Bonds and/or private placement of municipal
obligations the rule, not the exception– Multiple revenue sources– Public participation is evaluated on whether it
is needed to make the project pencil– Private capital sources rely on public capital
sources to meet underwriting criteria
Courtesy of Richard Klawiter, DLA Piper, Chicago
Urban Land Institute Real Estate 101 for public officials
PHASE 1PLANNED
DEVELOPMENT
CHICAGOLAKESIDE
MASTER PLAN
Lakeside Steel Plant site conversion
35 million square feet
Dwelling units maximum 13,575
Commercial Area approximately 17.5 million square feet
Source: Jeffrey Owen, DLA Piper, Chicago
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LAKESIDE PHASE 1 CAPITAL STRUCTURE
TIF BOND ISSUANCE CLOSING CONDITIONS:
RETAIL PRE-LEASE 1 TOWER PAD SALE SECURE PRIVATE EQUITY ANDFINANCING COMMITMENT
Bonds supported by TIF City GO Bonds $55MSecond lien bonds $41MTotal TIF bonds $96M
Private EQUITY $75MPrivate DEBT $226M
Source: Jeffrey Owen, DLA Piper, Chicago
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Land as equity: Pinole Valley Shopping Center
Pinole, CA
• Agency purchased site from foreclosure along with two gas stations for $7.3 million in 2004.
• Ground leased site to developer for 80% of net cash flow (NOI after debt service)
• Developer signed Trader Joe’s and Walgreens.
• Developer obtained financing to renovate the center based on the Agency land value serving as the equity.
• With sale, Agency receives 80% of net proceeds after paying off permanent loan.
Renovation of a 70,000 square foot neighborhood shopping center built in the 1960’s.
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Tax Credits provide equity in return for tax benefits to the tax credit purchaser
Low Income Tax Credits• Subsidize affordable rent-
restricted housing• $9 billion annual market –
awarded at the state level to specific projects
• Rigorous compliance requirements
New Market Tax Credits• Subsidize capital investments in
low income communities• $3 to $4 billion annual credit
market awarded federally to entities
• Rigorous compliance requirements
Courtesy of Leslie Eckstein, Wells Fargo Bank
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Argonaut Hotel, San Francisco
• Historic rehabilitation• Uses Historic Tax
Credits as equity. • Rent income maintains
the historic ships
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Appleton Mills: Lowell, MA
1.9 million square feet of mixed-use, transit-oriented developmentUp to 725 units of market rate and affordable housing, Up to 425,000 square feet of commercial spaceUp to 55,000 square feet of retail Total Cost $47,078,544Tax credit equity $26,282,806
Courtesy of Jim Keefe, Trinity Financial
• Examples:– Cleanup– Theater– Golf course– Park– Highway interchange– Streetscape downtown– Stadiums
Co-investment creates development value for public and private sectors
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Union City, CA• Intermodal TOD site• Community Theater as co-
investment• Brownfield site cleaned up by the
redevelopment agency
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Rancho Solano and Paradise Valley Golf Courses, Fairfield, CA
• Developer donates land to the city (180 acres for each golf course)
• City uses lease revenue financing for building golf courses
• Developer captures increased value of homes build around course.
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Deal Standards (1-6)1. Competence2. Price the benefits3. Align interests 4. Share success5. Have a “holding period” for returning the
public investment6. Have a stop loss for the public agency:
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Deal Standards (7-12)7. Validate the market and the costs8. Use the open book9. Third party verification10.Build in accountability11.Recognize that things will go wrong 12.Keep it simple
1. Make deals based on the real estate, not wishful thinking: Validate the deal based on the real estate economics and on what the markets will actually support.
2. Build trust and ownership: Who is involved in the partnership is as critical as what the project is. Developers and communities need to take the time to use the “open book” and to develop relationships of consistency and trust.
3. Do the hard work competently: Public private partnerships are complicated and require resilience and persistence to accomplish. They require a competent team on both sides of the table who take the time and effort to craft complex deals.
Or…
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Questions
1. What preparation does a community need to take to be able to be effective at public private partnerships?
2. What do you believe are the most important deal standards?
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Round Table Discussion1. What were the most important take-aways from
today and how will you apply what you learned to improving the quality of development in Prince George’s County?
2. What additional background or knowledge would help you in applying what you have learned today?
3. What worked well and what could be improved?