Real Estate Development Financial Feasibility

Summarizing
an important
real estate
concept
DEVELOPMENT
FINANCIAL
FEASIBILITY

Ploutus Advisors, LLC 1
DEVELOPMENT PROCESS

THE DEVELOPMENT ECOSYSTEM
Ploutus Advisors, LLC 2Source: Graaskamp’s Real Estate Process

THE DEVELOPMENT MODEL
Pre-Development
•  Concept,
Refinement, Due
Diligence
Control
•  Contract
Negotiation, Formal
Commitment
Development
•  Construction,
Completion,
Opening
Management
•  Property, Asset,
Portfolio

THE DEVELOPMENT PROCESS
Planning /
Design
Construction Operations
Approvals Financing
Marketing & Leasing
9 to 12
months
30 to 36
months
SIMULTANEOUS
PROCESSES
Source: Joseph O”Connor; ICFA

DEVELOPMENT FLOWCHART
Project Concept
Site Selection
Research
Properties
Land Purchase
Offer
Site Due
Diligence
Close Land
Preliminary
ProForma
Project Defn.
Architect
Conceptual
Design & Est.
Schematic
Design / Initial
GMP
Value Eng. &
Agency Review
Design Dev. /
Final GMP
Constn. Docs
Bid &
Subcontract
Building Constn.
Open for Use
Agency
EIR
Planning &
Zoning Approval
Eng. Consultants
& Studies Market Research
Financing
Options
Bond Equity Debt
IdeaPlanning
Execution
Source: Phelps Development

RISK VS. VALUE
HIGH
Property
Value
Low
Cap
Rate
Low
Risk
LOW
Property
Value
High
Cap
Rate
High
Risk
Return on Investment is inversely correlated
to probability of Return of Investment

REAL ESTATE DEVELOPMENT VS. RISK
Ploutus Advisors, LLC 7Source: Geltner, et al, 2007
CumulativeInvestment$
RiskLevel
Time Land Optioning,
Assemblage,
Permitting &
Design
Construction Lease-Up &
Tenant Finishes
Operation &
Stabilization
Land
Purchase
Shell
Completion
Development
Completion
Very High
High
Moderate
Low
Cumulative Investment $
Risk Level

THE DEVELOPMENT CYCLE
Ploutus Advisors, LLC 8Source: D. Kohlhepp, Johns Hopkins
Land Banking
Land Packaging
Land Developer
Building Developer
Building Operator
Building Renovation
Redevelopment
Property Ready to be
Redeveloped
Developable Land
Land with Plans, Approvals &
Studies
Building, Lots, Pads
Fully Constructed Building
Building Needing Renovation
& Re-Marketing
Worn Out Property
sells
sells
sells
sells
sells
sells
sells
continue
continue
continue
continue
continue
continue
continue
STAGE 1
STAGE 2
STAGE 3
STAGE 4
STAGE 5
STAGE 6
STAGE 7
BUYERGETS

8 CATEGORIES OF TASKS WITHIN EACH
STAGE OF DEVELOPMENT
• Feasibility studies, underwriting requirements, contract negotiations, and
closing conditionsAcquisition
• Financial projections, financial management and projections, and capital
formation and accumulationFinancing
• Projected economic conditions, market strategy, and advertising and
promotion (the marketing mix)Market Studies & Marketing
• Environmental studies (Phase I, II, III), LEED ratings, atmospheric surface
and sub-surface conditions, cultural and historical conditionsEnvironmental
• Federal (EPA, DOD, DOT), state (DES, DOT, Fish & Wildlife), regional &
intergovernmental (bay / watershed authority), local (zoning, building code,
police & fire), private (easements, boundary disputes, crane agreements)
Approvals & Permits
• Planning and design, engineering, constructionImprovements
• Off-site, on-siteTransportation & Accessibility
• Seller’s due diligence, marketing, sales contract, development agreementsDisposition
Source: D. Kohlhepp, Johns Hopkins

ECONOMIC FEASIBILITY

FINANCIAL FEASIBILITY
¡  Feasibility is a process where the developer hires consultants
to conduct legal due diligence, study the market and conduct
marketability research, initiate a design process, initiate the
entitlement process, arrange for equity and debt, and evaluate
project costs and returns
¡  Project is considered financially feasible when the return on
the project (or investment) equals or exceeds the required
return of the developer (or investor)
¡  Few measures of financial success:
§  Internal rate of return (IRR) via discounted cash flow (DCF) analysis
§  Cash on cash yield
§  Equity multiple
§  Debt service coverage (DSCR)

MARKET RESEARCH
A market study should be conducted to include:
¡  Project description
¡  Site evaluation
¡  Analysis of market area – primary and secondary
¡  Analysis of the area economy
¡  Market demographics
¡  Supply and demand analysis

¡  Consists of all costs necessary to build the project
¡  Fluid number that becomes more precise as the time of
construction approaches
¡  Budget should be finalized before construction starts
DEVELOPMENT BUDGET
Owner’s
Estimate
Architect’s /
Contractor’s
Estimate
Contractor’s
Bid
Construction
Contract
BUDGET STAGES

1.  Land and Building Costs
2.  Site Work
3.  Rehabilitation / New
Construction
4.  Contingency
5.  Architect and Engineer
Fees
6.  Interim Costs
DEVELOPMENT BUDGET COST
CATEGORIES
7.  Financing Fees and
Expenses
8.  Soft Costs
9.  Syndication Costs
10.  Developer’s Fees
11.  Project Reserves

QUICK ANALYSIS

STATIC ANALYSIS

FRONTDOOR APPROACH
(LOAN-TO-COST RATIO APPROACH)

BACKDOOR APPROACH
(DEBT COVER RATIO APPROACH – LENDER’S POINT OF VIEW

BACKDOOR APPROACH
(DEFAULT RATIO APPROACH – DEVELOPER’S POINT OF VIEW

DETAILED ANALYSIS

DETAILED DEVELOPMENT BUDGET

MARKET ASSUMPTIONS

LAND INFORMATION

AREA BREAKDOWN

CAPITALIZATION / SOURCES & USES

PROFORMA

RESULTS

SENSITIVITIES

IN CONCLUSION - THE ROADMAP
Plan
Gather
Relevant
Research
Involve All
Parties
Having A
Stake
Analyze
Make A
Qualified
Decision

CONTACT US
Disclaimer: The information contained herein may be subject to errors, omissions, changes in assumptions and, other factors. We do not provide
any guarantees, express or implied, and/or make any representations as to the accuracy of the assumptions used and/or other information
contained herein. All information contained herein is only for purposes of illustration, and should be independently verified by the user. The
analysis represents our interpretation and is NOT intended to replace information received from tax and/or accounting professionals. The user is
advised to conduct their own due diligence and consult with their advisors prior to making any decision.
For real estate consulting and
advisory, please contact:
Mr. Adnan Tapia
Email: atapia@ploutusadvisors.com
Tel: +1.424.274.3561
Ploutus Advisors, LLC
1875 Century Park East, Suite 700
Century City
CA 90067
Adnan is a Principal at Ploutus Advisors, LLC; a boutique real estate
investment and advisory firm based in Los Angeles, California.
Over a period of 18 years, Adnan has worked on 16+ million square
feet or US$2.5 billion worth of US and India focused real estate
transactions across several product types (office, industrial, retail,
residential, hospitality, mixed-use, land) and life cycles in areas such
as real estate private equity, financial consulting, acquisitions and
development.
Adnan graduated with a MBA in Banking and Finance from Case
Western Reserve University, Ohio, and was nominated to The Honor
Society of Beta Gamma Sigma. He also holds a Master in
Engineering from Cornell University, New York, and Bachelor in Civil
Engineering from University of Pune, India. In addition, he holds a
California Real Estate Broker’s license and is a member of ULI,
NAIOP and the Cornell Real Estate Council.

Real Estate Development Financial Feasibility

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