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1 CHAPTER SIXTEEN FINANCING PROJECT DEVELOPMENT Importance of Market and Feasibility Analysis The studies provide market participants with specialized market information. The studies represent the principle source of information to design-related questions. A market analysis is included in the loan submission package for commercial loans. Types of Market Studies Site-Specific Market Studies Highest and best use Determine how to best use a particular site Of vacant site: to determine value of land Of improved property: to determine improvement rent and values Types of Market Studies Site-Specific Market Studies Predetermined use studies Determine demand and supply of a particular use Marketability studies Determine how to best market a project Types of Market Studies Feasibility studies Broader in scope than other market studies Determine whether a proposed project will meet the objectives of the developer/ investor. Typically includes: A market analysis (e.g. analysis of supply and demand) A financial analysis (e.g. forecasts of expected cash flows, development and financing costs, IRR and NPV estimates) Real Estate Development Development and Construction Business Land development (horizontal development) is the process of changing raw land into a usable building site Building development (vertical development) is the process of constructing improvements on a developed site Suppliers of Financial Capital

2 Consulting Professionals The General Contractor The Construction Manager Suppliers of Financial Capital Equity Partners Joint Venture Partners Construction Financing Lenders Permanent Financing Lenders Consulting Professionals Lawyers Architects Engineers Marketing Agents The General Contractor The general contractor oversees all aspects of the construction of the project. Subcontractors are hired by the general contractor to complete specific tasks such as plumbing, painting, and electrical. The Construction Manager The construction manager serves as the developer s on-site agent. The Development Process Stage 1: The Idea Stage 2: Land Acquisition Stage 3: Project Feasibility Stage 4: The Contracts and Permits Stage 5: The Improvements and Construction Stage 6: Project Completion and Occupancy Stage 7: Management or Sale Project Financing S-T financing L-T financing Mini- perm

3 Take out commitment Stand by commitment Project Financing S-T financing L-T financing Mini- perm In construction and project finance, an informal term for debt financing that is payable over three to five years. Generally speaking, a developer accesses mini perm financing to complete the project to the point where it can begin to produce revenue. The developer then uses the revenue to pay off the mini perm. Take out commitment Stand by commitment Project Financing Take out commitment An agreement by a financial institution or another investor to make a long-term loan at a certain, stated date in the future. A take-out commitment may be made in construction or other projects when short-term financing is initially beneficial but the borrower anticipates long-term financing to become more advantageous at a later time. Stand by commitment A formal offer by a lender making explicit the terms under which it agrees to lend money to a borrower over a certain period of time. General Requirements for a Loan Submission Package Project information: Project description Site plan Plans and specs All the drawings pertaining to a development under consideration, including the building, and mechanical and electrical drawings. Includes written instructions to the builder for materials, workmanship, style, colors, and finishes. Development team Market and Financial Data Financial statements Projections Cost breakdown

4 Lease commitment Market study and appraisal Loan requests Equity partners Government and Regulatory Info Zoning Zoning is a legal method for municipalities to control the use of real property in certain specified areas. A zone is created and only certain types of property, or certain uses of properties, are allowed in the zone. Ad Valorem taxes Permits Legal Documents Legal entity Land cost Deed restrictions Limitations (covenants) written into a deed to restrict the control, occupancy, or use of a property. Subordination agreements Subordination agreements Formal document acknowledging that one party's claim or interest is inferior (junior) to that of the other party or parties. For example, a firm may agree to let a bank loan take precedence (seniority) over directors' or owners' loans to the firm. If such consent forms a part of a larger agreement, it is called a subordination clause. A force majeure clause (French for superior force ) is a contract provision that allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.

5 The provision may state that the contract is temporarily suspended, or that it is terminated if the event of force majeure continues for a prescribed period of time. The list of events to be included is a matter of negotiation between the parties. - A typical list of events might include war, riots, fire, flood, hurricane, typhoon, earthquake, lightning, explosion, strikes, lockouts, slowdowns, prolonged shortage of energy supplies, and acts of state or governmental action prohibiting or impeding any party from performing its respective obligations under the contract. So if, for example, a hurricane occurred that shut down a port, the seller planning to ship its goods through that port would not be liable for late delivery of the goods. - As such, the following elements should be addressed in a force majeure clause: Definition of force majeure events What happens when an event occurs Who can suspend performance; and What happens if the force majeure event continues for more than a specified period of time Loan Information- Interim Loan Permanent and standby commitment Plans and specs Cost breakdown Interior and permanent lender closing requirements Contingencies in Lending Commitments The maximum period of time to acquire (construction loan) The completion date Minimum rent-up requirement and approval of all major leases Provisions for gap financing Expiration dates Approval of design changes The Construction Loan Methods of disbursement

6 Interest rates and fees Assignment and commitment letter Tri-party buy-sell agreement Project Costs Land and site improvements Construction costs Hard costs Soft costs Project Costs Hard costs Hard costs are direct costs incurred in relation to a specific construction project. Hard costs may be directly related to construction, including labor, materials, equipment, basic building services, shell features, interior enclosures, fit-out costs, mechanical services and electrical services. Project Costs Soft costs Soft costs are also called indirect costs; these costs, in contrast to hard costs, are not directly related to the physical construction of the project. The common perception of soft costs is they include non-construction costs such as marketing, taxes, finance charges, insurance, interest payments and general administration costs. Example: Cost of Office Project