How Would You Improve ARGUS Valuation – DCF?

by Bruce Kirsch on May 15, 2012




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Major Mixed-Use Development Financial Modeling: How Difficult Could It Possibly Be?

by Bruce Kirsch on May 10, 2012

Well, pretty difficult. There’s lots of moving parts. You’re basically marrying several independent financial models into one mega-model. The permutations and combinations that make it particularly busy are:

  • Optionality on developing or selling each individual parcel
  • Optionality on, if selling the parcel, buying back the retail component
  • Optionality on retaining ownership of part, or all of, the public parking component
  • Disparate equity investors with different promote structures across the horizontal and vertical development components
  • Optionality on Master Developer as Land Equity contributor to vertical developments
  • And more.

While complicated, it’s all doable, and it all starts with a basic framework as shown below. From there it becomes tens of millions of spreadsheet cells which all feed into a Master Cash Flow summary.

How to organize the financial modeling of a major mixed-use real estate development project.

Let us know if REFM Consulting can help you model your major mixed-use project! We like doing these for clients because it’s essentially a giant puzzle. (and we like puzzles)

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How Lenders Treat Land Equity In A Real Estate Development Transaction

by Bruce Kirsch on May 6, 2012

Land Equity Defined: In the context of a real estate development transaction, Land Equity is non-cash equity credit given to a land owner if the land owner elects to contribute the land as equity instead of selling the land for cash to the developer. The “credit” is given by both the developer (project Sponsor) to the land owner, and by the lender to the Sponsor. Whether the amount of credit given by both Sponsor and lender is identical depends on the individual transaction circumstances and is the result of negotiation.

How Land Equity Is Represented In A Real Estate Development Pro-Forma:

Within The Uses of Funds:

  • Contributed Land Equity Value (instead of Land Cost)
  • Hard Costs
  • Soft Costs
  • FF&E
  • Financing Costs

Within The Sources of Funds:

  • Contributed Land Equity Value (instead of Cash Equity above and beyond the amount represented below)
  • Contributed Cash Equity
  • Debt Financing

How Lenders Treat Land Equity: Land equity is addressed differently by different banks and differently for different transactions. Typically, a Lender will give a Sponsor credit for Contributed Land Equity that is based in part on:

If the land has traded recently, 100% of the Purchase Price at which the land traded in an arms-length transaction. However, if the transaction was not arms-length (say a Master Developer entity sells the land to its owned Vertical Developer entity for a Purchase Price of $10.00), or if the land has been owned for a very long time and has such a low basis that it is not a reasonable number at present, then the Lender will base the amount on:

  • A stated value based on recent comparable land sales (an Appraisal is not always ordered by the Bank if comps are available), or
  • Some percentage (less than 100%) of an Appraised value.

The final dollar amount for which credit will be given for Contributed Land Equity will be the result of a negotiation between the Sponsor and the Lender, and will be influenced by:

  • the track record of the Sponsor
  • how aggressive the current lending environment is, and
  • the amount of Contributed Cash Equity from the Sponsor.

The Lender’s Loan-to-Cost % will be applied against the Total Project Cost inclusive of the Contributed Land Equity Amount even though the Land is not a cash cost. As a result, the Lender will have a first lien on the land.

Do you have a different view on or experience with this? Let’s hear about it in the Comments section below.

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