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Real Estate Development Financial Feasibility



This document provides an overview on real estate development and financial feasibility.

Topics Covered:
Development - Process, Ecosystem, Model, Flowchart, Risk vs Value, Development Risk, Development Cycle, Key Categories of Tasks
Economic Feasibility - Financial, Development Budget, Static Analysis, Loan-to-Cost, Debt Cover & Default Ratio Approaches, Detailed Proforma & Analysis

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Real Estate Development Financial Feasibility

  1. 1. Summarizing an important real estate concept DEVELOPMENT FINANCIAL FEASIBILITY
  2. 2. Ploutus Advisors, LLC 1 DEVELOPMENT PROCESS
  3. 3. THE DEVELOPMENT ECOSYSTEM Ploutus Advisors, LLC 2Source: Graaskamp’s Real Estate Process
  4. 4. THE DEVELOPMENT MODEL Ploutus Advisors, LLC 3 Pre-Development •  Concept, Refinement, Due Diligence Control •  Contract Negotiation, Formal Commitment Development •  Construction, Completion, Opening Management •  Property, Asset, Portfolio
  5. 5. THE DEVELOPMENT PROCESS Ploutus Advisors, LLC 4 Planning / Design Construction Operations Approvals Financing Marketing & Leasing 9 to 12 months 30 to 36 months SIMULTANEOUS PROCESSES Source: Joseph O”Connor; ICFA
  6. 6. DEVELOPMENT FLOWCHART Ploutus Advisors, LLC 5 Project Concept Site Selection Research Properties Land Purchase Offer Site Due Diligence Close Land Preliminary ProForma Project Defn. Architect Conceptual Design & Est. Schematic Design / Initial GMP Value Eng. & Agency Review Design Dev. / Final GMP Constn. Docs Bid & Subcontract Building Constn. Open for Use Agency EIR Planning & Zoning Approval Eng. Consultants & Studies Market Research Financing Options Bond Equity Debt IdeaPlanning Execution Source: Phelps Development
  7. 7. RISK VS. VALUE Ploutus Advisors, LLC 6 HIGH Property Value Low Cap Rate Low Risk LOW Property Value High Cap Rate High Risk Return on Investment is inversely correlated to probability of Return of Investment
  8. 8. REAL ESTATE DEVELOPMENT VS. RISK Ploutus Advisors, LLC 7Source: Geltner, et al, 2007 CumulativeInvestment$ RiskLevel Time Land Optioning, Assemblage, Permitting & Design Construction Lease-Up & Tenant Finishes Operation & Stabilization Land Purchase Shell Completion Development Completion Very High High Moderate Low Cumulative Investment $ Risk Level
  9. 9. THE DEVELOPMENT CYCLE Ploutus Advisors, LLC 8Source: D. Kohlhepp, Johns Hopkins Land Banking Land Packaging Land Developer Building Developer Building Operator Building Renovation Redevelopment Property Ready to be Redeveloped Developable Land Land with Plans, Approvals & Studies Building, Lots, Pads Fully Constructed Building Building Needing Renovation & Re-Marketing Worn Out Property sells sells sells sells sells sells sells continue continue continue continue continue continue continue STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5 STAGE 6 STAGE 7 BUYERGETS
  10. 10. 8 CATEGORIES OF TASKS WITHIN EACH STAGE OF DEVELOPMENT Ploutus Advisors, LLC 9 • Feasibility studies, underwriting requirements, contract negotiations, and closing conditionsAcquisition • Financial projections, financial management and projections, and capital formation and accumulationFinancing • Projected economic conditions, market strategy, and advertising and promotion (the marketing mix)Market Studies & Marketing • Environmental studies (Phase I, II, III), LEED ratings, atmospheric surface and sub-surface conditions, cultural and historical conditionsEnvironmental • 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) Approvals & Permits • Planning and design, engineering, constructionImprovements • Off-site, on-siteTransportation & Accessibility • Seller’s due diligence, marketing, sales contract, development agreementsDisposition Source: D. Kohlhepp, Johns Hopkins
  11. 11. Ploutus Advisors, LLC 10 ECONOMIC FEASIBILITY
  12. 12. FINANCIAL FEASIBILITY Ploutus Advisors, LLC 11 ¡  Feasibility is a process where the developer hires consultants 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 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)
  13. 13. MARKET RESEARCH Ploutus Advisors, LLC 12 A market study should be conducted to include: ¡  Project description ¡  Site evaluation ¡  Analysis of market area – primary and secondary ¡  Analysis of the area economy ¡  Market demographics ¡  Supply and demand analysis
  14. 14. ¡  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 Ploutus Advisors, LLC 13 DEVELOPMENT BUDGET Owner’s Estimate Architect’s / Contractor’s Estimate Contractor’s Bid Construction Contract BUDGET STAGES
  15. 15. 1.  Land and Building Costs 2.  Site Work 3.  Rehabilitation / New Construction 4.  Contingency 5.  Architect and Engineer Fees 6.  Interim Costs Ploutus Advisors, LLC 14 DEVELOPMENT BUDGET COST CATEGORIES 7.  Financing Fees and Expenses 8.  Soft Costs 9.  Syndication Costs 10.  Developer’s Fees 11.  Project Reserves
  16. 16. Ploutus Advisors, LLC 15 QUICK ANALYSIS
  17. 17. Ploutus Advisors, LLC 16 STATIC ANALYSIS
  18. 18. Ploutus Advisors, LLC 17 STATIC ANALYSIS
  19. 19. Ploutus Advisors, LLC 18 STATIC ANALYSIS
  23. 23. Ploutus Advisors, LLC 22 DETAILED ANALYSIS
  24. 24. Ploutus Advisors, LLC 23 DETAILED DEVELOPMENT BUDGET
  25. 25. Ploutus Advisors, LLC 24 DETAILED DEVELOPMENT BUDGET
  26. 26. Ploutus Advisors, LLC 25 DETAILED DEVELOPMENT BUDGET
  27. 27. Ploutus Advisors, LLC 26 DETAILED DEVELOPMENT BUDGET
  28. 28. Ploutus Advisors, LLC 27 MARKET ASSUMPTIONS
  29. 29. Ploutus Advisors, LLC 28 LAND INFORMATION
  30. 30. Ploutus Advisors, LLC 29 AREA BREAKDOWN
  31. 31. Ploutus Advisors, LLC 30 CAPITALIZATION / SOURCES & USES
  32. 32. Ploutus Advisors, LLC 31 PROFORMA
  33. 33. Ploutus Advisors, LLC 32 PROFORMA
  34. 34. Ploutus Advisors, LLC 33 RESULTS
  35. 35. Ploutus Advisors, LLC 34 SENSITIVITIES
  36. 36. IN CONCLUSION - THE ROADMAP Ploutus Advisors, LLC 35 Plan Gather Relevant Research Involve All Parties Having A Stake Analyze Make A Qualified Decision
  37. 37. CONTACT US Ploutus Advisors, LLC 36 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. For real estate consulting and advisory, please contact: Mr. Adnan Tapia Email: 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.