real estate finance for non real estate professionals2005

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Post on 12-Dec-2014



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High level overview of how commercial real estate projects are financed.


  • 1. Real Estate Finance 101

2. Real Estate Finance 101

  • Basic Theory:Creating Value
  • Elementary Theory: Time, Quality, Money
  • Advanced Theory:Sources of Capital and The Developers Creed

3. Early Construction Loan 4. Early Construction Loan: Draw Meeting 5. Creating Value

  • Create Value by finding a need in the market
  • Create cash flows through SALES or through RENTS
  • Create Value by Product Types:
    • Office
    • Retail
    • Residential
    • Special Purpose (Government, Religious, Single Purpose structures)

6. Time, Quality, Money

  • Time the Market (who will we compete with?)
  • Sales Period (how long will be renting or selling?)
  • Time to develop the Property
  • Entitlement
  • Design
  • Construction
  • Marketing and Sales

7. Quality

  • Quality
  • To meet the clients needs and market demands
      • Special tenant needs for IT, HVAC, structural, LEED, etc.
  • To satisfy generic building, life safety, energy,accessibility codes, and industry standards forquality

8. Money

  • Sources:
  • Equity
  • Debt
  • Construction Period (Short Term) Funds
  • Term Period (Long Term) Funds

9. Time, Quality, Money Analysis

  • Impacts of Quality and TimeonMoney
  • Right Product for the Market (design)
  • Inflation (Cost of construction, money)
  • Market appetite for Real Estate as alternative investment to Stock Market combined with low interest rates
  • Geo Political(Oil Crisis, Desert Storm, 9/11, Second Gulf War)
  • Acts of God (Hurricane Katrina)
  • Political (Evanston deal:28 months for entitlement)

10. Sources of Capital

  • Equity First Money at Risk
  • Individual investors
  • Syndicates / Partnerships
  • Funds (Pensions, Endowments)
  • Institutions (Life companies, REITS)
  • Commercial Equity Sources
  • Mezzanine Lenders

11. Sources of Capital

  • Debt Next level of financial risk
  • Banks (shareholders)
  • Life Companies (policy holders)
  • Pensions funds (pensioners)
  • Commercial Credit Companies (shareholders)
  • Bonds issued by Governments, Industry, andInstitutions (museums, schools) (investors)

12. Developers Creed

  • A dollar borrowed is a dollar earned.
  • A dollar renewed is a dollar saved.
  • A dollar repaid is lost forever.

13. Review Project Budget for Construction Loan

  • Sources and Uses Statement
  • Accounts for all project costs
  • Is accurate for the project and contemplated timethrough sell out or lease up
  • Spreading this will create a Project Cash Flowschedule (a.k.a. Pro Forma)

14. Review Bank Underwriting Criteria

  • Property Types readily Financed
  • Homes
  • Apartments
  • Condos
  • Offices (with tenants)
  • Warehouses
  • Owner-occupied commercial buildings including special purpose

15. Review Bank Underwriting Criteria

  • Commercial Property Types needing special underwriting:
  • Hotels
  • Nursing Homes
  • Single purpose buildings(freezers, auditoriums, religious structures)
  • Water Parks
  • Marinas
  • Country clubs

16. Review Bank Underwriting Criteria

  • Internal Loan Limits
  • Concept of Loan to Value Limits (equity)
  • Debt Coverage Ratio (ability to service debt)
  • Development Risk
  • Repayment Risk / Market Risk
  • Operating Risk
  • Development Team Risk

17. Review Bank Underwriting Criteria

  • Other factors banks look at:
  • Capital Markets (interest rate sensitivity, investor appetite for real estate, investor appetite for this product)
  • Developers motivation to do the deal
  • Project design
  • Construction Risk

18. Real Estate Finance 101

  • TQM
  • Equity and Debt
  • Sources and Uses
  • What Banks and Developers must consider

Questions? 19.


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