CEE 246B
REAL ESTATE
DEVELOPMENT
AND FINANCE
INSTRUCTOR: NELSON KOEN
WEEK 1 – SESSION 1
INTRODUCTION
Real Estate Development and Finance
To be Covered Today:
•
•
•
•
Learning Goals of the Course
Structure of the Class
Intro: What is Real Estate Development?
Real Estate Development 8 Stage Process
Real Estate Development and Finance
Class and Etiquette Rules:
• Be Engaged in the class
• Use name tags in front of you
• No use of Laptops or Cellphones in Class
DIGITAL
DISTRACTIONS
Real Estate Development and Finance
Class and Etiquette Rules:
• Be Engaged in the class
• Use name tags in front of you
• No use of Laptops or Cellphones in Class
• Raise your Hand and wait to be called
before speaking
• Be respectful to each other
• Warm Calls – come prepared to class
Real Estate Development and Finance
Main Topics to be covered – Learning Goals:
•
•
•
•
•
•
•
Phases of Real Estate Development
Financing Structures, Valuation and Pro-forma
Understanding Real Estate Markets
Performing Feasibility Analysis
Risks and Challenges in Real Estate Development
Learn from Guest Speakers
Explore Career Opportunities
Real Estate Development and Finance
How is the class structured?
▪ Lectures and Guest Speakers
▪ Class participation & Engagement – at least 3
meaningful participations – Don’t miss more than 3
guest speaker presentations
▪ 5 Quizzes based on Readings (one next Tuesday!)
▪ 4 Weekly Homework
▪ 3 Case Studies
▪ 2 Students in teams for HW and Case Studies
▪ 1 Group Project (teams of 4 students)
Real Estate Development and Finance
TEAMS - GROUP PROJECT (4 or 5 students)
Survey to form Group Project teams– Laura will send it out
TO BE FILLED OUT TODAY
• Program you are enrolled (Undergrad, Grad, MBA )
• Excel Proficiency (Beginner, Intermediate or Advanced)
• Preference of COMMERCIAL or RESIDENTIAL Project or NO
PREFERENCE
We will form the Group Project Teams – by this Monday
TEAMS: HOMEWORK AND CASE STUDIES (same team)
2 students from different programs (pair Undegrads and Grads)
If possible same preference (COMMERCIAL or RESIDENTIAL or None)
You form : HW & Case Studies teams (by this Friday at 9am)
Real Estate Development and Finance
Books:
Required for READINGS, Quizzes and Homework:
REAL ESTATE FINANCE AND INVESTMENTS
BY WILLIAM B. BRUEGGEMAN AND JEFFREY D. FISHER
15th Edition (or 14th Edition) HOW TO GET IT
Recommended:
THE REAL ESTATE GAME
BY WILLIAM J. POORVU AND JEFFREY L. CRUIKSHANK
Real Estate Development and Finance
What prior knowledge do you need?
▪ Knowledge of Excel is recommended
▪ Basic Knowledge of Finance, PV, IRR recommended
How much time do you need to commit?
Real Estate Development and Finance
▪ Please read the SYLLABUS and CLASS SCHEDULE
▪ Comply with the HONOR CODE
TA for the Class – Laura Vanderweyen
My Office Hours: Tue. & Thursdays 5:30 to 6:20 pm
About me
PRINT THE CLASS
SCHEDULE
OR SAVE IT IN YOUR
DESKTOP WHERE YOU
WILL HAVE EASY
ACCESS TO IT
FILES IN CANVAS
GLOSSARY AND IMPORTANT CONCEPTS
QUIZZES – IMPORTANT CONCEPTS
Terminology
- it is not always what you think
TAKE OUT LOAN
STABILIZED PROPERTY
Good Resource:
The Real Estate Game Book
Terminology in Real Estate
TYPE OF INVESTMENT PROJECTS/STRATEGIES
• CORE (AND CORE PLUS)
• VALUE ADD
• OPPORTUNISTIC
CLASS A, B AND C – PROPERTY TYPES
EQUITY MULTIPLE
Common Indexes Used in Real Estate
CAP RATE
CAPITALIZATION RATE = NOI/VALUE
LOAN TO VALUE
LTV= LOAN/VALUE
LOAN TO COST
LTC= LOAN/COST
CASH ON CASH =
ANNUAL PRE-TAX CASH FLOW/TOTAL CASH INVESTED
REAL ESTATE USES
▪ Residential (Single and Multifamily)
▪ Commercial
› Retail
› Office
› Mixed Used
› Industrial
› Hospitality (Hotels)
▪ Other – Education, Recreation, Institutional, etc.
Real Estate Development and Finance
What is Real Estate Development?
Why is it so attractive/fascinating?
Real Estate Development and Finance
Case Study about Market Square
Why was the project developed in
phases?
Advantages and Disadvantages
Why did the scope of the
renovation of the project changed
during construction?
WILL TALK ABOUT THIS ON Thursday and
also about the 2nd article
Top 5 reasons to
take this Class
1. Want to be a Developer/work for a Developer
2. Interest in Investing in Real Estate/source of
income – side business
3. Want to understand the point of view of the
Developer (will work for Contractor, Startup, etc.)
4. Family Business – need to understand how to
manage it
5. Usually largest asset $ someone will own
REAL ESTATE DEVELOPMENT PROCESS
8 stage process
1. Idea, Vision and Goals
2. Opportunity and Feasibility Analysis
3. Negotiation and Option
4. Entitlements and Financing
5. Contract
6. Construction
7. Completion and Occupancy
8. Property Management / Disposition
REAL ESTATE DEVELOPMENT PROCESS
8 stage process
Not all projects have all stages
It is not completely linear
In some projects some phases could be more
important than in other projects
1 - IDEA, VISION and GOALS.
You want to be a Real Estate Developer
Now what?
What are your goals?
What are the BIG Questions you need to answer?
1 - IDEA, VISION and GOALS.
You want to be a Real Estate Developer, then
Need to Define these 5 variables for your Business:
1. Type of Investment (Core, Value Add, Opportunistic)
2. Use and Product (Residential, Commercial, etc.)
3. Location – Market and Sub-Market
4. Size - Source of Financing (Private, Public, etc.)
5. Short Term, Long Term Goals for the Business
Why and how you select each of them?
Identify them for each guest speaker
1 - IDEA, VISION and GOALS.
Real Estate Developer – 6 attributes:
1. Leader - Coordinator
2. Entrepreneur - Risk taker
3. Optimistic
4. Negotiator - Empathy
5. Grit - Persistent
6. Intuition
TRY TO IDENTIFY THEM IN THE GUEST SPEAKERS
2 – OPPORTUNITY and
FEASIBILITY ANALYSIS
How will you know that you have a
good opportunity in front of you?
• Knowledge – about the area,
neighborhood, market
• Due Diligence
2 – OPPORTUNITY and
FEASIBILITY ANALYSIS
Due Diligence
2 – OPPORTUNITY and
FEASIBILITY ANALYSIS
Due Diligence:
PHYSICAL
MARKET
FINANCIAL
TECHNICAL - LEGAL
2 – OPPORTUNITY and
FEASIBILITY ANALYSIS
Go or No Go decision
• Risks vs. Rewards
Your Group Project is
working on this Stage
3- NEGOTIATION and OPTION
Offer - Counteroffer
Negotiation between Seller and Buyer
You may use a Broker to represent you
4 – ENTITLEMENT and FINANCING
ENTITLEMENT PROCESS
▪ Governmental Requirements to get Permits
FINANCING NEEDED
▪ Acquisition and Development Loan
▪ Construction Loan
▪ Long Term Loan (take out loan)
5 - CONTRACT
Putting everything together
▪ Close of Escrow of the property
▪ Capital Contributions
▪ Securing the Financing
▪ Hiring the Team
› Consultants
› Contractor
▪ Clock starts ticking….
6- CONSTRUCTION
Construction Period
▪ Manage risks – most of the cost overruns and delays
occur in this phase
▪ Monitor Budget and Schedule
▪ Construction Loan Draws
7- COMPLETION and OCCUPANCY
Obtain Certificate of Completion
Obtain Clearance from Building
Department, Planning Department, Fire
Department
Project is ready to be occupied !!!!
8 – Property Management or Disposition
Property – Asset Management:
▪ Marketing and Leases
▪ Day to day Maintenance and Operations
▪ Customer Service
▪ Monitor and Control Expenses and Income
or
Disposition : Sell the Property
POST-Mortem analysis
What went well?
What went wrong?
What we would do different the next time?
Case Studies
Best practices
Go for the next project