MODULE 10 Basic Premises w Risk/Return analysis is critical to establish project feasibility w Financial and ownership structures affect participants’

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Presentation transcript:

MODULE 10

Basic Premises w Risk/Return analysis is critical to establish project feasibility w Financial and ownership structures affect participants’ risks and returns

Analysis of Alternative Structures w Importance of “Structuring” w The Relative Attraction of Investment in Real Estate

The Basic Flow of Every Real Estate Transaction w Capital Structure: The Provision of funds Equity and Debt w Cash Flow Return Of and On Capital from Operations w Appreciation Upon Sale or Reversion Return on Risk Capital

Opportunities in Real Estate: The Ultimate Inefficient Market w Risk/Return tradeoffs w Successful projects rely on monopoly – and it’s legal

Legal Forms of Organization w Individual w Co-ownership (3 types of tenancy) w Group Ownership: Syndication Partnerships and Joint Ventures Corporations “C” Corporation “S” Corporation LLC w REITs

Financial and Ownership Structures w Real Estate Debt Equity Hybrid w Corporation Bonds Stocks Preferred Stock

Alternative Financial Structures w All-Equity w Leveraged Equity With First Mortgage With Subordinated Mortgage(s) w Hybrids With Participating Mortgage(s) Convertible Debt

Alternative Ownership Structures w Fee Simple Sole Ownership Joint Venture (including partnerships) w Leasehold Ground Leasing Improvements Leasing Master Leasing w Hybrids

Participating Debt w Equity Kicker Percentage of Appreciation (upon sale/refinancing) w Cash Flow Kicker Percentage of Operating Cash Flow (OCF) Percentage of Effective Gross Income (EGI) And/or Net Operating Income (NOI) w Lump Sum(s) at predetermined time(s)

Convertible Debt w Conversion of all or part of loan balance to equity at predetermined time or event

Real Estate Investment Trusts (REITs) w Equity REITs w Mortgage REITs w Hybrid REITs

Equity (Part I) w Sole Ownership w Joint Ventures All-Cash by Investor; carried interest by developer Debt and Equity JV Interim JV (less the 5 years) Credit Enhancement w Key Issues in Joint Ventures

Equity (Part II) w Partnerships General partnership Limited partnership

Other Shared Risk/Reward Arrangements w Presale Arrangements w Participating Management Agreements

Ownership w Fee Simple w Leasehold

Valuing Fee and Leasehold Interests w Leased fee interest = PV of lease payments + PV of residual (the reversion) w Leasehold Interest = PV of NOI (-) lease payments w Leased fee interest + leasehold interest = value of the fee simple

Lease & Leasehold Financing (Part I) w Ground Leases Developer (Lessee) Advantages Disadvantages Land Owner (Lessor) Advantages Disadvantages Subordination

Lease & Leasehold Financing (Part II) w Participating Ground Leases: Base Ground Rent Participation in Effective Gross Rents Participation in Cash Flow Participation in Refinance or Sale Proceeds

Lease & Leasehold Financing (Part III) w Equity Leases (Landlords/Tenants) Landlord Advantages Disadvantages Tenants Advantages Disadvantages Critical provisions

Lease & Leasehold Financing (Part IV) w Sales/Leasebacks The “Synthetic Lease” w Master Leases

Recap: Financing the Project through its Life Stages w Land Acquisition w Land Development w Off-sites w On-sites w Vertical Construction w Sales/Lease-up w Holding (Income properties) w Final Sale

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