MODULE 10 Basic Premises w RiskReturn analysis is

MODULE 10

Basic Premises w Risk/Return analysis is critical to establish project feasibility w Financial and ownership structures affect participants’ risks and returns

Analysis of Alternative Structures w Importance of “Structuring” w The Relative Attraction of Investment in Real Estate

The Basic Flow of Every Real Estate Transaction w Capital Structure: The Provision of funds • Equity and Debt w Cash Flow • Return Of and On Capital from Operations w Appreciation Upon Sale or Reversion • Return on Risk Capital

Opportunities in Real Estate: The Ultimate Inefficient Market w Risk/Return tradeoffs w Successful projects rely on monopoly – and it’s legal

Legal Forms of Organization Individual w Co-ownership (3 types of tenancy) w Group Ownership: w • Syndication • Partnerships and Joint Ventures • Corporations • “C” Corporation • “S” Corporation • LLC w REITs

Financial and Ownership Structures w Real Estate • Debt • Equity • Hybrid w Corporation • Bonds • Stocks • Preferred Stock

Alternative Financial Structures All-Equity w Leveraged Equity w • With First Mortgage • With Subordinated Mortgage(s) w Hybrids • With Participating Mortgage(s) • Convertible Debt

Alternative Ownership Structures w Fee Simple • Sole Ownership • Joint Venture (including partnerships) w Leasehold • Ground Leasing • Improvements Leasing • Master Leasing w Hybrids

Participating Debt w Equity Kicker • Percentage of Appreciation (upon sale/refinancing) w Cash Flow Kicker • • w Percentage of Operating Cash Flow (OCF) Percentage of Effective Gross Income (EGI) And/or Net Operating Income (NOI) Lump Sum(s) at predetermined time(s)

Convertible Debt w Conversion of all or part of loan balance to equity at predetermined time or event

Real Estate Investment Trusts (REITs) Equity REITs w Mortgage REITs w Hybrid REITs w

Equity (Part I) Sole Ownership w Joint Ventures w • All-Cash by Investor; carried interest by developer • Debt and Equity JV • Interim JV (less the 5 years) • Credit Enhancement w Key Issues in Joint Ventures

Equity (Part II) w Partnerships • General partnership • Limited partnership

Other Shared Risk/Reward Arrangements Presale Arrangements w Participating Management Agreements w

Ownership w Fee Simple w Leasehold

Valuing Fee and Leasehold Interests Leased fee interest = PV of lease payments + PV of residual (the reversion) w Leasehold Interest = PV of NOI (-) lease payments w Leased fee interest + leasehold interest = value of the fee simple w

Lease & Leasehold Financing (Part I) w Ground Leases • Developer (Lessee) • Advantages • Disadvantages • Land Owner (Lessor) • Advantages • Disadvantages • Subordination

Lease & Leasehold Financing (Part II) w Participating Ground Leases: • • Base Ground Rent Participation in Effective Gross Rents Participation in Cash Flow Participation in Refinance or Sale Proceeds

Lease & Leasehold Financing (Part III) w Equity Leases (Landlords/Tenants) • Landlord • Advantages • Disadvantages • Tenants • Advantages • Disadvantages • Critical provisions

Lease & Leasehold Financing (Part IV) w Sales/Leasebacks • The “Synthetic Lease” w Master Leases

Recap: Financing the Project through its Life Stages w w w w Land Acquisition Land Development Off-sites On-sites Vertical Construction Sales/Lease-up Holding (Income properties) Final Sale