real estate finance II Class : HOMEWORK 4 & MIDTERM REVIEWS

Transcription

1 real estate finance II Class : HOMEWORK 4 & MIDTERM REVIEWS

2 HW3 HOMEWORK 3: Open the attached file and combine with your HW2 Operating Proforma (suggest on a separate tab in your excel file). Calculate: Construction Loan Amount (to cover Total Development Budget) Monthly construction Loan draws given the monthly Hard and Soft Costs provided. Interest Reserve Operating Reserve Construction Loan Amount (earlier Dev Budget + Interest Reserve + Operating Reserve) TOTAL DEVELOPMENT BUDGET 2

3 HW4 HOMEWORK 4: 1. USE THE CLASS SLIDES OF HOMEWORK 3 to REFINE as necessary your HW3 answers for: Construction Loan Drawdowns Calculate Proforma Interest Cost during Construction Calculate Proforma Interest Cost during Lease-up Determine Total Construction Loan Determine Total Construction Budget (Loan + Equity) 2. Use your DCF Operating Proforma to refine: Permanent Loan amount to take out Construction Loan. (Note: use appropriate valuation amount) 3. If you sell the property 1 day after you do the permanent mortgage, what is your: IRR Equity Multiple 3

4 MIDTERM EXAM Solutions Review 4

5 SECTION A 1. The Cherry Hill loan application (reviewed in class) was a comprehensive presentation of the market data and project details in support of the loan. After careful review of the application, the lender refused to make the loan primarily because: a. The borrower did not have much experience in the property type. b. The DCF proforma annual cash flow did not adequately cover the debt service on the loan. c. The macroeconomic environment of Denver metro had recently shown some deterioration in the growth of one of its major economic drivers. d. The project team had a record of regularly going over construction budgets by 15% Doing real estate development projects differs significantly from making investments in operating properties. Which of the following descriptions is NOT unique to the development activity: a. A site looking for a use. b. A use looking for a site. c. Determining the imbalance between demand and supply of the relevant property type. d. Controlling the costs of land and improvements. e. None of the above, they are all unique and important to development! 5

6 SECTION A 3. Which is the correct definition of Residual Land Value? a. Total developed property valuation less the cost of the land. b. Total developed property valuation less the total cost of constructing the improvements. c. Total development budget less total cost of constructing improvements, including all soft costs. d. Total construction budget less the hard costs. 4. Typically with a construction loan, the lender seeks additional security in the form of: a. Completion Guaranty by the entity responsible for the development activity. b. Payment Guaranty by the borrower s General Partner. c. Payment Guaranty by a well-capitalized Limited Partner. d. All of the above. 5. In the typical construction loan: a. The developer makes interest payments only during the construction phase. b. The developer pays both interest and some principal to begin to amortize the loan during the construction phase. c. The developer makes no cash payments to the bank until the loan comes due. d. The developer and construction lender share equally in all payments to construction contractors during the construction phase. 6

7 SECTION A 6. The COMMON method of distributing funds provided by a construction loan is a: a. Single lump sum of money at the closing of the loan b. Single lump sum of money at the end of the construction project to reimburse the developer for the project s expenses and profit c. Series of payments throughout the construction project to reimburse the developer for costs incurred since the previous payment d. Series of payments throughout the construction project to reimburse the developer for budgeted expenses in the upcoming period 7. When might a Bridge Loan typically be used in a development project? a. When the sales of the condos is much longer than originally scheduled. b. When the lease-up time is much longer than originally scheduled. c. When the building is to be sold upon lease-up. d. When you are selling part of the mixed-use development. 8. In a condominium development project, the amount to be paid to the lender from each condo sale is called the: a. Release price b. Development return per unit c. Loan repayment d. Debt service 7

8 SECTION A 9. As a limited partner investor in a development project, for which phase would you expect to receive the highest return: a. Land optioning & assembly, design development, and entitlements phase. b. Construction of the improvements. c. The lease-up phase prior to stabilization. d. The stabilized operating phase. 10. Which of the following is typically not an item on a development project proforma: a. Hard cost contingency b. Soft cost contingency c. Interest Reserve d. Capital Expenditure Reserve 11. Which of the following is FALSE regarding the release price in a land development project? a. It is usually calculated to pay off the loan when the last lot is sold b. It is usually calculated to pay off the loan before the last lot is sold c. Increasing the release price usually lowers the lender s risk d. Increasing the release price is likely to lower the investor s initial cash flow 8

9 SECTION A 12. Which of the following is NOT regarded as contributing to the complication of estimating the amount of interest reserve? a. The loan is drawn intermittently and interest is calculated on drawn amount. b. Revenue from each type of completed project varies. c. The rate of repayment of a condo development loan depends on when the condos are sold. d. Development loan interest rates are usually fixed while market rates fluctuate. 13. Development activity in the USA is strongly linked to the macroeconomic environment. Which of the follow statements is the most accurate with respect to current conditions: a. The forecast for US growth for 2016 has been generally regarded as moderate at around 2% b. The 3Q 2016 GDP growth was recorded at 2.9%. c. The 3Q 2016 GDP growth was recorded at a moderate 1.8%. d. China s growth outlook is very strong at 6.9% 9

10 SECTION A 14. When developing projects in challenging urban environments, you might consider using a CRA loan. Which of the following statements about CRA loans is FALSE: a. CRA Loans were a result of the Community Reinvestment Act of b. CRA Loans are generally utilized in low and moderate-income communities. c. CRA Loans are typically part of the capital stack of Public-Private Projects. d. CRA Loans can be a core component of the capital stack for affordable housing. 15. Which of the following statements most accurately describes the 2016 investment environment for office buildings in the USA: a. Cap rates have remained compressed at just below 7%, providing equity investors with better returns than at the end of b. Cap rates have remained consistently compressed at just below 7% because the relevant Risk-free Rate has remained consistently at just above 2% since the end of c. With Cap Rates remaining compressed at just below 7%, the lenders have become more aggressive during the year and provided increasingly low-rate mortgages. d. Cap rates have remained consistently compressed at just below 7% but the yield for lenders has increased since the end of

11 SECTION B 1. You are considering the following development opportunity of a Suburban Office building and such properties are currently trading at an 8% cap rate: Office building project with 100,000 Net Rentable SF Land Acquisition cost $2M Construction cost $200/sf Estimated operating costs (to landlord) = $12/sf/year What is the required minimum market gross rent per SF/year that will make the project feasible? 11

12 SECTION B 2. You are looking at a site in Brooklyn for which you would like to bid. You intend to build an office building of net leasable 200,000 sf for which the market rental rates are projected to be $50/sf and stabilized occupancy at 90%. You have a substantial portfolio of these buildings and know that it will cost you approx. $200/sf to build, and upon completion you expect the Operating Expenses you must carry will be $15/sf. You check the capital markets and note that for such a property lenders are offering the following terms: interest rate of 5%, LTV 70%, DSCR 1.2times, term of 10 years with an amortization term of 20 years. What is the maximum price you could bid for the site and still have a feasible project? 12

13 SECTION B 3. The cap rates on multifamily properties are very low compared with historical rates, so therefore, as you consider developing a property, you would like to know what the break-even cap rate you would need to sell it at for your development project to be feasible. The project you are considering is for a 50 unit building on a site that is listed for $1M. You know that your construction costs will be approx. $150,000/unit, but you can expect averaged stabilized rental rates of $2000/ month with only 5% vacancy and minimal operating expenses of $500/unit/month. Calculate that break-even cap rate. 13

14 SECTION B 4. List three key differences between investing in a development project compared with investing in an operating property. Risks are higher: bigger chance of losing capital; not meeting return projections. Returns are potentially higher: DR usually 12-20% vs 8-10% Value of completed project is subject to variation vs the valuation of in-place leases. Financing for the construction phase is usually more expensive and can be more difficult to obtain. A wider variety of skills/participants are involved, therefore requiring more management. 14

15 SECTION B 5. You start a construction project and after spending all of your available equity, you start using your construction loan that has an interest rate of 8%. Given the following drawdowns over the first 4 months, what would be the loan balance at the end of the 4 th month? 15

16 SECTION B 6. The real estate development process typically has four phases. For a residential multifamily rental project give: 6. A brief description of each phase the activities and risks involved. 7. Also indicate the typical Discount Rate you would utilize for your financial analysis in each phase. 8. Also state what would be the typical sources of capital in each phase. Pre-development: option site, planning & design, get approvals, obtain financing. (30%+ from equity partners; maybe acquisition loan for local bank for land/ existing building.) Construction: improvements are built through to TCO (DR 12-20%; construction loan from local bank), Lease-up period (DR 8-12%; extension of construction loan, or if protracted, miniperm loan from local lender; if distressed, from non-traditional lenders), Holding period (DR 6-8%: equity and/or debt from insurance, pension funds, institutional, high-net worth, REITs). 16

17 SECTION B 7. List five key differences between a construction loan and a permanent mortgage. Construction Loan is always floating rate (vs potential fixed rate); C. Loan requires guaranty (vs mortgage with generally no guaranty); C. loan balance is drawn down over the construction period (vs perm. loan amount drawn down immediately); C.Loan is usually short term (vs potentially longer term e.g. 5,10, 20, 30 years), but may depend on the project e.g. Hudson Yards; Construction loan rates usually higher; loan amount is determined based on Loan to Cost (vs Loan to Value) and constrained by the permanent debt markets. Construction loan may often involve tri-partite agreements between developer, the construction lender and the permanent lender. 17

18 SECTION B 8. What would be the maximum amount a lender would give you for a construction loan if your proposed multifamily project has a total development budget of $4,500,000 with a LTC condition of 70%? Your completed property is expected to have a stabilized NOI of $300,000, and the mortgage market is offering 5% rates for 20 years, 1.2 DCR, and 70% LTV on a 6% cap rate. 18

19 SECTION B 9. If you are buying a property (site with an existing building) and anticipate undertaking a major redevelopment of it perhaps changing it to a totally new use how might you finance the purchase with debt? Describe the loans, relative rates, security required, and the respective methods of repayment. Take out a Value Add loan that covers the acquisition with mortgage on existing property and covers the construction costs, rate higher than permanent (lower than pure construction?) guarantees, repaid with permanent take-out; Take out a mortgage for the acquisition, then a construction loan for the redevelopment, then refinance with a permanent to repay both. 19

20 SECTION B 10. When deciding whether or not to make a construction or value-add loan for a development project, the lender has in mind five major credit concerns, known as the 5 Cs of Credit. List them with a brief description of each. Character Capacity Capital/Cash Equity Collateral (not a mortgage on the property!) Conditions: lender s conditions LTC 20

21 SECTION C 1. Which of the following is a soft cost of construction? a. The cost of the construction approvals b. The cost of excavating the site c. The cost of the site shed and facilities d. The cost of finishing the interior space 2. Mini-perm loans usually refer to financing: a. For pre-development costs b. For the period of condo sell-off c. For construction and all subsequent holding periods d. For construction, lease-up, and one or two subsequent years 21

22 SECTION C 3. You are going to do a development project with a 12-month construction period. An estimate of the Interest Reserve for a $1,000,000 construction loan with a 7% interest rate and assuming a 65% average drawdown is: a. $107,692 b. $70,000 c. $45,500 d. $5,833 22

23 SECTION C 4. In comparison to permanent financing, the rates and rate variability for a construction loan typically would be: Interest Rates Interest Rate Variability a. High Steady b. High Fluctuating c. Low Steady d. Low Fluctuating 5. Interest on a construction loan is usually charged: a. Up front at the beginning of the loan b. At the beginning of the month over the life of the loan c. At the end of the month over the life of the loan d. Compounded, at the end of the loan 23

24 SECTION C 6. Besides an estimate of costs, a construction loan submission package includes many other components. Which of the following is NOT one of those components? a. Proforma of Cash Flows for equity distributions b. Proforma of Development Cash Flows c. Proforma of Holding Period d. Sensitivity Analysis 7. Why would a developer be willing to manage a completed project even after it has been sold? a. The developer knows the project better than other management companies and, therefore, could manage the property more efficiently b. The developer could profit from the lucrative management fees being charges by management companies c. Knowledge of the tenant s needs and the current leasing market might give the developer better insight with respect to future developments d. All of the above 24

25 SECTION C 8. Consider the feasibility study shown in the table below. What is the return on total cost for the proposed project? Total sales revenue $10,000,000 Less: Development cost 6,000,000 Less: Land asking price 1,000,000 Potential gross profit $3,000,000 Less: Admin., legal, commissions, etc. 1,500,000 Potential net profit $1,500,000 a % b % c % d % 25

26 SECTION C 9. Refer to the information in the previous question. You have been advised that sales revenues may be 10 percent lower and/or development costs may be 10 percent higher. Performing a sensitivity analysis, you conclude: a. A 10 percent decrease in sales revenues would have a bigger impact on returns than a 10 percent increase in development costs b. A 10 percent increase in development costs would have a bigger impact on returns than a 10 percent decrease in sales revenues c. A 10 percent increase in development costs and a 10 percent decrease in sales revenues would have opposite impacts on returns, canceling each other out and having no impact on returns d. Both factors would have such a small impact, that there is no reason to be concerned about either a 10 percent increase in development costs or a 10 percent decrease in sales revenues 26

27 SECTION C 10. An analysis of whether land can be purchased and developed profitably is known as: a. Financial analysis b. Feasibility study c. Turnkey study d. Project profitability 27