1. Executive Summary
Letter of Intent
The following is a solicitation to land owners whom may be interested in a joint venture
opportunity with a developer in order to get rid of their land and make some extra profit.
The proposal will depict a researched development opportunity within the South Florida
real estate market that is not site-specific. Despite economical housing trends, there are
several niche markets in the area that have a great deal of unique potential.
A partnership is requested from the landowner in which they will receive a preferred
return that should exceed the current asking price of the land. The underlining and
ultimate goal is to have as little risk as possible for each of the players. To do this we
propose to create a 501(c) tax-exempt corporation to better secure our financial hurdles.
The project can either be held for an undetermined amount of time or sold immediately
following completion based on the landowner’s discretion.
If accepted, all documentation associated with the land will be used to determine subsidy
eligibility and environmental testing. Upon passing approval, the value of the land plus a
guaranteed 12% annual rate of return will be guaranteed to the landowner. At any point
before construction the landowner may pull out if not satisfied. If continued, the land will
be used as a down payment for the construction loan. If the proposal makes it to this stage,
it will have endured strict guidelines that even with the worst-case scenario of bankruptcy,
the to-date investment toward the project should by all means exceed the collateral owed
to the lender and the landowner may cash-out.
The following pages are intended to highlight the appropriate market demands and
potential risks accompanied by ways of mitigating that risk.
The same letter has been submitted to ____________________ to be distributed to other possible
landowners. We can only select one site, and time is of the essence. Please respond at your
The proposed project is a four story multifamily apartment building comprised of 24 units
and 10,000 sq. ft of ground floor retail. It will be of modular construction with the
foundation prepared to allow for additions or modifications over time. Based on the latest
research, it will be designed to appeal to a Hispanic market. So that we do not
underestimate the impact of the current down market, we propose all of the residential
units to be affordable for low-income families. This will make the project eligible for
reimbursement of up to 100% of the construction cost. As the market analysis will explain,
there is a long wait list for affordable housing which will guarantee occupancy in our
project. The general process of our cost reimbursement will be by applying for the Low
Income Housing Tax Credits (LIHTC) through the Florida Housing Finance Corporation
(FHFC) and then sell them as tax alleviation for the highest bidding investor.
2. Joint Venture Analysis
The joint venture can be structured in a manner of ways and can be negotiated in greater
detail based on the landowner’s primary objectives. Since LLC’s are non-recourse, any
property or estate of the parties that is not directly associated with the LLC will be
protected by law. Financial Insurance for Real Estate (FIRE) can be purchased to secure the
involved capital. Possible methods of establishing the joint venture are as follows and are
not limited to this list:
1. Create an LLC between the two parties, this would essentially work towards the
landowners best interests as if something were to happen (default, a suit, environmental
issues) by law it will be non-recourse for the members; the LLC would have full
responsibility and the LLC simply bankrupts. However, even after applying worst-case
scenarios and excessive contingencies, our calculations show hurdle-rate returns near
2. If the landowner does not want any responsibility of the venture for any reason, then they
may wish to sell the land for a minimal amount to a trusted shareholder, agent, or family
member. That person or group could then do a side contract with the landowner reassuring
the landowner’s ultimate compensation after the project has stabilized.
3. Create a general partnership with our already established LLC and the landowner will
serve as a silent partner. (Option 2 is still applicable.)
4. If the landowner is a corporation, LIHTC may be sold to the landowner by entering into a
limited partnership or forming a limited liability corporation with 99.99% of the profits,
losses, depreciation, and tax credits being owed to the landowner.
No matter the scenario, preferred returns will always be allocated to the landowner and
will see compensation before anyone else involved.
Other details and terms of the joint venture can be negotiated, such as a Purchase Money
Mortgage‐ a loan taken back by the seller of the land; as the buyer develops the land, new
financing is obtained and the seller is paid off. Leasing the land from the seller may also be
considered based on potential terms.
In conclusion, we are not intimidated with creative forms of accomplishing this. Any other
options are more than welcome.
3. Market Analysis
Target Consumers: retirees, teenagers, and Hispanics
Florida, along with Arizona and Georgia are the fastest growing states in the nation. The
growth of Florida is due in large part to the huge influx of Baby-Boomers retiring near the
Sunbelt. Although there are record numbers of wealthy retirees, not all are as fortunate and
the demand for affordable housing will continue to grow with this bracket of patrons.
Additional demand for rental units will also come from the Echo-Boomers; born 1977
through 2008. The prime age of renters in Miami is 20‐29. The peak of the echo-boom in
1990 released 4.3 million people into society who will be 20 near the estimated time of
completion of this project. These individuals will be looking to move away from parents to
live affordably with friends. However, the leading drive that makes Florida one of the
fastest growing states in the country is due to immigration from Latin American countries
because of its strategic international access. In Miami immigrants contributed to 40% of
household formations between 2000 and 2005. Twenty-five percent of renters are foreign
born. In addition, two out of three renters in the City of Miami are minorities.1 During 1994
to 2004, the number of minority renters rose by 3 million households, offsetting a
comparable decline in the number of Caucasian renters.2 The graph below depicts county
statistics from the US Census Bureau.
The Untapped Low-Income Apartment Market
Despite the current trends on mortgage foreclosures, the apartment market remains
strong. To reinforce this, the latest CBRE reports indicate that apartments are currently the
second best market while condominiums are the least successful of all sectors. Current
4. apartment stock in Miami is insufficiently counterbalancing the distressed 30,000
homeowners from just last year that had to foreclose. The state lands in third for most
foreclosures in the nation. It is obvious that these people will need short term means of
housing while looking for other homes or simply just cannot afford a 30-year mortgage
with their salaries. Sure enough, many of the oversupplied condominiums in Miami have
responded by converting to apartments to reflect this offset, however the quality of
condominiums when first built are significantly of better quality than that of apartments.
This in turn suggests that they are only filling the demand for high-priced luxury
apartments and leaving the lower-income apartment market untapped as it steadily builds
momentum. There is much lender scrutiny due to the oversupplied market, yet this
investigation has unveiled a niche market for low to middle-income short-term housing for
minorities in Miami.
With an area of more than 5,000 square miles, and a population surpassing 5.5 million
full‐time residents, South Florida is one of the largest consumer markets in the US. Miami is
the seventh largest metropolitan area in the US with an average household income of over
$72,000. Many international companies enter the United States by establishing their first
operations in South Florida. The cost of operating a business in Miami is highly competitive
compared to other major metropolitan areas. There is a low tax structure with no state or
local income tax, and corporate income tax is just 5.5%. Property taxes are currently among
the lowest of major US metropolitan areas. Retail hinges on income generating
communities. The buying power for our proposed retail can be calculated by figuring out
the catchment area of the employed population, which we can assume is within a radius of
a two-hour drive. This would encompass close to three million people who have the ability
to spend roughly 30% of their Average Median Income of $55,900 annually on housing and
leaves $33,540/12months=$2,795 * 3 million people = $8.4 Billion per month just floating
around the general area for products and services.
Local Funding Sources
Florida is being federally funded to meet its housing requirement demands and as a result
has created several services to distribute allocated funding to developers. The City of Miami
requires a minimum of 15% of units within a 10-mile radius to be affordable. The Economic
Development Department created a Community Development Entity (CDE) for purposes of
applying and allocating New Markets Tax Credits (NMTC). The NMTC program is
recognized for steering low interest, private capital into distressed communities to acquire
capital for commercial and residential projects that are hard to fund. Similarly, the
Hampton Roads Venture (HRV) is a community development investment firm that has
partnered with the City of Miami to help attract private sector investment capital,
specifically towards innovative real estate projects in lower income neighborhoods. They
are expected to apply for a $75 million allocation exclusively for Miami in which this
project could tap into. Last year, the city helped fund 10 projects that represented 1,104
new units and over $277 million in additional affordable housing projects. The city has a
goal to develop $1 billion in affordable housing by 2010, and since 2000, they have already
spent close to $600 million to show their commitment.
5. Public and Private Development
Public and private development may be requested from the local government, where if you
provide some public space, local art exhibition space, child or health facilities, or just
something relatively good to the general public, the city can do a number of different things
such as expedite the application process, increase FAR, zoning variances, and alleviate
Enterprise and Empowerment Zones
In addition to all of these opportunities to implement toward the project, Miami‐Dade
County has allocated regions within their political map as distressed areas. These areas
have been designated as Enterprise and Empowerment Zones. An Empowerment Zone is a
federal targeted to create economic opportunities. Businesses locating there will obtain
many governmental benefits such as sales & corporate tax credits and tax exempt bond
financing. It is considered, without a doubt, the most powerful engine for the economic
revitalization of inner city areas. Doing business in Enterprise Zones will also qualify for tax
exemptions among many other things. There are several sectors where the two zones
intersect and will hold much potential for the proposed ground floorretail of the
Federal Funding Sources
Other subsidies that may be available are from the IRS Treasury such as income tax
assistance, reduced real estate taxes, mortgage interest alleviation, and of course the
largest subsidy of all, the Low Income Housing Tax Credit (LIHTC) which will serve as the
guiding source for the development. Close to half of multifamily projects are funded in part
by LIHTC. The project at hand holds much merit oriented towards this source of funding.
Resident-Based Section 8 and Site-Based Section 8 is also available from HUD and will be
applied for in conjunction to the other subsidies. In 2000, Miami assigned an exclusive
“in‐house permit expediter” for affordable housing and has a Universal Application Cycle
for many other subsidies.
Risk Factors and Strategies for Risk Mitigation
Despite record breaking foreclosures and the oversupplied condo market with another
40,000 units coming online next year, Florida is nevertheless one of the fastest growing
states in the nation and will recover smoothly as interest rates decline and job growth
picks up. The market has reached or is nearing the bottom where there is nowhere else to
go but up. This is the most opportune time in decades to get involved with real estate.
However, to evermore safeguard our interest during this time of volatility in the market,
affordable housing is distributed in a lottery fashion for a long waitlist of people. If the
economy is bad, then the list will increase, thus reassuring a steady income for the project.
To continue mitigating the risk of the economy, the proposal is not site-specific in order to
expand the geographical area and demographical markets that may have unique potential
6. in its vicinity. Despite whatever is happening to the economical market, real estate will
always be a direct reflection of its local context, hence the term “location, location,
There is little political risk because there is predictability and transparency in the
governmental systems. Having well designated laws as they have in Miami as well as the
new Miami21 rezoning master plan are beneficial in order to eliminate uncertainties. A
large part of the population is Cuban and statistics show that tenants are expected to come
from the local area.3 The mayor of both Miami (Manuel Diaz) and Miami-Dade County
(Carlos Alvarez) are both Cuban born Hispanics ready to make a difference in the need for
housing. Mayor Diaz has recently been reelected and has put housing as a top priority.
According to a statement given by the mayor earlier this year, they will encourage joint
ventures between for‐profit developers and non‐profit agencies, taking politicians out of
the contract award process. Special considerations for several subsidies are given to
developments that target specific groups and areas such as this one.
As more foreclosed assets come online at affordable sale prices and price of materials
keeps increasing, it would appear to make sense to rehabilitate or add-value to distressed
properties. In the state, site costs keep rising and soft cost are increasing due to the
complexity of new and changing laws and codes. Yet labor costs have remained stable in
comparison. This is due in large part to the fast growth of immigration. The argument is
that while there is less up front risk and costs, if the property will be held for a long period
of time, which we are hoping is the case, then the cost of maintenance and upkeep may
prove to be less lucrative than a new development on raw land that will have a longer,
more durable lifespan. Creating the development from scratch will also allow for a
proposed overdevelopedfoundation and strong structure to tolerate the opportunity to
add to the building if the project proves extremely successful.
Lenders are being very careful with their money, but the truth of the matter is that they
need to invest their deposits into something or the value of their securities depreciates as
inflation increases. Their main concern is high-risk ventures that are usually associated
with large-scale developments that can be several millions of dollars. It is only to their best
interest leveraging smaller low-risk opportunities that can be easily evaluated and
calculated for risk without much capital upfront. Lenders are also allocating variable rates
that are unfavorable in an unstable market, yet the current low interest rates on loans and
mortgages will positively impact the project’s budget. Leverage risk will further decrease
this year because it is a highly liquid and stable debt market. Lower interest rates and the
weak dollar will also help to alleviate the current economy that may be considered a risky.
3 Joint CenterforHousing Studies
7. Insurance Prices
Insurance risk seems to be an issue in the city; both financial insurance and property
insurance. Property insurance is due to a devastating amount of natural disasters.
However, it is a high priority for the governor to have some insurance alleviation signed
this year that will reduce the overwhelming costs. As for the financial insurance, CBRE
states that a possible $32 billion reinsurance will improve availability for banks such as
Citizens to expand their policy offerings due to the direct competition with other financial
institutions that this will create.
New Construction Justification
The cost of new construction is also mitigated by using modular home manufactures.
Currently two prefab companies, Genesis Homes and Southern Structures have been
instrumental in the development of the design to accurately portray efficiency and
constructability. They have also provided competitive bids at around $50 per square foot.
The modular construction is guaranteed to be of LEED Certification quality thus more
easily gaining approvals and accelerating the city application process. At the landowner’s
request, Performance Bonds or Completion Bonds may be requested to further reduce
construction risk; otherwise construction will be paid monthly on Time and Materials. The
latest Building Information Modeling (BIM) software will be used to more accurately
communicate between LLC, municipalities, and contractors which in turn will improve
transparency for other parties, reduce unforeseen complications like change orders, and
reduce the costly construction time.
Competitive properties may be developed as soon as this niche market is more closely
examined by large institutional firms, thereby increasing the supply thus increasing
vacancies. This risk can be mitigated by acting as soon as possible. Furthermore, statistics
show that smaller buildings are in higher demand than large-scale apartment complexes,
which is beneficial because this project can be considered undersized.4
The complexities involved with applying and implementing affordable housing may be
considered a time risk. However the demand for affordability will always exceed supply.5
Affordable housing is a great way of minimizing uncertainty risk. Government assistance
will minimize the developer’s soft costs which has significant influence in the overall total
development cost. The subsidies will cover such line‐items as impact fees, property taxes,
and even marketing.
The risk of not having a proper demand is important, yet affordable housing tenants are
guaranteed as there is a long lottery list which will ensure occupancy. We are only
introducing 23 units into the market, which is relatively nothing compared to big
developers releasing several hundred units in one ribbon cutting. One and three bedroom
4 Joint Center for HousingStudies
8. units seem to be the most popular, thus the project will incorporate a reasonable
distribution of each. For individuals residing in the market rate units, the marketing of the
property will be a joint effort with brokers, lenders, and any investors which should adhere
to the current demand. Demand may strengthen even more if interest rates decline or job
growth picks up. Elderly rental housing may be a reliable source, however this is old
information to major developers who have already began exceeding the demand for that
Securing Retail Tenants
The interior layout of floor retail will be transformable. The partition walls will be
dismountable or relocated based on the tenant’s preferences. This allows flexibility in
allocating occupancy and reduces the cost of tenant improvements during turnovers. It
could be either one unit rented to a mid-sized franchise like CVS or Walgreens or three
specialty stores. The rear will allow for a loading dock with trash disposals that can be
shared with the residential tenants. It is of upmost importance to provide ‘Class A’
accommodations for the retail because it a superior market currently in Miami and a very
profitable sector in real estate in general. This is especially true when located on the
ground floor or near public circulation as may be the case. To further reduce risks, the
commercial tenants will be secured before construction commences. Fortunately, there are
already some interested medical tenants who specialize in eye-care that would enjoy the
ability of possibly working in the same building they would live in.
The ability to adapt and take advantage of short‐term downturns and to be able to hold
property long‐term has been said to be the key to success in real estate. Some people would
argue that holding the asset for a long period of time is a bad idea because of the
‘opportunity costs.’ In other words, cash in pocket now is better in order to reinvest it into
greater opportunities. The fact of the matter is that the value of the asset will keep
appreciating, the rents will keep increasing to adjust for inflation, and the property taxes
and finance costs steadily decrease. After twenty-seven and a half years the depreciated
value of the asset will be completely tax exempt in which the rental income will be strictly
profit. Another method to mitigate the long-term financing is through operations cost, by
applying triple net leasing. Another method is an expense stop. This is a predetermined
amount that the LLC will not pay in excess of from operations; the tenant will take on the
additional expenses. To improve the long-term affordability of the building, it will not use
cheap alternative materials because good efficient materials will reduce the long-term cost
of operation, maintenance and replacement reserves.
If the project can no longer support loan payments, it is possible that the lender can take
the title of the property without filing a default‐“deed in lieu of foreclosure”. By using this,
both parties may save time and money with the foreclosure costs. This would be ideal, but
the types of default procedures will vary by institution. If the parties are in dire need of the
equity to reinvest into other opportunities, then with a mutual agreement, the asset can be
sold based on the existing cap rates.
9. Management Team
To present absolutely all possible risks involved in the project, we will now disclose risks
associated with our company. We are a team of four graduate students from Harvard and
MIT’s midcareer level and real estate development programs focused on creating mixed-
use developments throughout South Florida. Although we do not possess a track record, we
have fresh academic expertise and local connections to create a quick and smooth yet
lucrative project. To mitigate any uncertainties of our company’s new standing, we will
benefit the partners and investors by not including the 10% developer’s fee. We also plan
to manage the housing thus also alleviating the 6% management fee. Vacancy, although
currently minimal at 3% will be assumed to be 10% to mitigate for any inefficiencies in our
calculations. All contingencies have been placed at 10% where the norm is 5%.
Replacement reserves are excessive to ultimately absorb any unforeseen complications as
we begin work in the ‘real world.’ All of these discounts combined will highly improve the
survival of the project. However, once the project is deemed a success and is generating
stable income, one unit will be taken into exclusive possession at no additional cost to
house the on-site management.
Marketing and Sales Plan
As mentioned earlier there is $400 million destined for investment toward the
development of affordable housing to be used by 2010. The current slow trend on real
estate is expected to gain some more momentum in the years during this project. If interest
rates keep declining as they have, and job growth continues to grow with the rise of
immigration to the state, then this project should prove to be a successful and lucrative
10. venture. The soon to be oversupplied market of Class A apartments will leave a big
business opportunity for the less expensive apartments.
The financial goal of the venture will be to get a 12% leveraged IRR. Even though it may be
considered low by some standards, it is a direct reflection of this low risk venture. The rent
from residential will be further described in the Financial Analysis of this report. The aim
for leasing the retail is either to be introduced at $35 per square foot or be based on 5% of
that retailer’s monthly income of sales are, such that NOI x 5% = rent. The greater sum of
the two will be the method chosen. Our service objective will be to create a better standard
of living for distressed families in Miami and use this project as a launch pad for more low-
income developments that will stimulate communities and ultimately raise the quality of
life for the families and surrounding neighborhood.
Statistics show that 95% of people who apply for apartments previously resided within one
mile of that location, and even more so for low-income. Four out of five apartment tenants
come from the local area. A major factor is that the population of Miami is 35% Cuban.
Because of this marketing will be done strategically toward that market sector. The
building as a whole will have a whimsical design reminiscent of typical architecture found
in the downtown areas of San Juan and Havana. The structure it’s self will be considered a
Garden Style Building because it is below five stories in height and will not require an
Local attorneys have already been identified to facilitate any discrepancies. BMC Capital
will most likely serve as the lender for the construction loan, and permanent loan will
possibly be obtained from the City of Miami Public Bonds. Southern Structures or Genesis
Homes will do the construction and the government will market the product.
Downtown areas have the greatest demand for housing and will be sought after during our
selection process of a site. However, waterfront property will be on the top of our list.
Studies show that demand will always stay strong for waterfront properties. Waterfront
development may be considered expensive in the front-end, but in the long run it is where
the majority of humans would prefer to live. Not just for the vistas but access to the water
is important, thus boat slips or swimming areas would be a major plus for the project.
Areas deemed ‘distressed’ by the city would also complement the investment returns of
this venture while doing ethical good and will be highly prioritized.
We propose 100% low-income units yet not all the units need to be affordable. To be
eligible for the maximum amount of local government benefits, 20% of the units need to be
affordable to individuals that make less than 50% of the monthly Average Median Income
11. (AMI) of $4,100.6. However, by providing all affordable units will allow for 100% of the
construction cost to be reimburse from the LIHTC.
Breakdown of LIHTC
All low-income tenants will be charged 30% of 60% of $55,900 (AMI) which is depicted in
the chart below using the HUD’s designated Family Median Incomes (FMI).
The project’s eligible amount will be 100% of the construction cost which is $ 3,384,122.
The full amount of the credits can be sold at about .85 cents on the dollar to thrifty
investors, banks, or Fannie Mae and Freddie Mac. It will be reimbursed at a rate of 9% or
$370,350 annually for 10 years.
Being a 501(c) non-profit organization, the project will be tax-exempt and profits will be
reinvested toward the corporation only after the land has been fully paid off along with a
12% annual interest gain. As shown in the table below the first year of operation is
assumed to have $341,403 in profit.
Tax-exempt status will also allow greater chances of allocation rights as the government
has a portion of their allocations “set aside” for non-profits. By financing through the City of
Miami Public Bonds will also add preference to this project during the city’s allocation
rounds. The project will be required to stay affordable to tenants for a minimum of 15
years. This means that an investor wishing to exit the partnership before the end of the
compliance period may do so by posting a surety bond to avoid credit recapture.
Have in mind the land owners ultimately gain will be repayment of the original value of the
land plus 12% interest gained per year for every year it has not been paid back in full. The
following is just to illustrate the potential for the landowner who wishes to stay involved
12. 10 Year Projected Returns
Sources and Uses
For your reference, depicted in the chart below, the sources and uses have been separated
on a month-to-month basis during construction.
This document is intended to serve as a detailed explanation of the proposal and is by no
means a binding contract if one should wish to pursue it.