Real Estate 101 for public officials
Urban Land Institute
Prince George’s County
June 15, 2012
Urban Land Institute
Real Estate 101 for public officials
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Topics we plan to cover
I.
The challenges of contemporary development (infill, TOD,
value-add conversions) (30 minutes)
II.
The development process and project viability (40 minutes)
III.
Real estate finance (30 minutes)
A.The market
B. Capital sources and rates of return
C. The capital stack
IV.
Using public-private tools (40 minutes)
V.
Round table discussion (30 minutes)
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Real Estate 101 for public officials
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Learning Objectives:
1. Obtaining the best outcomes for the community based on
understanding how real estate development works.
2.
Connecting the entitlement process to the development
process to achieve community goals.
3.
Standards for deals that are fair and defensible to the
public.
4.
New ways of thinking about how to create better projects
that meet community goals within the parameters of the
real estate financial requirements.
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Real Estate 101 for public officials
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•Charles A. Long
•Charles A. Long Properties, LLC
charlesalong@gmail.com
• Developer specializing mixed use development in California, US
• Consultant on redevelopment, capital finance and economic
development
• Instructor for ULI Real Estate School on development process,
public-private partnerships and sustainable development
• Former city manager of Fairfield and interim manager in
Mammoth Lakes, Hercules and Pinole, CA
• Author of “Finance for Real Estate Development “ published April
2011
• Served on 14 ULI advisory panels, chairing panels in Salem OR,
Boise, ID and Dallas, TX.
• Masters in Public Policy, UC Berkeley; platoon sergeant, US
Army
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Real Estate 101 for public officials
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Finance for Real
Estate Development
published by ULI
April 2011
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Real Estate 101 for public officials
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Introductions
• Your objectives from this course
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Real Estate 101 for public officials
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The challenges of contemporary development
“Transformation from a
car-dominated tangle of
offices, malls and auto
dealers into a livable city”
East 14th St., San Leandro, CA
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Real Estate 101 for public officials
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Development today is more complicated
physically and economically
•
•
•
•
•
•
More urban and mixed use
Public benefits more important
More complicated economics
More conversions from old uses
Less leverage and no “value add” financing
Density confusion
Appleton Mills, Lowell, MA
West End Commons, Oakland, CA
Lakeside Steel Plant, Chicago
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Real Estate 101 for public officials
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Private sector needs help
Obsolescence Barriers—Southwest Center Mall
Market for retail
too weak to
reposition the
center for retail.
Five property owners
Poor circulation
Development plan to create
Town Center project with 600
residential units and plaza.
• New circulation.
• New parcelization.
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Real Estate 101 for public officials
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Walkable, sustainable places are
more valuable
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Real Estate 101 for public officials
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Mixed use is hard to do
Community acceptance and
entitlement risk
Sector differences in market
strength
Parking costs and layout
Resizing the infrastructure
Financing challenges
Conflicts among uses
Silver Spring Town Center
Getting the density right
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Real Estate 101 for public officials
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Mixed use financing challenges
• Cost of capital for unitary
development configuration
• Longer absorption period for retail
• Valuing income and for-sale
• Federal pre-sale requirements for
condo projects
• Liability on for-sale residential
• Interconnected parking and operations
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Entitlement process now is more challenging
Alameda NAS,
Alameda, CA
• More public
involvement
• More review steps
• Skepticism about
density.
• Development impacts
must be funded
• Pre-development risk
results in missed
opportunities.
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Real Estate 101 for public
officials
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The Great Recession has changed
the capital stack
Equity
Mezzanine or
performing debt
Debt
Much higher equity: now 35% or
more—recourse provisions
tighter
Disappearance of "Gap" financing
to pay for “value-add” conversions
Much lower debt: now 65%
or less
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Real Estate 101 for public officials
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The result of the changes to the
capital stack
OVERALL PROJECT RETURNS
MUST BE HIGHER TO ATTRACT
CAPITAL
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Development today is inherently
public private
Uptown, Oakland, CA
• 665 rental units; 25
percent affordable
• New, one half acre park
• $160 million private
cost
• $50 million public
investment
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Mission Bay
San Francisco, CA
• $400 million of
infrastructure
• Cleanup of site
•
Public transit links
•
41 acres of open space
• Financed with “land
secured” bonds
Inherently public/private because:
1. Insures capture of public benefits in the
entitlement process.
2. Addresses greater economic risks and physical
complexity.
3. Integrates service costs into project economics
4. Brings non-project related resources to enhance
private project viability
5. Aids in site assembly
6. Enhances co-development opportunities
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Transit Oriented Development
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And yet, neither sector fully
understands the other
• Public:
– Weak understanding of the private real estate process and
economics
– Unrealistic, irresponsible or constraint-driven deal making
– Inconsistent and unreliable performance on commitments.
• Private sector:
– Uncertain about how to craft a partnership with a public
entity.
– Frustration with process and constraints
– Failure to capture opportunities
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Ultimately, this is about
governance
• Have a shared vision for the future---build a community
consensus.
• Set clear, predictable and high development standards.
• Develop the competence to understand constraints and
opportunities in real estate economics.
• Build partnerships with the private sector based on
fiduciary principles that protect the public interest.
• Have strong leaders and committed citizens
It’s about leadership
•
With a focus on transit-oriented development,
redevelopment, revenue creation and smart
growth, the Council is encouraging a more
business-friendly Prince George’s County by
expanding economic opportunities and
commercial development.
•
Excerpt from Prince George’s County Annual Report
It’s about competing effectively as a
quality place to live.
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Prince George’s County has
tremendous potential
15 Transit Stations
2,200 acres of vacant
land within ½ mile of
stations.
Source: Andrew Scott, Maryland Department of Transportation
What makes great communities?
Knowledge you need
•
•
•
•
•
Risk Profile of the development process
Development finance
Project viability
Deal standards
How to use the tools
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Real Estate 101 for public officials
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Organizational norms you need
• Leadership
• Community vision
• Collaborative decision-making across
departments
• Delegation of authority to carry out the
mission.
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Real Estate 101 for public officials
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Group discussion
1. What challenges do you perceive that
Prince George’s County faces in
achieving high quality development?
2. Got examples?
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Real Estate 101 for public officials
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The
Development
Process and
Project Viability
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Real Estate 101 for public officials
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Development is…
a separate self financing enterprise that goes from
small to large.
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Real Estate 101 for public officials
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The Development Process has three phases
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Real Estate 101 for public officials
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80% to 90% of project value is created in
the pre-development phase
Acquisition, design, entitlement,
financing, risk management
Project Value
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Real Estate 101 for public officials
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Pre-development work
manages risk for all phases
By the start of construction, risks should be
reduced to factors that have already been
addressed and are controlled through good
management.
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Pre-development can be expensive and
time consuming ($100 million project)
Item
Cost
Due diligence on land purchase
$100,000
Market analysis and marketing
$200,000
Project design
Environmental analysis and
entitlement process
Pre-construction services
$2,000,000
$1,000,000
TOTAL
$3,500,000
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Real Estate 101 for public officials
$250,000
33
Questions
1. Why do developers have the highest risk of
losing money before construction starts?
2. What implications does this risk profile have for
developers in Prince George’s County?
3. What measures has Prince George’s County
taken that address this risk profile?
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Real Estate 101 for public officials
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Project viability
and residual land
value
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Real Estate 101 for public officials
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Three elements to
evaluate project viability:
1. Project Value: based on either total sales or
on valuation of the stream of income
2. The Hurdle Rate: The minimum rate
reflecting the cost of capital and time that the
capital is used.
3. Project Costs: A valid estimate.
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Real Estate 101 for public officials
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A Project is “viable” if
VALUE minus COSTS
is sufficient to pay:
– Cost of Capital
– Developer profit
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Real Estate 101 for public officials
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PROJECT VALUE
BASED THE MARKET
– For Sale Project: (primarily
residential) Gross sales less marketing
– Income projects (retail, office,
apartments, etc.): INCOME DIVIDED
BY A “CAP RATE”.
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How to value an “income” project.
• Income project produce annual income from rent,
maintenance charges and other sources.
• Apartments, offices, retail stores, business parks
are all, usually, income projects.
• The income after expenses is called “Net
Operating Income” of NOI. It is the same as
annual profit.
• The market values the NOI using something
called a “capitalization rate”.
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Real Estate 101 for public officials
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A capitalization rate is simply an
shorthand indicator of market strength.
Net Operating Income (NOI)
Cap Rate=
Project Value
Project Value=
NOI
Cap Rate
High cap rate indicates market weakness and low cap rate
indicates market strength.
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Cap rates reflect market
sentiment
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Real Estate 101 for public officials
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Cap rate is the inverse of the
P/E ratio used in the stock market
Cap rate
2%
3%
4%
5%
6%
P/E Ratio
50
33
25
20
16.7
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Some stock P/E ratios
Average S&P stocks
General Electric
Microsoft
Starbucks
Whole Foods Mkt.
15.5
14.31
19.96
45.22
32.18
What does a high P/E (or low cap rate) signal
about expectations of growth in income?
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Pop quiz 1
What is the project value?
NOI
$3,000,000
$3,000,000
$2,000,000
$2,000,000
Cap Rate
5%
6%
4%
5%
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Web sites where you can
obtain current market data
• Real Estate Research Corporation
www.rerc.com
• Real Capital Analytics
http://global.rcanalytics.com/
• National Council of Real Estate
Investment Fiduciaries (NCREIF)
http://www.ncreif.com
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DETERMINING THE HURDLE
The cost of capital is the blended cost of
equity and debt over the time to construct.
Example
Cost of equity: 20% per year (30% of costs) = 6%
Cost of debt:
5% per year (70% of costs) = 3.5%
TOTAL ANNUAL COST OF CAPITAL
= 9.5%
If a project takes 2 years to construct, cost of capital
is: 9.5% per year or a total of about 20%.
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Real Estate 101 for public officials
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Typical hurdle rates based on
duration of development period
1-year: about 10%
2-years: about 20%
3-years: about 30%
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Real Estate 101 for public officials
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Hurdle rates for other
capital structures and construction periods
Months to
achieve
project
value
Debt
Equity
%
funding
36
75%
6.00%
36
80%
24
Interest
%
funding
Annual
return
Hurdle Rate
25%
20%
31%
6.00%
20%
20%
29%
75%
6.00%
25%
20%
20%
24
80%
6.00%
20%
20%
18%
12
80%
6.00%
20%
20%
9%
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THE COSTS:
A realistic cost estimate includes:
1.
Building costs
2.
Site Development (demolition, grading, utilities and landscaping)
3.
Parking (may be included in building for some types of projects)
4.
Connection and impact fees
5.
Offsite costs such as traffic signals or road improvements
6.
Design (architecture, engineering, consultants, etc)
7.
Marketing (brokers, advertising, etc.)
8.
Construction management
9.
Financing /legal/administrative
10. Taxes during construction
11.Contingency: 10-15% in early stages
DO NOT LUMP COSTS
YOU CANNOT CUT
THE BOARD LONGER
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Real Estate 101 for public officials
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OK. Once you have Project Value and
Hurdle Rate, then you can determine how
much you can afford to spend on a project
compared to what it is estimated to cost.
Maximum
supported =
investment
Project Value
1 + hurdle rate
If estimated project costs exceed the Maximum
Supported Investment then the project is not viable
and the developer will abandon the project.
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Pop quiz 2
What is the maximum supported investment?
Project Value
$36,000,000
$39,000,000
$50,000,000
$60,000,000
Hurdle Rate
20%
30%
25%
25%
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The return on a project pays:
• Cost of debt: interest on a construction loan
(4%-6%)
• Return on equity: return to investors (15% to
20%)
• Developer profit: based on project
performance after paying costs of capital.
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Developer profit comes from:
• Fees: Developer fee of 2-4% of cost with incentive
bonuses.
• Co-investment: Developer is an equity investor in
10-15% of equity requirement.
• Sharing of success:
– Participation in profits over the “preferred return” of 812%
– Higher participation in profits over a target of 15-18%.
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Residual Land Value is:
The price the project can afford after accounting
for the other costs of development.
Obtaining site control by tying up the land is the
first major decision a developer makes and is based
on market and costs.
If the costs of development change, the developer risks
a loss because the land price has already been
determined.
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Real Estate Development Process II
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Residual land value is the land
component of supported investment.
Project Value
1 + hurdle rate
Supported
investment
MINUS
Costs without land
=Residual land value
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Real Estate 101 for public officials
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Pop quiz 2
What is the project residual land value?
Project Value
Project Cost (w/o land)
Hurdle Rate
$36,000,000
$39,000,000
$50,000,000
$60,000,000
$25,000,000
$25,000,000
$35,000,000
$43,000,000
20%
30%
25%
25%
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Cash-on-cash hurdle rate allows quick
evaluation early in project
Once a property is tied up, do a more
detailed analysis based on more
accurate information
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Land Value Changes with Use.
Example on 3 acres
Scenario 1: -80 townhomes.
-net sales of $24 million
-costs (before land) of $16,000,000.
-land value at 20% hurdle is $4.0 million.
Scenario 2: -210 apartments in podium configuration.
-NOI at $30/sf rent is 3.3 million.
-Project value is $65.5 million at 5% cap
-costs (before land) of $42 million.
-land value at 30% hurdle is $8.4 million.
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An example using Agency requirements
Sale price of house #1: $500,000
$100,000
$25,000
$60,000
$65,000
Sale price of house #2: $500,000
Residual Land
Value
Agency
requirements
Profit
Design, finance,
management,
marketing
$75,000
$50,000
$60,000
$65,000
$250,000
$250,000
Construction
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How should an agency
establish its requirements?
Make the requirements as high as possible
because quality development produces value
for the community.
But, make the requirements clear and consistent
over time so that land prices can adjust to
reflect what a project can afford based on the
market and other costs of development.
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High quality, consistent standards are less risky
and produce high value
" Simplify the process for
developers. By streamlining
permitting and construction
processes, getting departments
to work together to promote
infill, and ensuring
requirements are consistent,
cities can smooth the way for
good development."
--Bay Area Greenbelt Alliance
Background material\Smartinfill
executive summary.pdf
• Developers prefer to
compete on value, not
cost.
• Policies may cost more but
make the community more
valuable.
• First, create a great place to
live: education, parks,
transportation and the long
term value will pay for the
costs.
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What happens to a project’s financial viability if:
: and costly?
• The entitlement is long
• The public agency suddenly changes the
development conditions?
• The public agency’s development
conditions are uncertain?
• The cost of development conditions
causes total costs to exceed project
value?
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Questions
1. What are the implications of basic real estate
economics for establishing development
standards in Prince George’s County?
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Real estate finance
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$4.575 trillion invested in U. S. private real
estate in 2007 (2008 Emerging Trends)
28.1% was Equity
Public Co. 3.5%
Foreign Investors
4.1%
Pension
funds
12.9%
71.9% was Debt
Life Insurance 2.5%
Govt. credit 3.5%
Private financial .6%
REITs
32.3%
Private
investors
44.1%
REIT sec .8%
Public
>0%
REIT unsec.
6.3%
Life
insurance
8.8%
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Real Estate 101 for public officials
CMBS
22.5%
Banks
56.9%
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Basic Financing Structure Involving Debt and Equity
DEBT SOURCE:
Lenders
EQUITY SOURCE:
Owners and
Investors
FUNDS
FUNDS
CAPITAL
CONSTRUCTION AND PERMANENT
DEBT FINANCING
PRE-DEVELOPMENT
AND PERMANENT
EQUITY FINANCING
DEBT SERVICE
RETURN
VISION, SKILLS
PRE-DEVELOPMENT,
REQUIRED CODEVELOPER
INVESTMENT
__________
ENTITLEMENT
PUBLIC SECTOR
AGENCIES
THE REAL ESTATE
___________
PUBLIC
PARTICIPATION
Political / Physical / Economic
Opportunities & Constraints
TAXES AND FEES
SALE, LEASE, OR
OCCUPANCY $
OPERATOR
RETURN
COMMODITY
AND/OR VALUE
THE MARKET
___________
USERS
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Financing terminology does not always mean the
same thing to everyone—lenders and investment
firms talk funny, make them explain!
• Interest rate
Swap
• Lock
• Promote
• Recourse
• Non-recourse
• IRR
• Preferred return
• Waterfall
•
•
•
•
•
Mezzanine
Bridge
LTC/LTV/DCR
Pre-buys
Participating
debt
• Deed of trust
• Credit Spread
• LIBOR
• Promotional interest
• Bankable takeouts
• Pari Passu
• Inter-creditor
agreements
• Capital Event
• Notional principal
• Leverage
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Stacking the capital
Equity
Mezzanine or
performing debt
Debt
• Developer co-invests
• Preferred and promotional return
• Target return and upside
The value-add play
Pays out based on value creation
• DCR
• LTV
• LTC
Performance guarantees with
recourse for:
•Project completion
•Cost estimates
•Lease up
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Typical return requirements
Equity
Mezzanine or
performing debt
Debt
• Preferred 9%-12%
• Target 15%-20%
• Total potential 25% or greater
Projected 20% or greater
15-25 year amortization
2-15 balloon
4.5% to 8% interest
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Application
Equity
Mezzanine or
performing debt
Debt
Pre-development after project
viability has been confirmed IF
entitlement risk is low.
Value add play on project
with existing cash flow.
Construction and permanent
finance only—NO PREDEVELOPMENT.
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80% Leverage
80% leverage on a project that costs $10 million and produces
$12 million in valuation after 2 year construction
Repay bank loan plus interest: $8,560,000
2 year construction
effective loan period 1 year
Debt
$8.0 million
Investor/developer
Distribution
$3,440,000
Equity
$2.0
million
Sales or
Value
Unleveraged
rate of
return=9.5%
Costs
31.1%
Leveraged
rate of return
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60% Leverage
60% leverage on a project that costs $10 million and produces
$12 million in valuation after 2 year construction
Repay bank loan plus interest: $6,420,000
2 year construction
effective loan period 1 year
Debt
$6.0 million
Investor/developer
Distribution
$5,580,000
Equity
$4.0 million
Sales or
Value
Unleveraged
rate of
return=9.54%
Costs
18.11%
Leveraged
rate of return
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The Waterfall
Cash Flow after paying loans and costs
1st Dollars out
Return of principal
Preferred return (including
developer co-investment)
2nd Dollars out
Promotional return parri pasu to investment
dollars to meet target total returns
3d Dollars out
Some percentage distribution to developer
Larger percentage return to developer
Ongoing small percentage distribution to investors
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How about the developer's profit?
There is not just one way:
• Equity investors require developer's interest
to be aligned with theirs.
• Profits to developer will be paid after
preferred return to investors
• Developer's share of profits increases with
profits.
• Some developers take some profits from
"fees"
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TYPICAL FINANCIAL STRUTURE
Capitalization
Leverage 65-80% depending on guarantees
 Equity (20-35%) contributions
90% Investors group
10% Co-investment from Developer
Distributions
 Cash flow to equity participants, usually with preferred
return to equity and waterfall distribution to investors and
Developer
 "Capital" event – success to Developer and Investor
Group after hurdle return based on IRR
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Typical deal structure
 Financings are about relationships. Recognize that “who”
you partner with is just as important as the property you
buy. The trustworthiness and reliability of the developer is
just as important as the merits of the particular project.
 Equity and debt partners invest through a joint venture
agreement allowing major decisions to be made jointly and
insuring alignment of interest!
 Developer must co-invest in the project
 Developer guarantees hard and soft costs and completion
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Typical deal structure
(continued)
 You spend 95% of the time negotiating 5% of the issues
that never occur.
 Take profits when they are available.
 Provide for a 3 to 7 year holding period. Sell when
business plan is completed – win, lose or draw.
• Provide success fees to the developer and investor group
on sale or refinance after meeting the required IRR hurdle.
• Allow the developer to take market rate fees for services
(property management, construction, etc.)
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Fiduciary parameters
• Validate all the assumptions: especially the market
and the costs.
• Are the developer’s financial transactions open and
transparent to the outside investors?
• Include provisions in the joint venture agreement
allowing removal of the developer for cause.
• Create a “buy-sell” provision, but don’t rely upon
it to solve all the problems.
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Questions
1. How will familiarity with private real
estate finance help you achieve higher
quality development in Prince George’s
County?
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Using public
private tools
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7 Tools you need to understand
1.
2.
3.
4.
5.
6.
Developer selection and negotiations
Community planning/Entitlements
Site assembly and cleanup
Creating a development entity
Municipal financing
Equity investment tools (including tax
credits)
7. Co-investment opportunities
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The 10 principles
COMPETENCE
1.
Properly Prepare for Public/Private
Partnerships
2.
Create a shared vision
3.
Understand your partners and key players
4.
Be clear on the risks and rewards for all
parties
5.
Document a clear and rational decisionmaking process
6.
All parties must do their homework
7.
Secure consistent and coordinated
leadership
8.
Communicate early and often
9.
Negotiate a fair deal structure
10. Build trust as a core value
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Steps in the process (publicly initiated)
• Public agency creates a vision through a communitybased decision process.
• Involve the property owners!
• Solicits developer through RFP, RFEI, RFQ
• Selects and executes an ENA or Sole Source
Agreement.
• Negotiates and executes a DDA
Build trust while conducting due diligence on the
project and on each other
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Steps in the process (privately initiated)
• Public agency creates a vision through a communitybased decision process (HOPEFULLY)
• Developer approaches public agency
• Agency and developer agree to negotiate leading to
an agreement.
Build trust while conducting due diligence on the
project and on each other
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Real Estate 101 for public officials
•84
Negotiation is about problem-solving
• Don’t treat the process as a hard bargaining
situation
• Know your project economics and don’t make
concessions you can’t afford.
• Build the relationship of trust
• Build community ownership
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Real Estate 101 for public officials
•85
Sharing Proprietary information
• Understand the local public information laws.
• Disclose to an outside 3d party consultant
• Recognize that the final deal must meet the
open book requirement.
• Don’t be ashamed about return requirements
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Real Estate 101 for public officials
•86
Community planning reduces entitlement risk
•
•
•
•
•
Livermore, CA downtown specific plan
•
•
•
Principles
Include all stakeholders
Base the plan on the market
Analyze all the impacts
Develop implementation tools
Identify public infrastructure
needs
Imbed flexibility
Develop knowledge/skill in real
estate
Use the RFQ
Walnut Creek, CA downtown plan
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Real Estate 101 for public officials
87
Site assembly challenges
Morgan Hill, CA Downtown
Opportunity Sites
• AVOID USING EMINENT
DOMAIN.
• Few property owners understand
the real estate.
• Long term owners.
• Mistrust of developers and city.
• Fear of limiting options by
choosing one.
• Potential for gaming the
process.
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88
Newark, CA
150 acre industrial
site conversion to
TOD
–Cleanup will increase land value by up to $130 million
–4 property owners: concerned about distribution of
costs, value and cooperation.
–Agency can force clean up and bill owners
–Agency to use TIF and land secured bonds to equalize
costs and fund infrastructure for access and circulation.
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Real Estate 101 for public officials
•89
Create a development entity
• Cities and counties protect “health and safety”.
• Land sales by competitive bid only, not economic use.
• Need authority to invest in and subsidize
projects based on economic merit.
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–
–
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Redevelopment agency
Economic development corporation
Business improvement district
Land Development Corporation
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Real Estate 101 for public officials
•90
Incremental
Assessed
Value =
Value created
from new
investment
Base
Assessed
Value=
Value of
project area
when formed
Tax
Increment $
Property
Tax $
Redevelopment
Agency
Invest in
project area
CITY/COUNTY
Provide
Services
Redevelopment finances
investment from increased value
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Real Estate Development
Process II
91
91
Use the development entity
•
•
•
•
•
•
Pre-development costs
Land acquisition
Public Facilities
Financing gap
Incentive payments
Backup guarantees
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Real Estate 101 for public officials
•92
Tax exempt financing lowers cost and increases
leverage
• Public financing takes many forms
• Land secured financing for
infrastructure/cleanup
• Housing revenue bonds
• Lease revenue financing for facilities
• Revenue and general obligation
bonds
Berkeley Reparatory Theater
• Federal regulations limit use to public
purpose and require compliance with
IRS regulations for use of funds.
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Real Estate 101 for public officials
•93
Land Secured Bonds: assessment bonds are the
primary means of financing infrastructure and
cleanup
• Assessment or annual tax levy can be
passed on to users
• Delinquencies result in tax lien and
foreclosure
Mission Bay
• BE CAREFUL! ESTABLISH
FINANCING STANDARDS.
• Private financing subordinates to
public financing.
Hunters Point
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Real Estate 101 for public officials
•94
New Public Incentives Paradigm
– Important layer in capital stack
– Bonds and/or private placement of municipal
obligations the rule, not the exception
– Multiple revenue sources
– Public participation is evaluated on whether it
is needed to make the project pencil
– Private capital sources rely on public capital
sources to meet underwriting criteria
Courtesy of Richard Klawiter, DLA Piper, Chicago
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Real Estate 101 for public officials
95
Lakeside Steel
Plant site
conversion
PHASE 1
PLANNED
DEVELOPMENT
35 million square feet
Dwelling units maximum
13,575
Commercial Area
approximately 17.5
million square feet
Source: Jeffrey Owen,
DLA Piper, Chicago
Urban Land Institute
Real Estate 101 for public officials
CHICAGO
LAKESIDE
MASTER PLAN
LAKESIDE
PHASE 1 CAPITAL STRUCTURE
Bonds supported by TIF
City GO Bonds
$55M
Second lien bonds $41M
Total TIF bonds
$96M
TIF BOND ISSUANCE
CLOSING CONDITIONS:
RETAIL PRE-LEASE
1 TOWER PAD SALE
SECURE PRIVATE EQUITY AND
FINANCING COMMITMENT
Private EQUITY
Private DEBT
$75M
$226M
Source: Jeffrey Owen, DLA Piper, Chicago
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Real Estate 101 for public officials
•97
Land as equity:
Pinole Valley Shopping Center
Pinole, CA
Renovation of a
70,000 square foot
neighborhood
shopping center
built in the 1960’s.
• Agency purchased site from foreclosure along with two gas stations for $7.3 million
in 2004.
• Ground leased site to developer for 80% of net cash flow (NOI after debt service)
• Developer signed Trader Joe’s and Walgreens.
• Developer obtained financing to renovate the center based on the Agency land value
serving as the equity.
• With sale, Agency receives 80% of net proceeds after paying off permanent loan.
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Real Estate 101 for public officials
98
Tax Credits provide equity in return for tax
benefits to the tax credit purchaser
Low Income Tax Credits
• Subsidize affordable rentrestricted housing
• $9 billion annual market –
awarded at the state level to
specific projects
• Rigorous compliance
requirements
New Market Tax Credits
• Subsidize capital investments in
low income communities
• $3 to $4 billion annual credit
market awarded federally to
entities
• Rigorous compliance
requirements
Courtesy
of Leslie Eckstein, Wells Fargo Bank
Urban Land Institute
99
Real Estate 101 for public officials
Argonaut Hotel, San Francisco
• Historic rehabilitation
• Uses Historic Tax
Credits as equity.
• Rent income maintains
the historic ships
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Real Estate 101 for public officials
100
Appleton Mills: Lowell, MA
1.9 million square feet of
mixed-use, transit-oriented
development
Up to 725 units of market
rate and affordable housing,
Up to 425,000 square feet
of commercial space
Up to 55,000 square feet of
retail
Total Cost $47,078,544
Tax credit equity
$26,282,806
Courtesy of Jim Keefe,
Trinity Financial
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Real Estate 101 for public officials
101
Co-investment creates development value
for public and private sectors
• Examples:
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–
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–
–
–
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Cleanup
Theater
Golf course
Park
Highway interchange
Streetscape downtown
Stadiums
Union City, CA
• Intermodal TOD site
• Community Theater as coinvestment
• Brownfield site cleaned up by the
redevelopment agency
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Real Estate 101 for public officials
•102
Rancho Solano and Paradise Valley Golf
Courses, Fairfield, CA
• Developer donates land
to the city (180 acres for
each golf course)
• City uses lease revenue
financing for building
golf courses
• Developer captures
increased value of homes
build around course.
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Real Estate 101 for public officials
103
Deal Standards (1-6)
1.
2.
3.
4.
5.
Competence
Price the benefits
Align interests
Share success
Have a “holding period” for returning the
public investment
6. Have a stop loss for the public agency:
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Real Estate 101 for public officials
104
Deal Standards (7-12)
7. Validate the market and the costs
8. Use the open book
9. Third party verification
10.Build in accountability
11.Recognize that things will go wrong
12.Keep it simple
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Real Estate 101 for public officials
105
Or…
1. Make deals based on the real estate, not wishful
thinking: Validate the deal based on the real estate economics and on
what the markets will actually support.
2. Build trust and ownership: Who is involved in the
partnership is as critical as what the project is. Developers and
communities need to take the time to use the “open book” and to develop
relationships of consistency and trust.
3. Do the hard work competently: Public private partnerships
are complicated and require resilience and persistence to accomplish. They
require a competent team on both sides of the table who take the time and
effort to craft complex deals.
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Real Estate 101 for public officials
•106
Questions
1. What preparation does a community need to take
to be able to be effective at public private
partnerships?
2. What do you believe are the most important deal
standards?
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Real Estate 101 for public officials
107
Round Table Discussion
1. What were the most important take-aways from
today and how will you apply what you learned
to improving the quality of development in
Prince George’s County?
2. What additional background or knowledge would
help you in applying what you have learned
today?
3. What worked well and what could be improved?
Urban Land Institute
Real Estate 101 for public officials
108