1. Financing Project Development
CHAPTER 16
Financing Project Development

2. Financing Project Development
Developer Challenges
National and local economies
Competition among developers
Changes in tenant preferences
Project Development
Finance land acquisition with intent of developing it and selling it
Development is impacted by the regulatory environment

3. Financing Project Development
Permitting
Application
Site
Location
Preliminary Design
Zoning
If in compliance, then permitted
If not in compliance, then appeals process
City planning department input

4. Financing Project Development
Developer Phases
Land acquisition
Development and construction
Completion and occupancy
Management after completion
Eventual Sale
Economic success and value creation

5. Developer Business Strategies
Develop, own, manage, and lease projects for many years
Leasing and management are major components of the business model
Develop, own, lease-up to normal occupancy, then sell
Buyers: insurance companies, syndicates
Sometimes continue to manage the property after sale

6. Developer Business Strategies
Develop land and buildings in a master-planned development
Business parks and industrial parks
Some build to suit a single tenant
Some developers specialize in specific development phases
Most developers will consider a serious offer to purchase at any time

7. Risks & Feasibility Risk begins with acquisition Seasoned Property
Leasing Prior to Completion
Demand Factors
Vacancy rates, rent levels, predevelopment leasing commitments
Post-development competition
What do end users want?

8. Risks & Feasibility Project Risks Specific Component Risk
Site Location
Value increases with tenant perception
More valuable sites result in higher-quality developments
Density increases with value perception
Specific Component Risk
How design features and amenities are valued by potential tenants

9. Project Development Financing
Equity investment
Developer
Partnership
Construction (Interim) loan
Appraised value of completed development
Hard costs
Materials and labor
Soft costs
Planning, leasing and management costs

10. Project Development Financing
Loan Structures
Short-term financing if the intent is to sell the property after completion and lease-up
Permanent loan and construction loan if the developer retains ownership as part of their business model
Construction financing followed by extended financing if the developer might own the property for a short while

11. Project Development Financing
Complications
In multi-loan financing, a permanent loan must be in place first.
If a sale is planned, market conditions may require a committed buyer in place.
Excess speculative and open-ended lending may lead to overbuilding

12. Lender Requirements Loan submission information
Detailed description of development and market analysis
Requirements become complicated when multiple lenders are needed
Permanent commitment
Binding agreement between developer and permanent lender
Permanent lender “take out” commitment “takes out” the construction lender

13. Lender Requirements Standby commitments
Binding agreement, but low expectation of being used
Used when:
Developer does not want to pay fees for a permanent loan
Expectation of securing a better permanent loan later
Plans to sell the project and permanent loan is not needed

14. Lender Requirements Permanent lender common contingencies:
Time limit to acquire a construction loan
Completion data for construction
Minimum leasing requirements and approval of main leases
Gap financing provision
Expiration date
Approval of design and material changes

15. Lender Requirements Construction or Interim Loan Mini perm loan
Usually local lenders who…
Know the local market
Monitor construction progress
Disburse funds as phases are completed
Mini perm loan
Monthly draw method
Floating interest rate

16. Lender Requirements Closing the Interim Loan
Assignment of commitment letter
Create obligation between interim and permanent lenders
Triparty buy-sell agreement
Create obligation between all three parties

17. Lender Requirements Permanent Loan Closing
Lender confirms that contingencies are met
Nonrecourse Clause
Restrict lender’s claim in default
Increase emphasis on property quality
Credit enhancements

18. Project Costs Cost per square foot of gross building area
Compare with comparable property
Loans to cover improvement costs only
20% equity investment
Holdbacks

19. Profitability Before-Tax Cash Flows and After-Tax Cash Flows
Net Present Value
Internal Rate of Return
Sensitivity Analysis
Feasibility Analysis