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Development Economics For Planners and Other Land Use Professionals

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Information about Development Economics For Planners and Other Land Use Professionals
Real Estate

Published on January 2, 2009

Author: JWELAW

Source: slideshare.net

Description

Presentation made with TIm Youmans of Economic Planning Systems, Inc. for the annual conference of the California Chapter of the American Planning Association on September 25, 2008
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Development Economics for Planners How the Marketplace Affects Planning Outcomes APA-CA 2008 Conference September 23, 2008

Development Economics Why should Planners care? Old School – We just set the standards – making money is the developer’s problem New School - Plans that don’t work are a waste of resources and public involvement Public-Private Partnerships – Win/Win (not surrender) Financial Markets – capital is a global commodity essential to community well-being Lost in Translation - planner speak vs. developer speak

Why should Planners care?

Old School – We just set the standards – making money is the developer’s problem

New School - Plans that don’t work are a waste of resources and public involvement

Public-Private Partnerships – Win/Win (not surrender)

Financial Markets – capital is a global commodity essential to community well-being

Lost in Translation - planner speak vs. developer speak

Development Economics Public Facilities Financing Plans and Fiscal Impact Analyses Ensuring development pays its own way for public infrastructure and services “ Community Benefit” Economic Development / Redevelopment Project Feasibility Analysis - Determining need and magnitude of subsidies or incentives No Free Lunch – Who Pays? Public objectives have real costs (clean air, water, affordable housing, schools)

Public Facilities Financing Plans and Fiscal Impact Analyses

Ensuring development pays its own way for public infrastructure and services

“ Community Benefit”

Economic Development / Redevelopment Project Feasibility Analysis

- Determining need and magnitude of subsidies or incentives

No Free Lunch – Who Pays?

Public objectives have real costs (clean air, water, affordable housing, schools)

Basics of Development Economics Market Research Purpose Objectives Linkage between Market Research and Financial Feasibility Financial Feasibility Purpose Case Studies Risk/Return/Time Value of Money

Market Research

Purpose

Objectives

Linkage between Market Research and Financial Feasibility

Financial Feasibility

Purpose

Case Studies

Risk/Return/Time Value of Money

Market Study Objectives Creation of a Land Use Plan or Building Project consistent with current trends Validation of a Development Project Justify debt or equity financing Market Creation Strategy Identify the basis for new projects or products that cannot be justified by current trends

Creation of a Land Use Plan or Building Project consistent with current trends

Validation of a Development Project

Justify debt or equity financing

Market Creation Strategy

Identify the basis for new projects or products that cannot be justified by current trends

Types of Market Studies Long-range planning (5-20 yrs) Regional plans City General Plans Specific Plans Community Plans Site Plans (2-10 yrs) Residential subdivision Commercial center Buildings (6 months–2 yrs) Residential Non-residential (Retail, Office, Industrial, Mixed Use)

Long-range planning (5-20 yrs)

Regional plans

City General Plans

Specific Plans

Community Plans

Site Plans (2-10 yrs)

Residential subdivision

Commercial center

Buildings (6 months–2 yrs)

Residential

Non-residential (Retail, Office, Industrial, Mixed Use)

Linkage Between Market and Feasibility Analyses Market analysis provides technical assumptions for feasibility analysis Feasibility analysis tests market assumptions to develop viable project Sales prices Supportable square feet of development

Market analysis provides technical assumptions for feasibility analysis

Feasibility analysis tests market assumptions to develop viable project

Sales prices

Supportable square feet of development

Financial Feasibility Analysis The “Pro Forma” Identify key variables through market research Sales prices Construction costs Fees Land Values Test sensitivity to changes in market conditions Evaluate conditions necessary to achieve return requirements

The “Pro Forma”

Identify key variables through market research

Sales prices

Construction costs

Fees

Land Values

Test sensitivity to changes in market conditions

Evaluate conditions necessary to achieve return requirements

Residual Land Value Final Sales Price Market Derived minus Development Costs equals Residual Land Value Market comparables Estimated Dev. Costs Impact Fees Backbone Infrastructure & Mitigation Site Development Costs Building Construction Costs Contingencies Builder’s Profit

Final Sales Price

Market Derived

Residual Land Value

Market comparables

Estimated Dev. Costs

Impact Fees

Backbone Infrastructure & Mitigation

Site Development Costs

Building Construction Costs

Contingencies

Builder’s Profit

Hypothetical Project Alternatives Analyzing Density for New Transit-Oriented Development

Financial Feasibility: Current Market Conditions Target: $40-$50/ land sq. ft. Target: $90-$100/ land sq. ft.

Financial Feasibility: Break-Even Conditions No adjustment required Increased $42k to achieve feas.

Fee Breakdown

Return on Investment (ROI) Time Risk Capital Req. Risk/Reward/Timing of Investment in the Development Cycle

Return on Investment (ROI) continued Risk/Reward/Timing of Investment in the Development Cycle

Return on Investment (ROI) continued General Plan Tentative Building Entitlement Map Permit Sources and Mix of Capital Vary as Development Process Progresses

General Plan Tentative Building Entitlement Map Permit

Return on Investment (ROI) continued Estimated ROI Requirements in Stable Market Expectation for Return and Risk Tolerance Varies for Each Source of Capital Item Priority Risk Debt 8-10% 8-10% 8-10% 1 Guaranteed Pmt Mezzanine N/A 10-12% 10-12% 2 Guaranteed Pmt Equity 25-40% 20-30% 15-20% 3 At Risk Payment General Plan Ent. Tentative Map Building Permit

Return on Investment (ROI) continued Sources and mix of capital vary as development process progresses General Plan Tentative Building Entitlement Map Permit Acquisition & Development Loan Sophisticated Developer & Lender Secured & Guaranteed Peeling the Development Investment Onion Cash Option Joint Venture Speculative Expense Option Exercised Add Equity Investors Additional Draws Securing Site Planning Environmental Closing on Site Engineering Infrastructure Finance Site Improvements Development Fees Marketing /Sales/Service Hard Money –Tough Terms guaranteed minimum preferred / priority share of profit Land Developer Sells to Merchant Builder or Commercial RE Co Construction Loan Short term “ Take Out” Loan Long term financing

General Plan Tentative Building Entitlement Map Permit

Acquisition & Development Loan

Sophisticated Developer & Lender

Secured & Guaranteed

Cash

Option

Joint Venture

Speculative Expense

Option Exercised

Add Equity Investors

Additional Draws

Securing Site

Planning

Environmental

Closing on Site

Engineering

Infrastructure Finance

Site Improvements

Development Fees

Marketing /Sales/Service

Hard Money –Tough Terms

guaranteed minimum

preferred / priority

share of profit

Land Developer Sells to Merchant Builder or Commercial RE Co

Construction Loan

Short term

“ Take Out” Loan

Long term financing

Return on Investment (ROI) continued Expectation for return and risk tolerance varies for each source of capital Estimated ROI Requirements in Stable Market Banks, Insurance Companies SECURED DEBT 1 st POSITION Debt 8-10% 10% 10% Mezz. N/A 10-12% 10-12% Pension Funds, Institutional And Specialized Investors MINIMUM and PREFERRED RATE OF RETURN + PROFIT SHARE RATES SUBJECT TO CAPITAL MARKETPLACE Other Opportunities for Comparable Risk and Return Item Priority Risk Debt 8-10% 8-10% 8-10% 1 Guaranteed Pmt Mezzanine N/A 10-12% 10-12% 2 Guaranteed Pmt Equity 25-40% 20-30% 15-20% 3 At Risk Payment General Plan Ent. Tentative Map Building Permit

Return on Investment (ROI) continued Expectation for return and risk tolerance varies for each source of capital Estimated ROI Requirements in Stable Market Equity 25-40% 20-30% 15-20% At Risk

Internal Rate of Return (IRR) Project internal rate of return (IRR) = the discount rate at which the net present value of all cash flow invested in and thrown off by the project equals zero. Also known as the "unleveraged" IRR. Equity IRR = IRR of the share of that cash flow that goes to the owner, after receiving the loan proceeds, paying expenses, debt service, and repaying the loan Source: Stuart Meck, FAICP, APA Research Department, May 2005 Developer rate of return is NOT a percentage of sales price e.g. $400,000.00 unit and developer return of 20% IRR $400,000.00 x .20 = $80,000.00/unit x 100 units = $8 M Equity = 10% of Project Cost = $3.9 M x .20 = $780,000.00

Project internal rate of return (IRR) = the discount rate at which the net present value of all cash flow invested in and thrown off by the project equals zero. Also known as the "unleveraged" IRR.

Equity IRR = IRR of the share of that cash flow that goes to the owner, after receiving the loan proceeds, paying expenses, debt service, and repaying the loan

Developer rate of return is NOT a percentage of sales price

e.g. $400,000.00 unit and developer return of 20% IRR

$400,000.00 x .20 = $80,000.00/unit x 100 units = $8 M

Equity = 10% of Project Cost = $3.9 M x .20 = $780,000.00

Development Economics Lessons for Planners Developers make buckets of money DELAY AND SQUEEZE TO GET ALL YOU CAN Plan it, and they will come Market? We don’t need no stinkin’ market Don’t worry about the costs, set high standards for the market to meet public goals Time taken to process the environmental review and application has no consequences we need to be concerned about

Lessons for Planners

Developers make buckets of money

DELAY AND SQUEEZE TO GET ALL YOU CAN

Plan it, and they will come

Market? We don’t need no stinkin’ market

Don’t worry about the costs, set high standards for the market to meet public goals

Time taken to process the environmental review and application has no consequences we need to be concerned about

Development Economics Lessons for Planners Development capital is a resource As important as air, water, transportation, design, public services, etc. Scarcity – competitive investment opportunities Plans for development with no market or not financially feasible will never be built Plans that don’t provide for market demand will more likely be amended Time and risk in development processing impact achievement of planning goals

Lessons for Planners

Development capital is a resource

As important as air, water, transportation, design, public services, etc.

Scarcity – competitive investment opportunities

Plans for development with no market or not financially feasible will never be built

Plans that don’t provide for market demand will more likely be amended

Time and risk in development processing impact achievement of planning goals

Development Economics Lessons for Planners Adding Market Savvy to Planner’s Toolkit Transformational Planning what planning techniques can most effectively influence markets to meet planning goals? can markets provide effective planning tools? (i.e. carbon credit trading; transfer of development rights)

Lessons for Planners

Adding Market Savvy to Planner’s Toolkit

Transformational Planning

what planning techniques can most effectively influence markets to meet planning goals?

can markets provide effective planning tools? (i.e. carbon credit trading; transfer of development rights)

Contact Information Joel Ellinwood, AICP 916.789.9932 [email_address] Tim Youmans 916.649.8010 [email_address] www.epsys.com A copy of this presentation and a list of additional reference materials are available on the web at http://www.lawyer-planner.com and http://www.epssac.com

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