Table Of Contentfinance
for
real estate
development
Charles long
FinRED_FOB.indd 1 3/22/11 12:56 PM
About the Urban Land Institute About the ULI Center for Capital Markets
and Real Estate
The mission of the Urban Land Institute is to provide
leadership in the responsible use of land and in creat- The ULI Center for Capital Markets and Real Estate focuses
ing and sustaining thriving communities worldwide. on real estate finance, real estate industry and investment
ULI is committed to trends, and the relationship between the capital markets
n Bringing together leaders from across the fields of and real estate. The mission of the Center is to promote
real estate and land use policy to exchange best understanding of the real estate capital markets and to
practices and serve community needs; provide leadership in fostering a healthy and productive
real estate industry and capital markets sector that in turn
n Fostering collaboration within and beyond ULI’s
promote thriving and sustainable communities worldwide.
membership through mentoring, dialogue, and
The Center pursues this mission through research, trend
problem solving;
analysis, education, events, publications, web-based
n Exploring issues of urbanization, conservation,
resources, advocacy, and thought leadership.
regeneration, land use, capital formation, and sus-
tainable development;
n Advancing land use policies and design practices
that respect the uniqueness of both built and natu-
ral environments;
n Sharing knowledge through education, applied
research, publishing, and electronic media; and
n Sustaining a diverse global network of local practice
and advisory efforts that address current and future
challenges.
Established in 1936, the Institute today has nearly
30,000 members worldwide, representing the entire
spectrum of the land use and development disciplines.
ULI relies heavily on the experience of its members.
It is through member involvement and information
resources that ULI has been able to set standards of
excellence in development practice. The Institute
has long been recognized as one of the world’s most Copyright 2011 by the Urban Land Institute
respected and widely quoted sources of objective infor- 1025 Thomas Jefferson Street, NW
Suite 500 West
mation on urban planning, growth, and development.
Washington, DC 20007-5201
All rights reserved. No part of this book may be reproduced in any form
or by any means, electronic or mechanical, including photocopying and
recording, or by any information storage and retrieval system, without writ-
ten permission of the publisher.
Catalog number: P100
Library of Congress Cataloging-in-Publication Data
Long, Charles,1947-
Finance for real estate development / Charles Long.
p. cm.
Cover photo:
ISBN 978-0-87420-157-4
Codo 241, in York, Pennsylvania, was financed with long-term
1. Real estate development. 2. Real estate development--Finance. I. Title.
capital from local investors. It is a 70,000-square-foot adaptive-use
HD1390.L66 2011
project that includes rental apartments, offices, and a bistro.
332.7'2--dc22
J. David Allen and Son Photography 2011008977
ii Finance for Real Estate Development
FinRED_FOB.indd 2 3/22/11 12:56 PM
Author Reviewers
Charles Long Ryan Beible
Principal, Charles A. Long Properties, LLC Student Reviewer
Oakland, California Johns Hopkins University,
Edward St. John Department of Real Estate
Baltimore, Maryland
Stephen Blank
Senior Resident Fellow, Finance,
Project Staff
Urban Land Institute
Washington, D.C.
Gayle Berens
Senior Vice President,
David Blitz
Education and Advisory Group
Principal, Nebo Capital, Inc.
Dean Schwanke Los Angeles, California
Executive Director,
ULI Center for Capital Markets and
Robert Feinberg
Real Estate; Senior Vice President,
Senior Vice President, Grubb & Ellis
Urban Land Institute
New Mexico
Anita Kramer
Albuquerque, New Mexico
Senior Director, ULI Center for
Capital Markets and Real Estate
Terri Gumula
Adrienne Schmitz
Workouts & Dispositions
Senior Director, Publications
Vice President, Citigroup
James Mulligan
New York, New York
Managing Editor
Lise Lingo Rebecca Rivard
Manuscript Editor,
Student Reviewer
Publications Professionals LLC
Johns Hopkins University,
Betsy VanBuskirk Edward St. John Department of Real Estate
Creative Director
Baltimore, Maryland
Anne Morgan
Graphic Designer Brent Smith
Craig Chapman Associate Professor, Virginia Commonwealth
Senior Director, Publishing Operations University School of Business
Richmond, Virginia
Steven Spillman
Principal, Pacifica Companies
Mission Viejo, California
Roger Staiger III
Managing Director, Stage Capital, LLC
Fairfax, Virginia
iii
FinRED_FOB.indd 3 3/22/11 12:56 PM
About the Author
Charles a. long has had a long and varied career as Long is a full member of the Urban Land Insti-
a developer, development consultant, city manager, tute and, within ULI, a member of the Public/
and educator, specializing in mixed-use infill and Private Partnership Council and a faculty member
redevelopment projects, including acquisition, entitle- teaching the Real Estate Development Process II,
ment, development, and consulting. He has 36 years Public/Private Partnerships, and Decision Making for
of diverse experience in local government and devel- Development Professionals courses. He has worked
opment with an emphasis on economic development, on 14 ULI Advisory Panels, most recently chairing
finance, and public/private partnerships. He served a panel in Dallas, Texas. He is cochair of the Sus-
for eight years as city manager in Fairfield, California, tainability Committee for the San Francisco District
a city with a national reputation as being innovative Council and helped design and deliver seminars on
and well managed. implementing sustainable communities for public
Since 1996 Long has worked as a consultant to officials, sponsored by the Daniel Rose Institute. He
public and private clients on development and man- has taught at the School of Public Administration at
agement. He has held interim positions for several Golden Gate University and has conducted courses
cities in finance, redevelopment and management, on real estate development, economic development,
including interim town manager of Mammoth Lakes and organizational change internationally.
and interim city manager of Hercules and Pinole, all Long has a BA in economics from Brown Univer-
in California. His diverse assignments include writ- sity and a Masters of Public Policy from the University
ing redevelopment plans, working on development of California at Berkeley. He served in the U.S. Army
projects, conducting pro forma analysis, conducting as an infantry platoon sergeant.
strategic planning, representing public agencies in
negotiations, marketing development opportunities,
assisting with organizational development, conduct-
ing capital and financial planning, implementing
budget reform, analyzing military base reuse, and
promoting alternative energy development. He has
overseen more than $600 million in public financ-
ing during his career. His work on development is
focused in California, with an emphasis on public/
private partnerships and mixed-use infill.
iv Finance for Real Estate Development
FinRED_FOB.indd 4 3/22/11 12:56 PM
Foreword
Financing a real estate development project is a Many books have been published on the subject
challenging undertaking that requires sweat equity, of real estate finance or real estate development,
working capital, market knowledge, financial but few actually focus on the nexus, the specific
experience, connections, and strong analytical and challenge of financing a project. Charles Long, the
communication skills. It involves both art and science. author of this book, brings a unique and practical
In essence, a real estate developer must connect with perspective to this issue, drawing on his considerable
and convince both equity and debt capital providers— development experience in both the private and
who will likely put up most of the capital for a public sectors. This is a book written not from
project—that the developer can successfully invest and an academic perspective but from a practitioner’s
deploy such capital, in an inherently risky business, perspective, on a topic that requires a practitioner’s
and not only return that capital to the investor but also perspective. The book draws on that experience,
deliver promised returns on that capital. as well as considerable research and the author’s
Needless to say, investors and lenders expect experience as an educator, to offer practical guidance
to see a great deal of solid evidence that their capi- and perspective on how real estate development
tal will be well managed in this process. This book finance works.
is intended to enhance understanding and provide
a guide for developers and would-be developers Dean Schwanke
looking to prepare that evidence and to successfully Executive Director
arrange and structure equity and debt financing for a ULI Center for Capital Markets and
real estate development project. Real Estate; Senior Vice President
The book begins by putting finance into context Urban Land Institute
within the development process, highlighting four Washington, D.C.
dimensions for successful development—values,
information, financial viability, and relationships. It
then goes on to cover the basics of real estate finance,
land valuation and acquisition, task management and
budgeting, the capital markets for real estate, obtaining
financing for development, the ownership entity and
financing structures, managing risk in the entitlement
process, public/private partnerships, and case studies
and stories about how developers find capital and
arrange financing.
v
FinRED_FOB.indd 5 3/25/11 11:24 AM
Acknowledgments
This book, I hope, connects the practice of real estate development to its underlying
concepts, a goal that I would not have been able to achieve without lots of help from
colleagues who were generous in sharing their wisdom, experience, and encouragement.
Among these are Rick Dishnica, Alex Rose, and Ehud Mouchly for patiently mentoring
me; Anita Kramer at ULI for encouraging me to embark on this project; Dean Schwanke
at ULI for pointing me in the right direction countless times; David Mulvihill at ULI for
giving me great opportunities to engage with new teaching (and learning) experiences;
Terri Gumula for conscientiously helping to make the book better; Stephen Blank, Steven
Spillman, and Roger Staiger for patient and insightful reviewing; Adrienne Schmitz, the
project director, for pulling everything together; and finally, to countless professionals in
this wonderful business called real estate development who shared with me their projects
and insights and who are cited in the book. I hope that I have conveyed at least a small
part of the energy and creativity of this unique industry.
Charles A. Long
vi Finance for Real Estate Development
FinRED_FOB.indd 6 3/22/11 12:56 PM
Contents
Chapter 1. The Development Process...........................2 Disciplined.Acquisition:.Site.Selection,.Negotiation,..
and.Due.Diligence...............................................................................66
Real.Estate.Overview.............................................................................3
. Information.Inputs .....................................................................67
The.Development.Process.and.Risk..................................................6
. Negotiating.with.Site.Owners.................................................70
Stages.of.Development.........................................................................8
. Due.Diligence...............................................................................72
. Predevelopment..............................................................................8
Example:.Simple.Pro.Forma.for.a.Mixed-Use.Project...............74
. Development...................................................................................9
. Close-out.and.Operation...........................................................10
Four.Dimensions.of.Successful.Development.............................12 Chapter 4. Task Management and Budgeting........76
. Values..............................................................................................12 Task.Management.to.Achieve.Financial.Viability......................77
. Information.....................................................................................12 . Site...................................................................................................78
. Financial.Viability.........................................................................13 . Market............................................................................................79
. Relationships.................................................................................14 . Community...................................................................................80
Skills.of.a.Successful.Developer.......................................................14 . Product/Project.Design.............................................................80
Development.Sectors..........................................................................16 . Cost.and.Construction.Management.....................................81
. Customer.Issues...........................................................................19 . Finance...........................................................................................84
. Return,.Absorption,.and.Risk....................................................19 . Personnel.Selection....................................................................84
Case.Study.............................................................................................22 . Other.Services..............................................................................90
Task.Funding...........................................................................................91
Chapter 2. The Basics of Real Estate Finance..........28
Basic.Debt.and.Equity.Structure.....................................................30 Chapter 5. Capital Markets for Real Estate..............92
Project.Valuation..................................................................................33 Capital.Market.Conditions................................................................93
. Capitalization.Rates....................................................................35 Capital.Sources....................................................................................96
Measuring.Project.Return.................................................................38 . Banks,.Savings.and.Loans,.and.Mutual.Savings.Banks..........99
. Internal.Rates.of.Return.............................................................38 . Commercial.Mortgage–Backed.Securities..........................101
. Leverage.........................................................................................40 . Private.Equity.Capital...............................................................103
Funding.a.Project..................................................................................41 Fiduciary.Principles.............................................................................111
. Funding.Predevelopment.Costs...............................................41 Investment.Strategies.......................................................................114
. Debt.Funding.................................................................................41 Property.Characteristics...................................................................116
. Equity.Funding..............................................................................43 . Sector.Risk....................................................................................116
The.Typical.Deal...................................................................................45 . Regional.Strength........................................................................117
Financial.Structuring.for.a.Hypothetical.Project.........................45 . Tenant.Strength..........................................................................118
. Estimating.Costs.........................................................................48 . Value-Add.Opportunities........................................................118
. Evaluating.Return........................................................................54 Capital.Markets.and.the.Risk-Reward.Evaluation.....................119
Chapter 3. Land Valuation for Acquisition...............58 Chapter 6. Obtaining Financing for Development......120
Determining.a.Valid.Hurdle.Rate.for.Evaluating.. Market.Conditions..............................................................................121
Project.Viability....................................................................................59 Connecting.with.Capital.Sources...................................................123
Calculating.the.Supported.Investment.and.Residual.. . .Accessing.Predevelopment.and.Development..
Land.Value.............................................................................................62 Equity.Capital..............................................................................123
. Costs...............................................................................................62 . .Accessing.Construction.and.Permanent..
. Residual.Land.Value...................................................................63 Financing.......................................................................................126
. Finding.a.Buyer.for.the.Property............................................126
vii
FinRED_FOB.indd 7 3/22/11 12:56 PM
Presenting to Financing Sources ...................................................126 Managing the Process ......................................................................159
E xperience, Credibility, and Financial Capacity Conclusion ...........................................................................................161
of the Development Entity ......................................................127
T he Development Project and the Chapter 9. Public/Private Partnerships ..................162
Business Plan ..............................................................................127
Application ..........................................................................................163
E ntitlement Process and Role of Public/Private
Public Capital for Private Projects .......................................164
Partnerships ................................................................................129
Entitlement Risk .......................................................................166
Conclusion ...........................................................................................129
Site Access, Cleanup, and Reconfiguration .......................167
Co-investment ..........................................................................168
Chapter 7. The Development Entity, Joint Ventures,
Community Preparation .................................................................169
and the Financing Structure .........................................130
Partnership Entity .....................................................................170
Real Estate Entities .............................................................................131
F inancing Program for Infrastructure or Other
Partnerships ................................................................................132
Public Facilities ...........................................................................171
Limited Liability Companies (LLC) .......................................133
Business Improvement Districts ............................................171
S Corporations............................................................................133
S tapleton Airport Redevelopment: An Example
R eal Estate Investment Trusts ...............................................133 of Community Preparation ......................................................171
Corporations .............................................................................134 How Communities and Developers Work Together ...............172
Elements of a Joint Venture ...........................................................134 Negotiating a Deal ....................................................................173
Business Plan .............................................................................136 Public/Private Financing Tools ......................................................174
Participants ................................................................................136 Redevelopment Agencies .......................................................174
Governance ................................................................................137 Municipal Bonds .......................................................................176
Capitalization .............................................................................137 Land Assembly and Conveyance ........................................178
Revenue Distribution Among the Partners .......................138 Grants and Incentives .............................................................179
General Provisions ...................................................................139 Affordable Housing Subsidies ..............................................179
Financing Structure ...........................................................................139 Tax Credits ..................................................................................180
Profit Distribution to the Development Entity .........................144 Deal Standards ...................................................................................182
Example: Profit Distribution within a Development Entity .......145
Chapter 10. How Developers Get Capital ..............186
Chapter 8. Managing the Entitlement
Getting Started ...................................................................................187
Process for Financial Viability .....................................150
Building Relationships ......................................................................192
Mapping the Process ........................................................................152
Skills for Acquiring Capital in the 2010s....................................194
Before Making an Offer ...........................................................153
After an Offer Is Accepted .....................................................153 Appendix A: Bios of Interviewees ..................................198
During Due Diligence ..............................................................154 Appendix B: Glossary .............................................................202
As Circumstances Change ....................................................154
Index ..................................................................................................208
Managing Project Economics During Entitlement ................154
Density .........................................................................................155
Parking ..........................................................................................158
For supplemental materials, see
Public Improvements ...............................................................158
http://www.uli.org/financered.
Design ...........................................................................................158
viii Finance for Real Estate Development
FinRED_FOB.indd 8 3/25/11 11:24 AM
finance
for
real estate
development
FinRED_FOB.indd 1 3/22/11 12:56 PM
