Finc 672 Exam #2 - Chapter 16

Front 1

Project Development

Back 1

refers to the process of financing the acquisition of a tract of land with the intent of constructing a building, leasing, managing, and eventually selling the completed project

Front 2

Items To Check When Evaluating A Site For Possible Development

Back 2

1. Allowable uses per zoning classifications
2. Minimum lot size per zoning classifications
3. Maximum Floor-to-Area Ratio (FAR)
4. Building bulk/density limits
5. Setback/building line
6. Building height limits
7. Building footprint/envelope
7. Parking ratios

Front 3

Permitting Process

Back 3

Public officials verify application compliance with current zoning classifications

Permit is in compliance - permit is granted and the construction of the project may commence subject to building codes and inspections

Permit Denied - applicant will usually clarify or amend the application and will ask the city planning staff/director to review it again.

If Denied Again - the applicant usually has a right to a hearing before a subcommittee (zoning and planning) of the city council.
- a staff recommendation is usually made by the city planning department to this subcommittee regarding the application
- at each step in the process, the planning staff and the applicant engage in a series of negotiations (communications) in which problem areas of the proposed development are discussed.
- modifications are usually offered by the applicant
- in many cases this process fails and a series of appeals and/ or reapplication is made by the developer

If the application continues to be denied - the applicant has the right to a hearing before the entire city council.
- three outcomes are possible
1. approve the application
2. deny and remand the application back to the planning staff
3. deny the application with prejudice (meaning that the specific application in question cannot be resubmitted by the developer again for approval

Front 4

Phases of Real Estate Project Development

Back 4

Phase I - Land acquisition

Phase II - Construction

Phase III - Completion and Occupancy

Phase IV - Management

Phase V - Sale

Front 5

Project Risk Factors

Back 5

construction delays, price increases in materials, and interest rate increases

*cause changes in project risk`

Front 6

Construction loans are based on a combination of:

Back 6

1. the appraised value expected upon completion

2. the hard costs of construction (such as materials and labor for site improvements

3. soft costs (such as leasing costs, planning costs, and management

4. MAY also include some of the costs of finishing the interior space for tenants through the lease-up stage.

*If the may also be possible to obtain additional financing using the value of the land as security if the developer owns the land free and clear of debt.

*Lenders prefer to make loans in amounts closely related to the cost of improvements.

*When possible they prefer not to finance large amounts of soft costs or off-site improvements as these items MAY NOT be recovered in the event that the development encounters financial difficulty

*However, in a rapidly expanding market, competition among lenders may result in more flexible lending policies.

Front 7

Three general development loan structures depending on what the developer wants to do:

Back 7

1. Sold upon completion & lease up - Developer's profit = difference between developer's cost and the price received for the copleted property represents profit to the developer. Developer will usually consider short-term financing structures.

2. Developer may retain ownership with the expectation that he will continue to manage, operate, and lease the property as an integral part of his business. The developer will seek LONGER-TERM financing structures. This may consist of two loans, a permanent loan and a construction loan.

3. A developer may consider the sale or refinancing of a property upon completion. In this case, the developer may seek short-term construction financing, coupled with either an option, or a commitment, to extend financing for one or two years beyond the construction period.
*allows additional time beyond construction to prepare the property for sale or provide actual financial data from operations to lenders.
*commonly referred to as MINI-PERM LOANS and may have maturities ranging from five to seven years

Front 8

Common Contingencies in Lending Commitments

Back 8

1. The maximum period of time allowed for the developer to acquire a construction loan commitment

2. completion date for the construction phase of the project

3. Minimum rent-up (leasing) requirements and approval of all major leases in order for permanent financing to become effective

4. Provisions for gap financing should the rent-up requirement not be met
*gap financing provides that the "gap" between any partial funding advanced (advanced on a pro rata basis or in proportion to occupancy increases) by the permanent lender. The gap lender usually takes a second lien position and earns interest at a higher rate than both the interim and permanent lenders plus a nonrefundable gap commitment.
* a gap loan can also be used to when costs overruns in excess of both the construction and permanent commitments occur, or if a permanent loan commitment is less than the construction loan.

5. Expiration date of the permanent loan commitment and any provisions for extensions

6. Approval of design changes and substitution of any building materials by the permanent lender.

Front 9

Mini-perm loan

Back 9

*used instead of negotiating a construction loan and permanent loan, a developer may obtain a single loan from an interim lender and use it to finance contruction and operations for a year or two beyond the lease-up stage.

*Lenders, primarily savings and loans and commercial banks, offered these loans as "one-stop shopping" that enables developers to proceed without obtaining a permanent loan

Front 10

Monthly Draw Method

Back 10

* type of open-ended mortgage

*The developer request a draw each month based on the work completed during the preceding month. If an architect or engineer verifies to the lender that such work is in place, the lender disburses the funds.

*The collateral value for the loan increases simultaneously with the disbursement of funds

*In some cases, the developer submits invoices to a title insurance company, if the lender is using one, with updates the title abstract between each draw and then approves payments on the invoices. As payments are made, contractors and subcontractors sign an agreement that they have been paid for work done to date. This usually precludes them from filing mechanics' liens.

Front 11

Prime Lending Rate

Back 11

Short-term interest rate charged on commercial laons to the bank's most creditworthy customers.

Front 12

Floating rates may be based on:

Back 12

1. the bank's prime rate

2. Treasury Bill Rates

3. LIBOR (London Interbank Offering Rate)

Front 13

Triparty buy-sell agreement

Back 13

In lieu of assignemnt of the take-out commitment, the developer, construction lender, and long-term lender may enter into this more formal agreement in which:
1. the permanent lender agrees to buy the construction mortgage loan directly form the construction lender upon completion date, assuming all contingencies are met, and
2. the two lenders agree about their duties and responsibilites

This agreement goes beyond the asssignment of the take-out commitment and provides that the permanent lender will:
1. notify the interim lender that the take-out commitment is in full effect
2. indicate whether all necessary plans and documents have been reviewed and approved prior to closing the construction loan, and
3. provide the construction lender with notice of any violations in the terms of the loan commitment by the developer and the time available to cure such a violation.

*both lenders are to be better informed as to the progress the developer is making and whether any problems are likely to occur when it is time to close the permanent loan

* By using a triparty agreement, the construction lender agrees not to accept funding from any source other than the initial permanent lender

Front 14

Exculpation clause

Back 14

limits the liability of borrowers by restricting the claim of lenders to proceeds from the sale of the real estate in the event of default

*after the permanent loan has been closed and the project is operating normally