120911 HOW DO DEVELOPERS THINK Session Objectives Define Developer Define Development Understand how Developers Think Understand How Developers Make Money Understand How Developers Break Down the Deal ID: 636574
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Project Title
Project detailSlide2
12/09/11
HOW DO DEVELOPERS THINK?Slide3
Session Objectives
Define DeveloperDefine DevelopmentUnderstand how Developers ThinkUnderstand How Developers Make MoneyUnderstand How Developers Break Down the Deal
To Give You a Better Understanding of Developers and How You Can Work Better With Them.Slide4
One who actually brings a projects vision to reality by managing and coordinating the various components of a project.
Compare a Developer to an Orchestra Conducter
Don’t Play the Instruments – Just Directs the Performance.What is A Developer?Slide5
A FOUR LETTER WORD!
What is Development?Slide6
R – I – S – K !!!
AND LOTS OF IT!!!
What is Development?Slide7
Problem; Challenge; Opportunity= IDEA?
Market definition (how much do you know?)
Site.. Planning & Product Design IssuesCash Flow Analysis – Stage 1: SWAGDetermine ValueDetermine Supportable DebtDetermine Project Cost
Financing Gap / Feasibility is ConventionalResource AvailabilityAre my deal assumptions realistic?How Do Developers Think?Slide8
10 Unit Deal
Acquisition $ 200,000 Construction $ 600,000
Soft Cost $ 240,000Total Project Cost $1,040,000
Project CostSlide9
Revenue: # units x proposed “Street Rent”Less Vacancy Allowance (Use 5%)Equals Effective Gross Revenue
Minus Operating Cost (%EGR; PUPA)Equals Net Operating Income (NOI)Loan to Value Ratio versus Debt Coverage Ratio (LTV or DCR)Supportable DebtProject Cost
Required EquityBreaking Down the Deal!Slide10
10 Units @ $600/mth- 10% required investor return
Gross Rental Income $72,000Less Vacancy (5%) (3,600)Effective Gross Income $68,400
Less Operating Cost (30,000)Net Operating Income $38,400Debt Coverage Ratio 1.15Available for Debt $ 33,391
Cash Flow Before Taxes $ 5,009
Project FinancialsSlide11
Project Cost $1,040,000Less Supported Debt $ 375,908
Required Equity $ 664,092Justified Equity $ 50,090*Financing Gap $ 614,002**
* Justified Equity = cash flow divided by investor desired returnProject Financials Con’t
-Slide12
Feasibility Defined:
A project that produces enough revenue so that it pays its operating cost, debt service and produces cash flow.Slide13
How do Developers Make Money?
Cash Flow (From Cash Flow)
Cash Flow (From Tax Benefits)
Cash Flow (From Appreciation)Slide14
Debt From LendersUnderstand how lenders evaluate riskFigure out how to reduce risk of default and foreclosure
Equity From InvestorsUnderstand how Investors measure ROIBe able to manipulate variables affecting project cost, revenue and cash flow
Two Kinds of Money NeededSlide15
Maximize economic benefits and minimize equity investmentInvest in projects yielding the highest ROI
Investor problems with community development dealsCD projects tend to offer low ROIReturns are low relative to costLower Rents / Sales PriceProject Cost same as in higher rent areas
Higher VacancyHigher Operating CostsUncertain appreciation-
May require higher equity investment because of lenders perception of higher riskInvestor Needs?Slide16
Lenders are risk limiters, not profit maximizersLending is a low-margin, high volume businessNo “upside” for lenders; fixed returns
Lenders problems with Community Development Deals?They see CD deals as “risky” due to:Pioneering project (nobody has done a deal like this before)
Unproven MarketQuestions about what people are willing to pay if subsidies are unavailable: “That’s a low income market, you can’t build this kind of development there..”Unfamiliar locations
Lenders Needs!Slide17
Create Plans to Address Lenders and Investors Concerns:Investors see inadequate return on investment
Lenders see unacceptable levels of riskWhat can You Do?Slide18
Remember that RFP’s are ProposalsTerms of Proposal can be Negotiated – Intent can remain the sameDevelopment Evolves it is not Static
Due Diligence is the Life Blood of a DealWe are a team of ONE!Take
AwaysSlide19
Government can provide incentives to investors or enhance the comfort level of debt and equity providers through guarantees, subsidies, POLICY CHANGES and HOW CAN WE CREATE A WIN – WIN FOR THE COMMUNITY!
How?Slide20
Leadership
Eric L. Haynes is the CEO of Inner Urban Holdings, LLC.- Mr. Haynes is a licensed general contractor with extensive experience in construction and development and an in depth knowledge of building codes and project delivery methods. In the public arena, Eric L. Haynes
served as a commissioner in the City of Lauderdale Lakes, Florida; Chairman of the Lauderdale Lakes Community Redevelopment Agency (CRA); member of the ICSC and as a member of the board of directors of the Florida Redevelopment Association, experiences which have given me an in-depth
Mr. Haynes was first elected to the city commission in 2002 and has been a resident of the City of Lauderdale Lakes since 1994. Mr. Haynes is a lifelong resident of Broward County, Florida where he attended public schools and graduated from Boyd Anderson High School located in the City of Lauderdale Lakes in 1988. After being honorably discharged from the United States Army after two years of service, he attended Florida A&M University where he majored in Business Economics.Slide21
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