DEVELOPMENT 101:

BEHIND THE NUMBERS

URBAN DEVELOPMENT INSTITUTE – FRASER VALLEY CHAPTER

HUGH CARTER

MARCH 10, 2016

OVERVIEW

The Development Process

Managing the Risk

Evaluating a Site

Behind the Numbers : A

Case Study

Finance

Conclusions

THE DEVELOPMENT PROCESS

1. Pre-development Concept

2. Land Assembly

3. Financing

4. Evaluating a Site

5. Planning and Approvals

6. Construction

7. Marketing and Sales

8. Post Construction

MANAGING THE RISK

I. Planning & Rezoning Risk

II. Construction Risk

III. Market Risk

IV. Financing Risk

THE PRE-DEVELOPMENT CONCEPT

Get the initial concept for the project created – to start the process.

Goal of development?

Staying in business for the long run?

Personal legacy?

Company expertise?

How does this fit with our team?

How does it fit with our partners?

Expected type and market viability?

Scale?

LAND ASSEMBLY

Study RGS (Metro Vancouver),OCP’s, Neighbourhood Plans,and Zoning

Preliminary Meetings with Municipal Planners and Engineers (Plans and Strategies)

Keep in Touch with Brokers andPotential Vendors

Brainstorming and Blue SkyThinking

Preparing an Offer

Due Diligence Period (SubjectPeriod)

Making the Call and Going Firm (Subject Removal)

LAND ASSEMBLY (CONT.)

Negotiation elements

Price

Deposits (Refundable, Non-

Refundable, Applicable)

Accommodate financing and equity

Timing – Deposits and Closing

Subject Conditions

Right to examine title

Permits / approvals that are

prerequisites (Third Reading)

Reps. and Warranties

Assignment

Back of the Napkin Analysis

Be prepared to accept that

sometimes “you win by losing”

MUNICIPAL COSTS AND LAND VALUE

Municipal costs

Development Cost Charges

Amenity Fees

School and Park

Storm Detention

New Policies and Specifications

Land costs

Rarely goes down

Patient

Speculative

Development costs are relatively fixed and movewith market conditions:

Costs of materials

Costs of labour

Costs of management

Minimum return on investment necessary to secure financing.

Development

costs and

margin

Land costs

Land

Municipal

Fees &

Charges

FINANCING STRATEGY

What is the development strategy (scale, mix, phasing, marketing) ?

What are the sources of financing to be used ?

Your money

Equity partners – large or small?

Land / development partners

Banks / institutional lenders

How to structure the risk and reward?

What guarantees will you offer?

When to give payouts to equity/joint venture partners?

Sources of Financing?

Banks and Credit Unions

Brokers

Business associates, friends, and family

35%

SECURING THE FINANCING

Financing Considerations Developer’s experience / track record

Financial strength of the developer (Company Balance Sheet / Cashflow)

Financial strength of the guarantors to service and fund overruns

Project Dynamics – market / absorption / presales / prelease, etc.

Site Conditions (Geotechnical, Phase 1 Environmental)

Appraisal / Feasibility Study

Equity (Real vs. Appraisal Surplus)

Cost Control

The Financing Process Application

Discussion Paper (Terms/Conditions)

Commitment Letter

Conditions Precedent

Quantity Surveyor (Budget Confirmation)

Loan Documentation

Recourse (Corporate/Personal Guarantors)

Funding

Repayment

PRO FORMA ANALYSIS

What is the highest and best use of

the site?

Market Study (Pricing, Competition,

Absorption)

Land Uses and Unit mix

Preliminary site plan(s)

Servicing Costs (Off-site and On-Site)

Building Costs

Pro Forma

Sensitivity Analysis

THE FINANCIAL MODEL

Pro Forma

Revenues

Price Point

Costs

Land, servicing, municipal, finishing,

approvals, marketing, financing, etc…

Margin

Return to equity partners and investors

PRO FORMA STAGES

Pro Forma Stages:

Land Acquisition (Secure Land)

Due Diligence (Remove Subjects)

Financing (Secure Lender)

Development Permit Proforma (Municipal Approvals)

Building Permit Proforma (Construction Start)

THE FINANCIAL CASHFLOW MODEL

~ A PROFORMA OVER TIME

Cash Flow:

Models the Pro Forma Revenues, Costs and Return Over the Length of the Project

Used for internal monitoring

Used for financial reporting purposes

Requirement of Lender

FINANCIAL TERMINOLOGY

PROPERTY METRICS

ROC - Return on Cost

ROR - Gross Sales Margin

ROE - Return on Equity

IRR - Internal Rate of Return

BEHIND THE NUMBERS : A CASE STUDY

Base Pro Forma

Sensitivity Analysis

1. Delayed Approvals (18 Mos.)

and 5 % Cost Escalation

2. Delayed Approvals (18 Mos.)

and 5 % Price Reduction

BASE CASE PRO FORMA

18 MONTH DELAY AND 5% COST ESCALATION

18 MONTH DELAY AND 5% PRICE REDUCTION

UDI DEVELOPMENT 101 DELAY BY 18 MOS. AND AVERAGE PRICE DECLINE BY 5 %

TOWNHOUSE PRO FORMASouth Surrey

REVENUE Price per Unit # of Units Total $ per SqFt

Sale - A 453,962$ 34 15,434,717$ 299.25$

Sale - Single B1 384,617$ 41 15,769,297$ 294.50$

Total Revenue 416,054$ 75 31,204,014$ 296.83$

COSTS Total Per Unit

Total Sales Costs 973,620$ 12,982$

Total Land 7,682,700$ 102,436$

Total Servicing Costs 1,343,835$ 17,918$

Total Construction Costs 12,818,940$ 170,919$

Total Municipal Fees 1,968,322$ 26,244$

Total Soft Costs 2,100,532$ 28,007$

Total Finance Costs 2,086,305$ 27,817$

TOTAL COSTS 28,974,255$ 386,323$

PROFIT 2,229,759$ 29,730$

Percent of Costs 7.7% 7.7%

Percent of Revenue 7.1% 7.1%

BASE CASE

PROFIT 4,479,084$ 59,721$

Return on Costs 15.8% 15.8%

Return on Revenue 13.6% 13.6%

VARIANCE (NEW VS. BASE CASE)

PROFIT 2,249,326-$ 29,991-$

-50.2%

Return on Costs -8.1% -8.1%

Return on Revenue -6.5% -6.5%

SUMMARY

CONCLUSION

To quote another major developer on the development process:

“Okay – we have a pro forma. Now all we need is some land, a site plan, issued for

construction drawings, municipal approvals, buyers, all the building materials, a

schedule, sales brochures, signage, ads, a web site, sales contracts, a disclosure

statement, a sales office and the market to hold together for the next three years.”

SOME FINAL THOUGHTS

1. As demonstrated, development is capital intensive and entails

considerable risk but with thoughtful planning the end product

can be rewarding for both the investors and the community.

2. Developers and their investors are seeking an environment of

“certainty” as financial commitments are made on the basis of

approved neighbourhood plans and municipal fees, charges,

policies and bylaws in place at the time of land acquisition. Be

financially realistic and responsible.

3. Respect your community vision and neighbourhood plans while

not being overly prescriptive regarding land use planning policies,

which limits creativity and meaningful urban design solutions.

4. Try to create a culture of fairness, respect and understanding that

allows municipal staff to work with developers in a common

sense, solutions-based way.

5. Encourage diversity and flexibility in land uses.

6. Have a clear approvals process and internal leadership.

CONCLUSION – WORKING TOGETHER

THANK YOU