Development / acquisition underwriting

1) a) Yield on Cost after NOI and capex reserve b) Multiple on Cost c) As GP I want to see my promoted profit as a % of my gross profit d) project level / LP level IRR -- really as a sensitivity to see where the hurdles are going to be liable based on sensitizing the inputs of the deal e) yield cap spread

Assume speculative space is not leased, what are the impacts on yield if it takes 12 months after completion to lease the speculative space? 2) Hard to answer...by yield do you mean IRR? cash on cash yield is hard to answer for this as it's an annual metric. obviously for the year you dont lease you lose money from leakage expenses to keep the place running. But let's say you invest equity...have a 60% NOI margin...hold for 10 years and sell at a 6% cap for a sale value of lets say ~3x gross your initial investment...not having that first year of cash flow would dock your IRR by approximately 10-15%. Now this is very back of envelope math (literally done here on an HP in 3 minutes)....but a shot at an answer to #2...

If given the task of underwriting a 10,000 SF venue space to be owned by our Development team in Austin, how would you structure your task list to develop a proforma? What data sources would you use? 3) I really split it into 3 separate buckets...all of which need to be up and moving simultaneously...as each side will need numbers from the other. 1st is the development leg work. Need to be running down GC bids, proper zoning/muni processes, going through their rolodex to search for the right marketing/archiect/engineering/law firms to use. Any worth while developer in their market should be able to give a reasonable estimate of what these costs are going to look like - barring anything peculiar. 2nd is the legal...all of the aforementioned people will work off contracts that need to be vetted and executed. Once development agreements/bank term sheets/jvs come in he/she will run the red-lining on that as well. 3rd is the finance job...making sure the underwriting is in place to run with the inputs. always know what you break-even/walkaway costs are...if your project has no way under this at any point, dont waste pursuit costs chasing a losing horse. Once the bones come together and a marketing package is ready...start fetching interest from banks and or equity partners depending on how the deal is going to be structured. As actual hard bids and costs come in...update the models and start to fine tune what the proforma will look like. at the early stages this proforma should include rent/opex inputs from axio costar etc...dependign on budget and size of project a specific market study might be worthwhile.

in terms of financing, do most ground up developments assume construction loans, and then refinance to permanent ones after stabilization or completion? My assumptions on financing would be Construction Loan: 65% LTC, 3-year interest only term at WSJ Prime minus(-) 75 basis points. 1% origination fee, open prepayment at time. Loan is last money in and is refinanced by the Permanent Loan at the end of 3 years (inclusive of construction schedule). Permanent Loan: 70% LTV based on 7.5% cap rate value. 10-year term at 5% fixed interest on 25-year amortization. 1% penalty (on outstanding balance) for prepayment in first 5 years 4) Sure the above scenario sounds fine. The project strategy dictates the loan strategy. If you're doing it right now maybe refi risk is something you want to consider. for a longer term strategy maybe you go with a construction-to-perm loan...or a strategy that allows for an earn-out once various covenants are achieved. On your loan sizing for the perm...most banks will take the minimum of three metrics they are comfortable at -- each a LTV, DCR or fixed dollar value.

had one more question in regards to land acquisition for development use. What kind of financing is typically given on a land acquisition? what can help increase the loan amount? do most funds/sponsors acquire land with debt?