Real Estate Flashcards

Question 1

Q

Real estate development is important because it does the following:

real estate chap 1 - 4

Answer

A

Increases investment, sustains the tax base, & can serve as a catalyst to revitalize urban and rural areas

Question 2

Q

There are three basic strategic approaches to economic development: placeoriented, resident-oriented, and business-oriented approaches. Each of these approaches has proven effective at promoting economic growth, but the strategies are most effective when used in combination.

real estate - chap 1 - 4

Answer

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Business-Oriented Approaches
Focus on directly assisting businesses through specific efforts in business finance, entrepreneurial and small business development, business retention and expansion, technology transfer, and business recruitment.

Place-Oriented Approaches
Focus on the community’s physical resources. Place-oriented efforts seek to improve roads and utilities, to develop employment centers, as well as transform brownfields into usable sites. They include broad and specific efforts to revitalize areas and reuse specific sites. This manual focuses on place-oriented or real estate approaches to economic development.

Resident-Oriented Approaches
Focus on helping local residents participate and advance in the workforce. Examples of resident-oriented approaches include school-to-work programs for high school students, job training classes for adults, and job placement centers.

Question 3

Q

Real estate development is the lifeblood of a community. It provides valuable jobs and sustained tax base and is controllable and responsive to community needs. Development also provides for increased investment and sustainable growth within a community. The goals and outcomes of development are compatible with economic development. These goals include:

Real estate - chap 1- 4-5

Answer

A

✓ Creating and retaining jobs;

✓ Attracting and creating new or expanding businesses;
✓ Enhancing the local tax base through new and higher property values;
✓ Stimulating nearby real estate improvements;
✓ Improving the appearance of a neighborhood (removal of slum and blight).

Question 4

Q

Many of the factors driving land value, commercial, and industrial development today are the same as over 200 years ago: price, location, available fmancing, & supply and demand. Land booms and busts, fraud and deception, government policy, incentives, and indust1y restructuring have always been components of real estate development and reuse. Understanding their past influences will give the economic development practitioner a better understanding of their future impacts.

Real Estate - Chap 1 - 5-6

Answer

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Early trends

Several key pieces of early legislation laid the foundations of our current land system. Hoping to encourage settlement west of the Appalachian Mountains, the federal government instituted a number of pro-development initiatives in the late 18th and early 19th centuries, including establishing the basic real estate principles of land surveying and subdivision, providing for a liberal credit system, and giving away some 300 million acres of land for private ownership during the “Free Soil Movement” in 1862. These programs provided major incentives for the populace to farm land, consequently leading to tl1e development of roads, transportation systems, and towns.

Historical Perspective of Industrial Parks

Industrial parks were born as railroad companies developed or sold tl1eir vast land holdings to commercial and industrial investors. Prior to the expansion of the railroad network, most manufacturers had to be located on or near water transport in order to receive raw materials and distribute finished product via ships and barges. With connecting and spur lines in place, the manufacturing sector (with its smoke and smells) could cluster away from the downtown area. Land speculation focused on agriculture at the start of the 19th century, shifted to land speculation in cities -a major factor driving this switch was the birth of growing industrial parks.

Historical Perspective of Office Parks

The massive work of industrialization coupled with considerable rural-tourban migration created a need for office complexes separate from industrial parks and clusters. Escalating land prices in the central business districts of major cities and the introduction of the elevator led to the birth of the skyscraper. Banks, insurance companies, newspapers, corporate headquarters, retail establishments, government offices, and professional offices all wanted the prestige of being high up in a trendy skyscraper.

Major office development continued in the cities until the 1950s phenomenon of “urban flight”, where significant numbers of the middle class moved from the cities to suburbia. The suburbanization of office development ensued, as developers took advantage of cheaper land, lower construction costs, and more liberal zoning regulations (not to mention incentives from suburban cities). So popular was this office-building trend in the suburbs that from 1979 to l 989, the U.S. office market had the greatest boom in its history. However, as a result of this urban out-migration, many cities were left with a surplus of older Class B and C office, retail, and industrial space.

Question 5

Q

As stated by U.S. Federal Reserve Chairman Ben Bernanke, the following bullet points summarize the causes of the great recession:

real estate chap 1 - 8

Answer

A

✓	Dependence on unstable short-term funding;
✓	Deficiencies in risk management;
✓	Over-leveraged assets;
✓	Poorly structured derivatives markets;
✓	Under-regulation of markets.

Question 6

Q

The common tenets of mixed use developments are:

real estate chap 1 - 12

Answer

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✓ Inclusion of complementary office, hotel, retail, and housing spaces together;
✓ Inclusion of desired urban conveniences in a pedestrian friendly environment;
✓ Promotion of vertical versus horizontal developments;
✓ Consideration of environmental costs/ gas prices;
✓ Incorporation of multiple forms of movement into a single development, including automobiles, walking, train terminals and biking

Side Note - mixed use is a also a tenet of the triple bottomme line sustainablility trend which seeks benefts of development not just in the form of profits but also in terms of net improvements in the quality of life and environmental stress.

Question 7

Q

Entertainment Center
Acronyms

real estate chap 1 - 15

Answer

A

✓ CEC -Children’s Entertainment Center: Discovety Zone, Club Disney, Jeepers;

✓ EOR -Entertainment Oriented Retail: Bass Pro Shop, Barnes & Nobel, Cabela’s, Niketown, Warner Bros.;
✓ FEC -Family Entertainment Center: Fun Factory, Putting Edge, Mountasia, Regal Cinemas Funscape;
✓ LBE -Location Based Entertainment: Dave & Busters, Gameworks, IMAX, Theme Parks, Skating Rinks;
✓ UEC -Urban Entertainment Center;
✓ UED -Urban Entertainment Destination;
✓ LED -Leisure Entertainment Destination;
✓ RDE -Retail Dining Entertainment.

Question 8

Q

Types of Development and Redevelopment
There are four primary types of development and redevelopment:

real estate chap 1 - 15

Answer

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✓ Build-to-suit;
✓ Speculative development;
✓ Greenfield development;
✓ Redevelopment/ reuse.

Question 9

Q

Built to Suit explained

real estate chap 1 - 15-16

Answer

A

In build-to-suit development, a business retains a contractor or developer to build a customized structure. Typically, the business secures long-term financing and owns and manages the building or agrees to a long-term lease with the developer/ owner. In build-to-suit development, the needs of the end-user guide the design of the facility, as opposed to anticipated real estate market needs. Because the design is specific for one tenant, it can be difficult to find businesses for a former build-to-suit property, especially if the building has a special purpose design.

Question 10

Q

Speculative Development explained

real estate chap 1 - 16

Answer

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Speculative development occurs when a facility is built prior to securing a tenant. Speculative development provides a marketing tool, appealing to tenants needing space. However, the facility may not meet the client’s needs, and for communities who do it alone, the financial risks may be high. There is no guarantee that a tenant or end-user will be secured. In tight credit markets, financing is typically not available for speculative development.

Developers often refer to multi-tenant properties as a “spec project” that they hope to achieve a leasing target prior to construction. Risk can be decreased by preleasing of some of the space prior to construction. Conventional lenders typically require that a certain percentage of the space be pre-leased prior to making a loan. In slow development cycles, the credit market can change underwriting criteria to demand higher pre-leasing requirements.

Question 11

Q

Greenfield Development explained

real estate chap 1 - 16

Answer

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Greenfield development takes place on large tracts of previously undeveloped land in rural and suburban areas. It provides competitively priced land to new and expanding businesses while also fostering job creation. Examples of this type of development include industrial parks, technology parks, and commercial development at highway interchanges.

Question 12

Q

Redevelopment/Reuse Development Explained

real estate chap 1 - 16

Answer

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Redevelopment and reuse are processes for taking previously developed property or areas to a higher, more productive use. Specifically, redevelopment refers to new construction (with demolition if necessary) or the process to improve an area through both new construction and property reuse. Property reuse, or simply reuse, refers specifically to the renovation or rehabilitation of an existing building. This type of development encourages infill rather than sprawl, makes use of existing infrastructure, and helps to remove blight.

Question 13

Q

Potential sie issues comparison - new development vs. redevelopment

real estate chap 1 - 16

Answer

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New Development: No or new infrastructure; larger parcels, need for subdivision; wetlands

Redevelopment & Reuse: Existing, older infrastructure; small fragmented parcels, need for land assembly; brownfields

Question 14

Q

Real Estate Development Process (8 in total)

Real Estate chap 1 - 17-18

Answer

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✓	Predevelopment
✓	Market, financial, and political feasibility;
✓	Site and engineering analysis;
✓	Financing;
✓	Contractor negotiations and public approvals;
✓	Construction;
✓	Marketing;
✓	Building occupancy and management.

Question 15

Q

Predevelopment (step 1 Real Estate Development Process) explained:

Real Estate chap 1 - 18

Answer

A

The outline of the real property development process bears a strong resemblance to that of a business plan; in essence, it is a business plan for an endeavor.

During preclevelopment, the developer or business considers possible sites. Alternately, they have a site and they are considering possible building sizes and uses. In discussions with prospective tenants, owners, lenders, partners, consultants, and government staff, the developer does a “quick and dirty” analysis of the project to conceptualize potential fatal flaws. If a project looks favorable, the developer will (if they have not already clone so) secure site control.

Question 16

Q

Phase II: Market, Financial, and Political Feasibility (step 2 Real Estate Development Process) explained:

Real Estate chap 1 - 18

Answer

A

If the initial project evaluation is favorable and site control is complete, the developer begins the more costly feasibility analysis process. For this phase, we address tluee feasibility concerns:

✓ There must be sufficient market demand; that is, market feasibility.
✓ It must provide a sufficient return on investment; that is, financial feasibility.
✓ It must be approved by the public sector; that is, political feasibility.

Question 17

Q

Finally, market feasibility ((part of Phase II: Market, Financial, and Political Feasibility (step 2 Real Estate Development Process)) helps determine if the project will satisfy lenders enough to provide a loan.
A market analysis is intended to answer the following questions:

Real Estate chap 1 - 18

Answer

A

✓ What products are appropriate for this market?
✓ What will tomorrow’s customers demand?
✓ What is the appropriate timing and phasing for this project?
✓ What is the appropriate quantity and mix of uses for this project given the market?
✓ Are there financial considerations that the market alone will not bear?
✓ How can this project be best-positioned in the competitive marketplace?

Question 18

Q

While the methodologies may vary, there are five key components to any quality market study:

Real Estate chap 1 - 18

Answer

A

✓ Subject Site Analysis - Where is the project located, and how do its physical characteristics, including planning, zoning, access, adjacency, topography, etc. impact its overall feasibility?
✓ Economic and Demographic Analysis - What is the regional forecast for jobs and household growth, and how much of that growth may impact the market conditions for the project?
✓ Competitive Supply Analysis - What other projects will compete with this project for market share, and how competitive will this project be visa-a-vis those projects in terms of quality of execution, price, timing, positioning, etc?
✓ Demand Analysis - How deep is the overall pool of customers (residents, tenants, etc.) for this project in the marketplace? Is the demand growing or shrinking? Are the needs of the market changing over time?
✓ Development Recommendations - How do the above factors play against each other and inform recommendations as to product program, timing/ phasing, implementation strategy, prices/ rents, and product types?

Question 19

Q

Often times, a real estate project will require multiple types of financial feasibility testing to model the project on multiple dimensions. At minimum, these models and dimensions may include:

Real Estate chap 1 - 19

Answer

A

✓ Residual Land Value -What would a private developer pay for this land underneath my project if it was developed as proposed?
✓ Discounted Cash Flows -If my project receives income over time, and I have to build it today, what is the present value of this project, taking into account the cost of borrowing money today and the recognition of income for years down the road
✓ Rates of Return -there are multiple ways to measure the relationship between dollars spent (cash, equity, debt) and dollars received (bullk sales, ground lease, vertical lease, distributed profits), and different entities will value these returns differently.

Side note - In general, a real estate project is considered viable if the net income generated from the sale or rental of a project provides the developer/investor with a return that is commensurate with the associated risks. In general, there must be a favorable relationship between the dollars spent on a project -capital and operating costs (called cash outflows) and the revenue generated from the sale of the property and/ or the rental income of a project (called cash inflows).

Question 20

Q

Phase Ill: Site and Engineering Analysis (step 3 Real Estate Development Process) explained:

Real Estate chap 1 - 20

Answer

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The site and engineering analysis is intended to result in a development plan, on paper, which can be discussed with and perhaps officially submitted to appropriate planning agencies. In some areas, an informal discussion is encouraged before official submission; in many instances that is preferable for the developer because less engineering work is required to create a concept or schematic plan than for a full plan for site plan and/ or subdivision approval.

Question 21

Q

Creation of the plan (for phase III: Site & Engineering Analyis) must consider not only the site itself, but also the surrounding area. Topics to consider include:

Real Estate chap 1 - 20-21

Answer

A

General
✓ Visibility;
✓ Access;
✓ Surrounding property characteristics

On Site - Natural Conditions & Contamination
✓	Topography, vegetation;
✓	Property size and shape;
✓	Soils, wetlands;
✓	Environmental contamination;
✓	Seismic conditions;
✓	Protected or endangered species;
✓	Archaeologically significant areas

On-Site - Road Issues
✓	Curbs, curb cuts, gutters, sidewalks;
✓	Code and zoning ordinances governing site access;
✓	Parking, internal circulation;
✓	Rail rights-of-way and spurs;
✓	Street easements and rights-of-way.

Off-site - site access infrastrucutre
✓ Perimeter road volume, capacity, circulation, turn lanes, traffic signals;
✓ Highway access, bridges, underpasses, rail crossings;
✓ Transit access;
✓ On-street parking;
✓ Police and fire protection access.

On-Site/Off-Site - Utilities
✓ Water, sewer, and storm water capacity;
✓ Storm water drainage and retention;
✓ Gas, electric, and telecommunications capacity;
✓ Cable and internet services and classifications

Off-Site - Planning & Development
✓ Circulation -the area required for pedestrian and vehicular circulation and access, including area for service docks and access, auto circulation to parking areas, passenger drop-off areas, and walkways
✓ There may be dedicated local and state highway restrictions, ordinances, and right-of-ways/ easements on site access and traffic flow systems as well as requirements for new roadways, turning lanes, traffic signals, etc.

Question 22

Q

Phase IV: Financing (step 4 Real Estate Development Process) explained:

The availability of financing is one of the most critical factors in real estate development affecting what gets built, where, when, and by whom.
Real estate financing is challenging because of:

Real Estate chap 1 - 22-23

Answer

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✓ The magnitude of the capital requirements -capital requirements for real estate development usually are greater than the assets of the developer or investor.
✓ The risky nature of real estate investments -they are long-term and relatively illiquid.
✓ The unique nature of land and buildings -land is considered a durable asset; buildings are a depreciable asset.

Question 23

Q

Phase IV: Financing - Debt vs. equity

Real Estate chap 1 - 22-23

Answer

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Debt capital - Debt capital is money loaned to be paid back in fixed installments on a fixed schedule. It reduces the amount of equity and thus increases the variability of return on equity investment (i.e., leverage). There can be more than one lien or one type of debt. EDOs often provide a second loan, which only gets repaid after the private lender first lien is paid off. Most commercial lenders will not finance the full cost of the project. In the past, lenders lent up to 80% or more of the total project costs or appraised value. Today’s lenders are less likely to do this, and often require equity participation upwards of 40%.

Equity Capital - - Developers are often required to provide their own investments into real estate projects in the form of “equity”, sometimes from a partnership or joint venture. Equity is an ownership investment into a project with no predetermined schedule for payback. It bridges the gaps between debt fmancing and the cost of the project. It is subordinate to debt financing, meaning that if the project performs poorly or fails, proceeds go to pay off lenders first. There are an increasing number of pooled equity sources that seek out real estate ventures as a potential vehicle. These fall into pools that are privately-held (“private equity”) and those that are publicly-traded and invested pools (“public equity”), both of which are different peaks and nadirs in the investment cycle.

Question 24

Q

Phase V: Contractor Negotiations & Public
Approvals (step 5 Real Estate Development Process) explained:

Real Estate chap 1 - 24

Answer

A

This stage involves setting up the joint venture and/ or the public/ private development agreement (if public money or land is involved), getting the final permit approvals, securing the financial commitments including the permanent financing and the construction loan, setting up the construction contracts, and negotiating the prelease agreements. Getting all of the necessary pieces in place requires elaborate and often prolonged negotiations. Good intentions do not build real estate. Until there are legally binding commitments that specify who does what when, who owns what, and who pays whom, the project cannot go forward. Real estate development is always a lawyer intensive game.

Major public approvals include:

✓ Zoning;
✓ Subdivision;
✓ Site plan review;
✓ Building permits

Major Private Development Agreements Include:

✓	Joint venture agreements;
✓	Land acquisition contracts;
✓	Lender commitments;
✓	Architect and engineering agreements;
✓	Construction contracts;
✓	Lease/Sale contracts;
✓	Insurance agreements.

Question 25

Q

Phase VI: Construction (step 6 Real Estate Development Process) explained:

Real Estate chap 1 - 24

Answer

A

This stage involves the actual development or construction of the site or facility, as well as activities required to prepare the site for construction.
These activities can include:

✓	Environmental remediation;
✓	Demolition;
✓	Infrastructure development (parking, roads, utilities);
✓	Building construction/ renovation;
✓	Tenant improvements;
✓	Preleasing.

Question 26

Q

Phase VII: Marketing (Step 7 Real Estate Development Process) Explained

Real Estate chap 1 - 25

Answer

A

Marketing to potential tenants and purchasers is a vital stage of the real estate development process and typically begins prior to construction. Developers and economic development organizations determine marketing strategies for preconstruction pricing, advertising, promotion, earned media, and broker relations.
Pre-construction pricing offers discounted pricing to tenants and buyers who make a deposit to reserve land/ space prior to construction. Earned media is publicity about the project from the news media. Broker relations establish policies and procedures to work with and compensate real estate brokers.

Question 27

Q

Phase VIII: Building Occupancy & Management (Step 8 Real Estate Development Process) Explained

Real Estate chap 1 - 25

Answer

A

Once development is completed, the building is occupied and the property owner must manage the property. Management entails property and asset management. Property management includes the marketing, leasing, and maintenance of the property, as well as tenant relations and services. Asset management includes capital improvements, refinancing, and the sale of the property. Sale of the property marks the end of the process and recapture of the initial investment.

Question 28

Q

The Need for Participation in Development - Explained - don’t need to memorize

Public participation, especially the provision of incentives, is generally based on the “but for’’ test. That is, the development would not happen “but for’’ the use of the incentive. Type III below is common among economic development practitioners to target a specific use to drive the market.

Real Estate chap 1 - 25-26

Answer

A

Type I
Projects for which there exists neither current market support, nor the likelihood of adequate market support to justify their costs in the foreseeable future. There is no expectation of cost recovery. This type
generally requires front-end assistance. Low income housing projects typically fall within this category.

Type II
Projects for which current market support is inadequate to justify development, but for which there exists some reasonable probability that if
the property is developed, it will generate sufficient revenue to repay its total costs or a portion of those costs. Examples include rural industrial parks, distressed neighborhood grocery stores, and hotels next to convention a centers. Most EDO-initiated speculative buildings fll in this category.

Type III
Projects for which the public sector controls a property parcel or development right that is uniquely valuable to the developer, such as owning valuable land downtown. The impetus for this type of development is to generate money or meet econ develop or social objectives.

Question 29

Q

Participation of the private sector is vital to the real estate development process. Players include the following

real Estate Chap 2 – 28

Answer

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✓	Developers;
✓	Equity investors;
✓	Business owners;
✓	Lenders;
✓	Architects, engineers, contractors, attorneys;
✓	Property managers;
✓	Tenants.

Question 30

Q

Developers may become involved in real estate development to:

real Estate Chap 2 – 28

Answer

A

✓ Respond to an unmet or unsatisfied market need.

✓ Create market demand that previously was non-existent, such as a theme park

✓ Respond to local, state, or federal initiatives that provide real estate development incentives for targeted areas and populations.

Question 31

Q

Public agencies and nonprofit development organizations often facilitate the real estate development process. This effort may include:

real Estate Chap 2 – 32

Answer

A

✓	Facilitating regulatory approvals;
✓	Providing partial financing;
✓	Providing infrastructure;
✓	Improving streetscapes;
✓	Implementing a facade improvement program;
✓	Becoming a tenant in the project.

When the public agency is taking a facilitating role, the developer takes the lead role. The developer will acquire or lease the property, identify the land use, and conduct predevelopment activities. An EDO might want to take a facilitating role when:

✓ Responding to a specific developer initiative;
✓ Encouraging the private sector to identify and initiate projects;
✓ Encouraging development by reducing the risks associated with initiating development;
✓ Focusing redevelopment on an area rather than a specific site.

Question 32

Q

Initiator Role

As the initiating body, the EDO acquires or owns property for development. For an EDO to initiate development, the following conditions should be present:

real Estate Chap 2 – 32-33

Answer

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✓ A strong need to develop a specific property or area;
✓ Political will to withstand the risks of development;
✓ An agency with expertise and resources to develop the property.

Question 33

Q

Initiator Role

Once an area is established, the redevelopment agency is given additional powers and resources to initiate redevelopment through land assembly and the other tools. Its actions may include a combination of any of the following:

real Estate Chap 2 – 33

Answer

A

✓ Conducting feasibility analysis and conceptual design;
✓ Obtaining regulatory approval or working with the regulatory agency to gain approval;
✓ Initiating the public participation process;
✓ Issuing a Request for Proposal (RFP);
✓ Selecting a developer;
✓ Providing partial financing;
✓ Selling or leasing land;
✓ Providing project-specific infrastructure improvements.

Question 34

Q

Physical conditions, access, visibility, utilities, and parking are among a developer’s first considerations when embarking on property development. In general, the more accessible a site is, the greater its market potential. The following are questions to consider when looking at the site:

Real Estate Chap 3 - 46

Answer

A

✓ What is the topography and shape? How well will the site accommodate development or reuse?
✓ How does the site “read” from the road? Is it easily visible from important high-traffic corridors? How does it look from the primary approach route?
✓ Do nearby roads allow for easy access to the site?
✓ How accessible is the site for private vehicles? Pedestrians? Mass transit?Truck and rail service?
✓ What is the lot size? Is it adequate to support parking? If not, is affordable parking available?
✓ Are utilities and public services (police, fire, etc.) affordable and adequate?

Question 35

Q

Regional characteristics are an important consideration in the formal market analysis. Regional transportation systems and spending patterns can be discerned through field observations, discussions with local business owners, and a cursory analysis of the area before a formal feasibility study. While a thorough market analysis is use-specific, there are some general questions that guide a brief analysis of regional characteristics:

Real Estate Chap 3 - 46

Answer

A

✓ What kinds of businesses seem to be doing well in the neighborhood? Do they have plans for expansion?
✓ What income brackets characterize local neighborhoods?
✓ What is the regional transportation infrastructure system like? Does it provide ready access to the site and thereby increase access to a larger market?
✓ What are the commercial traffic patterns among principal and supporting activities?
✓ Is there access to mass transit? What is the level of usage by day, week, and hour?
✓ What are private vehicular traffic patterns like? Where are the major thoroughfares? Are there any planned improvements or new routes?
✓ Is there heavy-truck or rail service? What kind of uses could this site serve?
✓ What is the size and location of the nearest airport?
✓ How is transportation access to relevant support services, suppliers and labor? How long does it take to travel to the site from their locations?

Question 36

Q

Neighborhood characteristics, such as the relative safety and the level of blight in an area, contribute to the potential success of a property. Distressed neighborhoods may be eligible for public funding targeted at eliminating blight. Therefore, a developer should consider public incentives for development that may be available due to a neighborhood’s socioeconomic characteristics. An analysis of the neighborhood should include the following questions:

Real Estate Chap 3 - 46

Answer

A

✓ What is the perception versus actual crime levels in the area? Have they gone up or down in the recent past?
✓ Has the neighborhood implemented crime-prevention tactics, such as better lighting, a neighborhood watch, and increased police patrolling?
✓ Does it look like there might be an emerging residential community?
✓ What is the average income level and general spending habits of the residents? Is there a healthy consumer base and labor supply?
✓ What is the character of adjacent properties? Are there many vacant buildings in the area? Have they been purchased recently? Are buildings being renovated or have rehabilitation potential?
✓ How are the aesthetics? Is the area clean?
✓ What other businesses are in the neighborhood?
✓ How are existing neighborhood businesses performing?
✓ What types of units are available for rent and at what cost? Is there an unmet demand for a particular type of rental space?

Question 37

Q

A market analysis is intended to answer the following questions:

Real Estate chap 4 – 52

Answer

A

✓ What products are appropriate for this market?
✓ What will tomorrow’s customer demand?
✓ What is the appropriate timing & phasing for this project?
✓ What is the appropriate quantity and mix of uses for this project given the market?
✓ Are there financial considerations that the market alone will not bear?
✓ How can this project be best-positioned in the competitive marketplace?

Question 38

Q

The market analysis process varies by land use (office, industrial, retail, etc.). However, in general it should follow some basic guidelines:

Real Estate Chap 4 - 53

Answer

A

✓ Define the market area (or primary and secondary market areas).
✓ Evaluate the supply of current and future competitive properties and tenants.
✓ Evaluate area market demand from customers for retail and housing uses and for tenants for all land uses.
✓ Assess the expected demand and projected absorption rate for the market area

✓ Compare the project with similar projects on a cost or rental-per-squarefoot basis, taking into account various site factors, such as access, visibility, physical or perceptual boundaries, vacancies, amenities, design considerations, etc.
✓ Estimate the overall market capture, absorption, and sales prices or lease rates of the proposed project.
✓ Identify amenities and characteristics of the subject property that give it a competitive edge in the market. (These can be refined later).

Question 39

Q

good market analysis takes into account the site within the context of its neighboring land uses, patterns of regional growth, planning/ zoning considerations, and role within the regional economy. In general, it should address the following:

Real estate chap 4 - 56

Answer

A

✓	Size, topography, layout & constraints
✓	Surrounding land uses
✓	Proximity to employment and services
✓	Area prestige/ reputation
✓	Access, visibility & frontage
✓	Planned infrastructure improvements

Question 40

Q

Major economic factors to consider include in econ and demographic analysis :

Real estate chap 4 - 56-57

Answer

A

✓	Employment growth
✓	Location of employment cores
✓	Major employers
✓	Major industries
✓	Industries that are growing/ declining
✓	Economic development initiatives

There are a number of public and private sources of data to analyze the above, but often times a good study will incorporate first-person primary research in addition to mere data gathering.
Major demographic factors to consider include:

✓	Household and population growth
✓	Income distribution
✓	Household age by income
✓	Household size and types
✓	Ownership and renter propensity
✓	Annual retail expenditures

Question 41

Q

Supply analysis also informs an understanding of future supply conditions. Will the market be inundated with competitive projects in the near future? Is the existing competition, both planned and proposed, missing a market segment? At minimum, supply analysis should address the following:

Real estate chap 4 - 58

Answer

A

✓ Current and future supply conditions
✓ Performance of existing, relevant projects
✓ Price/ rent trends
✓ Historical sales/ absorption rates
✓ Nature of buyers/ renters/ tenants
✓ Future development pipeline
✓ Current market segmentation
✓ Dominant consumer preferences?
✓ Location, quality, product trade-offs in the marketplace
✓ Identification of niche market opportunities

Question 42

Q

The supply analysis will also determine the Primary Market Area - the area from which 80% of the demand at the subject site is likely to emanate, and the Competitive Market Area - the area in which the subject site will most actively compete for market share. There is no way to determine these factors without conducting first-person supply-side analyses. Note that for each land use - retail, residential, hospitality, office, industrial - the PMA and CMA determination will be different and calculated differently.

Factors to include in competitive supply analysis include the following:

Real estate chap 4 - 58-59

Answer

A

Residential Property types
✓	Historical permit activity
✓	New Home sales data
✓	Resale market data
✓	Project location
✓	Number of units
✓	Sales pace/Lease-up pace
✓	Builders
✓	Floor plans & sizes
✓	Base prices/ rents
✓	Upgrades, premiums
✓	Average $/SF
✓	Orientation
✓	Amenities
✓	Execution
✓	Physical layout
✓	Marketing
✓	Buyer profile

Commercial Property Types

✓	Total inventory
✓	Vacancy rates
✓	Absorption
✓	New construction and pipeline
✓	Average rents and rental rate growth
✓	Project Location
✓	Total square feet
✓	Vacancy rate
✓	Rental Rates
✓	Lease Terms
✓	Orientation
   o	Office: Class A trophy, boutique, medical, etc.
   o	Retail: Neighborhood, lifestyle, community, etc.
✓	Tenant profile
   o	Anchor tenants
   o	Typical tenant size
✓	Industry segments

Question 43

Q

In general, demand models attribute a majority of demand potential to the Primary Market Area and a subset of demand potential to a Secondary Market Area. Delineating these market areas is a function of primary research and market knowledge, and is the result of integrated analysis of all of the above factors.
When constructing demand models, the market analysis should consider the following factors that affect demand potential.

real estate chap 4- 59-60

Answer

A

Residential product types
✓	Household growth and turnover
✓	Income
✓	Age and move-down percentages
✓	Tenure shifts
✓	Turnover rate
✓	Consumer preferences

Office & industrial product types
✓	Employment growth
✓	Industry distribution
✓	Office location agglomerations
✓	Spin-off needs
✓	Distribution of jobs into space
✓	Square feet needed per new office-using or industrial-using job

Retail product types
✓	household growth
✓	income & discretionary income
✓	household expenditures
✓	Expenditures by store and center type
✓	Sales per square foot thresholds for different retailers

Question 44

Q

Recommendations may be geared towards the developer or the EDO, and often inform an understanding of the level of involvement required by the public sector or the expected outcome of a particular real estate development venture.
Recommendations that come out of Market Feasibility include:

real estate chap 4- 60-61

Answer

A

✓ “Highest and Best” land use(s) - What land uses provide the greatest level of economic value today and tomorrow?
✓ Orientation and target consumer - Who is the customer for this project, and What are their needs?
✓ Market Positioning - How should this project be positioned in the marketplace to differentiate it from the competition?
✓ Pricing - What are the achievable rents and/ or prices that this project can achieve, and do these prices justify the cost of construction?

✓ Constriction Type - What type of construction (wood frame, steel, concrete, etc.) do the prices justify, based on financial modeling, and do these construction types deliver the type of project envisioned?
✓ Features and amenities - What features & amenities must this project deliver in order to be successful? How do these features & amenities impact the overall construction cost or management cost of the project?
✓ Absorption/Sales - How quickly will this project sell in the marketplace, and will this time period be in-line with the type of financing taht is secured?
✓ Profitability - Does the developer or EDO recognize a profit in the venture, and if not, what incentive must be offered in order to generate profit?

Question 45

Q

Before embarking on a community involvement process, the EDO should develop a community involvement strategy that includes two main components: (1) goals for the process; and (2) an assessment of the community. The resulting strategy should reflect both the goals and the community. A number of factors should be considered, such as:

real estate chap 4 - 62

Answer

A

✓ Area History: What is the culture and history of the area in which the project is located? Have there been other attempts at development?What kind of attitude does the community have toward change?
✓ Community Leadership and Vision: Who are the leaders in the community? Are there community leaders who may not be part of a formal organization? Does the leadership change often?
✓ Affected Parties: Who are the stakeholders in the community? Are the stakeholders represented by organizations? What are the characteristics of those organizations?
✓ Project Funding: How is the project being funded?
✓ Project Size and Complexity: How large is the project or proposed redevelopment area? How many neighborhoods does it affect? Who or what entity is driving the process? What motives are driving the process?Who has power to stop the project or plan?
✓ Existing Plans and Studies: If a project, is the site included in an existing plan (e.g., neighborhood plan, revitalization plan)? If a redevelopment plan, has there been a previous planning effort? What was the result? Are there ideas for the site from previous plans or efforts?
✓ Staffing: What is the institutional capacity to undertake the proposed project?

Question 46

Q

Fiscal Impact Measures

How do you calculate cost per job and leverage?

real estate - chap 4 - 72

Answer

A

Cost per job is the cost to the public sector for creating a job. Leverage is the amount of private-sector funds that are invested per dollar of public investment.

For example, say an agency provides $100,000 as part of a $400,000 public funding package for a $1 million project that generates 50 jobs. The agency may claim that its program returned $2,000 ($100,000 grant/SO jobs) per job and leveraged $900,000 with its $100,000 investment for a leverage of 9.0. An economic development professional, wishing to compare altemative investments, should aggregate all public costs local, state, and federal) in calculating cost per job and leverage. Then, the $100,000 from the one funding agency is combined with $300,000 from other public agencies for a total of $400,000 in public investment. This investment generates $8,000 per job ($400,000 in public funds / 50 jobs) and leverages $600,000 in private investment for a leverage ratio of 1.5.

Question 47

Q

What is a hurdle or discount rate?

Real Estate Chap 5 -75

Answer

A

Risk depends primarily on factors such as market demand, competitive strengths, type of development, construction challenges, regulatory climate, and liquidity. Such factors are compared to similar factors for alternative investments. Anytime one makes an investment they are foregoing the opportunity to make a return form an alternative investment (known as opportunity cost). For example, an investor may accept a return of 8% on an established shopping center, reasoning that it is comparable in risk and return to the stock market, which yields 8-10% return long-term. When such as return, say 8%, is designated by the investor as their minimum threshold return, it is referred to as the hurdle rate or discount rate.

The developer may set the hurdle rate at 18% for a higher risk development project. If the anticipated return of a project is greater than the hurdle rate, the developer will go ahead with the project. If a project’s expected return is less than the hurdle rate, the developer or investors will not participate or they will negotiate a better deal.

Question 48

Q

Cash Flow
Financial projections are prepared to address questions of feasibility by projecting cash flow. Cash flows include the following major categories:

Real Estate Chap 5 -76

Answer

A

Cash  Outflows:
✓	Property acquisition;
✓	Development costs;
✓	Operating costs;
✓	Debt service;
✓	Capital improvements;
✓	Selling costs.

Cash Inflows:
✓ Operating revenues;
✓ Sales proceeds.

These cash flows are best understood through the preparation of financial projections. Common financial projections are:

✓ Development costs;
✓ Sources and uses of funds ;
✓ Operating pro forma;
✓ Supportable debt & equity

Question 49

Q

What are hard costs in real estate?

Real Estate Chap 5 -77

Answer

A

Hard Costs
Costs which include labor and materials; these costs are often referred to as “bricks and mortar” costs. Because of the uncertainties in estimating these costs, contractors typically include a 5-15% contingency fee.

Tenant Improvements
The cost of finishing out the building; these costs include carpeting, lighting, floorboards, etc. The contractor normally provides an allowance for these features. Costs in excess of the allowance are covered by the tenant.

Question 50

Q

What are soft costs in real estate?

Real Estate Chap 5 -77

Answer

A

Soft Costs
Costs, which include professional fees for engineering and architecture services, taxes, interest and other loan related fees, permitting fees, insurance, advertising and promotion. These costs typically include a developer fee or payment for the developer’s professional time. This fee is over and above the investment return, which typically goes to the developer and other equity partners. Soft costs could include:

✓	Architecture and engineering (A&E) fees;
✓	Permit fees;
✓	Legal fees;
✓	Construction loan interest;
✓	Construction insurance;
✓	Pre-leasing marketing costs;
✓	Developer fee.

Side Note: The development costs (Hard, soft, and tenant improvements) are combined with land acquisition to determine total capital requirements. Sometimes the pro forma financial analysis is first prepared without land costs to estimate how much the land is worth based on a targeted rate of return. The following Table, Cicada Building, provides a general breakdown for development costs. This generic building will be discussed throughout this chapter to illustrate financial analysis.

Question 51

Q

Operating Pro Formas for real estate - just read

real estate - chap 5 - 80

Answer

A

The operating pro forma is the standard format that shows projected revenues, expenses and cash flows to be generated by a project. It can be in single year or multi-year statements. In the case of a single year pro forma, the figures are based on cash flows from the first stable year of a project’s operations. The stabilized year, often the 2nd or 3rd year, is the year that the property is fully leased. This year is assumed, sometimes optimistically, to be a good indication of future cash flows. Generally, there is no resale component in the single year pro forma statement. Multi-year pro formas show expectations over several years or the entire life of the project ending with the sale of the property. They account for projected annual changes in revenues and costs. (For more on multi-year projections, see later discussion of advanced investment return calculations.)

Pro formas are also done for land sales, say for an industrial park or with unit sales for multi-family housing. We are using the leased facility as an example because it is often the most complex form of pro forma.

In drawing up the pro forma statement, the gross square feet is reduced to net square feet to account for hallways, elevator shafts, public restrooms, and other space that isn’t leased. The developer estimates rents, vacancies, and absorption from market research. Absorption is the rate at which space is leased or sold. Operating expenses are based on those for similar properties, adjusting for differences in utility costs, building design, size, age, condition and amenities. Once the revenue and operating expenses are projected, the income generated from the project can be calculated. Income produced by a property is defined in terms of its net operating income (NOI). It is simply the balance remaining after all operating expenses are deducted from gross receipts but before debt service and capital reserves. Capital reserves are funds set aside on an annual basis to pay for periodic capital improvements such as the replacement of a roof, overhaul of HVAC, and tenant improvements as tenants roll over. Capital reserves are deducted from NOI to generate cash flow from operations.

Question 52

Q

What is Depreciation?

Real Estate - 81-82

Answer

A

Depreciation is a reduction in value of an asset, usually due to age and wear and tear. This consumption of physical capital is recognized by taxing authorities as a cost of production and can therefore be deducted from net income.
As a building ages, it depreciates in terms of taxable value, even though it may be increasing in terms of its market value. Only income producing property is eligible for depreciation. This includes buildings, sidewalks, landscaping, etc. Land is not depreciable, as it is assumed to hold its value over time.

The depreciation rate for tax deductions on real estate is calculated using the straight-line method, where the cost of an asset minus the residual value of the asset is divided by the number of product years of the asset, called the depreciable life.

The depreciable life of real property is an arbitrary apportionment that does not necessarily reflect the value of the asset. For tax purposes, the depreciable life of real property is 27.5 years for residential rental property and 39 years for nonresidential real property.

Question 53

Q

How do you calculate debt service?

Real estate Chap 5 - 84

Answer

A

Debt service is calculated by taking the stabilized year operating income and dividing it by a factor or coverage ratio that the lender determines. For example, a $200,000 projected operating income divided by a coverage ratio of 1.2 equals $166,667. The lender will agree to provide a loan based on a payment of $166,667. The coverage ratio provides a buffer in case the projected $200,000 operating income proves optimistic.

The ratio required varies, depending on the type of project, character of the developer, the lender’s assessment of project related risk and the lender’s general policies. Lenders generally like to see a minimum debt coverage ratio of 1.2. However, the higher the risk of a project, the higher the required debt coverage ratio.

Question 54

Q

What is the loan to vale ratio?

Real estate Chap 5 - 84

Answer

A

This is the ratio between the loan amount and a property’s appraised value or total capital requirements. If this exceeds a certain ratio, say 70-80%, the loan will have to be rejected or renegotiated. The lower the ratio, the greater the equity a borrower has in a property and the less inclined the borrower will be to default and lose the property to foreclosure. Like the debt coverage ratio, the lender required loan to-value ratio is based on property characteristics, lender confidence in the developer and the lender’s general policies.

Question 55

Q

3 ways appraisers typically appraise property:

real Estate Chap 5 85-86

Answer

A

Cost Approach - This approach is based on the rationale that no one would pay more for a property than it would cost to buy the land and build the structure that occupies it.

Market or Sales Comparison - This method compares a property with similar properties that have sold recently in tl1e surrounding area, making adjustments from the comparable sales to allow for any differences among the properties.

Income Capitalization - This approach is based on the rationale that properties produce a stream of income, and investors will pay a price that reflects the value of that income. Capitalization is based on the rationale that at any given time, a property will be valued according to its current net operating income.

When the net operating income (NOI) is divided by a property’s sales price, the resulting figure is called the Capitalization Rate. The capitalization rate, or cap rate for short, is expressed as a percentage.

Question 56

Q

Payback period defined:

real Estate - Chap 5 - 87

Answer

A

Payback period is the length of time it takes for the project cash flows to recover the initial investment. For example, a development project that costs $100,000 and generates cash inflows of $25,000 a year has a payback of 4 years.

If the payback period is equal to, or slightly less than, the economic life of the project, then the proposal is unacceptable. If the payback period is considerably less than the economic life of the project, then it begins to look more attractive.

There are major drawbacks to using payback:

✓ It does not measure the time value of money. Cash paid back four years from now is given the same value as cash received next year.
✓ It does not consider differences in economic lives. With the payback period, there is a tendency to think that the shorter the payback period the better the project. However, a project with a longer payback period may be better if the project will generate cash inflows for a longer period of time.

Question 57

Q

Cash on Cash Return, also known as return on equity (ROE)

Real estate Chap 5 - 88

Answer

A

Cash on cash return is simply the cash flow divided by equity. It can be done for the stabilized year of operations or for each year of a multi-year operating pro forma. The advantage of cash on cash return is that it is simple to calculate and understand. The disadvantage is that it does not account for property appreciation.

Question 58

Q

financial leverage

real estate chap 5 - 88

What is negative leverage?

real estate chap 5 - 90

Answer

A

Financial leverage is defined as the use of borrowed money. Leverage reduces equity and thus, increases the risk or variability on the return on equity. The objective of leverage is to borrow money at a rate lower than the expected return on assets (ROA), resulting in a higher expected investment return.

Negative leverage occurs when the cost of borrowing (interest) exceeds the rate of return on a project. This can occur when operating expenses are higher or net revenues are lower than originally expected. Negative leverage amplifies losses in the same way that positive leverage amplifies gains. Therefore, leverage increases the risk or variability of investment returns.

Question 59

Q

Present Value

Real Estate Chap 5 91

Answer

A

Present value = FV /(1+r)n

For example, if an investor wishes to know the present value of a $10,000 cash payment five years from now, she will start with her discount rate, which we will assume is 13%, and then compute the following:

Present Value = 10,000 /(l.13)5 (power)
=5428

Question 60

Q

calculating income stream

Real Estate Chap 5 91-92

Answer

A

The formula for calculating an income stream that is increasing at a compound growth rate (g) in perpetuity is as follows:
PV = CF
r-g
Where PV = present value of the income stream
CF = first year of income (NOI)
g = annual growth in income
r = discount rate

If we assume that the first-year NOI for a property will be $350,000, we require a 13% (or .13) return, and cash flow will grow at 3% (or .03), we get the following

PV= 350,000 = 350,000 = $3,500,000
.13 - .03 = .10

(350,000/.1)

In practice, even if real estate investments have economic lives of seventy-five years, investors generally hold them for much shorter time periods. In such cases, the discounted cash flow method accounts for the resale of the property, as well as its income streams. Still, the end result is about the same. To prove this, start with the same initial income payment, $350,000, and compound it by 3% for the next four years, giving a total of five years of income. At the end of this time, assume the investor will sell the building. Since the building will be valued by its income stream, the future buyer will value the building according to its income in year six. This amount, $405,746 (or $350,000 x (1.03)5) is divided by .1 (r-g = 13% - 3% = 10%), as in the above formula, giving a sale price in year six of $4,057,746. This is then added to the income for year five. Now we have five years of cash flow which we can discount at 13% to find the present value of the building as shown below.

Question 61

Q

Net Present Value

real estate chap 5 -93

Answer

A

NPV is the quantity that results when the initial investment is deducted from the discounted value of the projected cash flows. A project is justified if the discounted value exceeds the initial investment. Calculating the NPV is a fourstep process:

Step 1:
Forecast the cash flows generated by the project
Step 2:
Determine the appropriate discount rate or opportunity cost of capital to determine the present value.
Step 3:
Use that rate to discount the expected cash flows to determine the present value.
Step 4:
Calculate the net present value by subtracting the required initial investment from the present value.

NPV= net present value
Rt =net cash flow at time t
i= discount rate
t=time of the cash flow

NPV = Rt/(1+i)t

Question 62

Q

Interal rate of Return

real estate chap 5 -94

Answer

A

If the resulting NPV is positive then the investment exceeds the discount or hurdle rate and, based on the numbers, worthy of going forward. If the NPV is negative, the investment does not meet the investment return requirement. If the NPV is zero, then the investment return equals discount rate and is acceptable. Furthermore, when the NPV is zero the discount rate equals the IRR.

https://www.excel-easy.com/examples/irr.html

Question 63

Q

Access is one of a developer’s primaty considerations. In general, the more accessible a site is, the greater its market potential. The following are road issue questions to consider when generating reuse ideas:

Real estate chapter 6 - 96

Answer

A

✓ Do adjacent or nearby roads allow for easy access to the site?
✓ Is there interstate highway access? Access to key state or county roads?
✓ How accessible is the site for private vehicles? Pedestrianans? Mass transit? Truck and rail service? Are there rail spurs connected to the site?
✓ What are the traffic volumes on the roads?
✓ What traffic control and safety systems are on the roads?

Question 64

Q

Define easment and right of way

Real estate chapter 6 - 96

Answer

A

An easement is the legal right to use the land of another for a specific purpose, other than the right to possess that land. A right-of-way is one such right that can be granted/acquired through an easement, which essentially implies that the owner through the easement gives another the right to pass over the land in question or put and maintain a transport route such as needed for utilities and rail roads.

Answer 65

A

Building footprint
The site coverage for a facility - its “footprint” - is determined by three variables: the total gross area, the number of floors and the configuration.

Parking requirements
The largest site requirement in many programs is the area required for parking. This requirement may be set by facility program needs or zoning requirements that establish parking ratios for different land uses.

Circulation and open space requirements
The area required for pedestrian and vehicular circulation, access, and common open space.

Special constraints and requirements
In the form of utility easements, rights-of-way, retention or sedimentation ponds, recreation areas, vista and line-of-sight restrictions, floodplain areas, and ecological preserves.

Boundary, Topography, and Legal Surveys
Topography, legal description, and utility surveys are essential for development to know the topographic character, property line location, existing natural and artificial site elements, legal description, and the available utilities. These surveys also identify easements, rights-of-way, and other encumbrances.

Other important characteristics
✓ Geotechnical/soil characteristics (natural and existing man-made) affect the economics of the redevelopment and the buildable area of the site. A soils survey and soils engineering report can provide the required information.
✓ Seismic potential and conditions.
✓ Protected and endangered species
✓ The environmental contamination potential must be evaluated on every site. This is covered in more detail later in this book.
✓ Historical and archeological surveys are typically required by local, state and/ or federal regulations.

Answer 66

A

✓	Local & regional master planning
✓	Land use and zoning
✓	Planning and subdivision development
✓	Site plan review requirements
✓	Infrastructure development requirements
✓	Building construction
✓	Fire and life safety
✓	Health, safety and welfare of the public
✓	Historic and landmark regulations
✓	Licensing
✓	Energy conservation
✓	Environmental issues
✓	Occupational safety & health (OSHA)
✓	Disabled persons' access & use

Answer 67

A

Location of columns
The fewer structural columns, the more creative an architect can be with reconfiguring the space.

Size of the floorplates
A building with a smaller floorplate is more suited to uses that do not need expansive spaces, like housing.

Ceiling height
Ceilings over nine feet often give architects the flexibility to install electrical and ventilation systems.

Thickness of walls
Thick walls may indicate that they are load-bearing and therefore difficult to reconfigure.

Size, location, and number of windows
More windows are always attractive for housing and office space. Also, the number of windows directly affects the amount of light and air certain areas of the building receive. Large expanses of old fashioned, single-glazed windows can cause extensive heat loss, resulting in increased occupancy costs. A city’s light & air requirements may therefore impact new-use options

Depth of the building
The deeper the building is, the more difficult it may be to find uses for the interior, or core, space. Additionally, a city’s light and air requirements may restrict uses for the middle of the building.

Major systems
The age and quality of the electrical, plumbing, elevator, the type and condition of the roof structure and HVAC systems affect whether such systems need to be replaced or upgraded. In either case, the expense may impact feasibility.

Answer 68

A

Short-term financing to fund predevelopment activities including site assessments, feasibility studies, legal fees, and other out-of-pocket expenses until the project starts producing income. It can come in several forms, including lines of credit and revolving credit agreements. These loans are commonly secured by personal guarantees or by the creditworthiness of the developer, rather than by a lien on the property. Interest rates on these loans tend to be higher than other loan types.

Answer 69

A

These are short or medium-term financing used to cover construction costs during construction or renovation. Maturities of these loans usually average between one and two years. Interest rates on these loans are usually high, depending on the risk associated with a project. Construction loans are generally repaid with the mortgage or permanent loan as the phases of the project are completed, or when the construction work is finished. Lenders typically require the developer to hold a commitment for a permanent mortgage before they will agree to provide construction financing.

Answer 70

A

The major source for project financing, often called permanent financing is long-term financing. It typically comes in the form of a conventional mortgage loan with a maturity of 25 to 40 years. A mortgage is essentially a long-term loan secured by a lien on the property, giving the lender the right to sell the property in the event of a default. The amount of the loan is based on the appraised value of the project and the expected project income.

Answer 71

A

Fully Amortizing
This type of mortgage provides for the gradual repayment of the debt by means of systematic payments of both principal and interest over a set period so that there is a zero balance at the end of the period. This is considered the least risky type of debt.

Partially Amortized Mortgage
Commonly referred to as a “balloon mortgage” this is a short-term loan with a final or balloon payment due at the end of the term. This can be a very risky loan.

Interest-Only Loan
Interest-only loans do not include the repayment of any principal for a given time period. The borrower pays only the interest while the loan balance remains unchanged.

Zero-Coupon
In these types of loans, the interest accrues over the term of the loan and becomes principal. In most cases, neither principal nor interest is repaid until the property is sold. This is the riskiest loan structure available.

Answer 72

A

✓ Savings and Loans, or thrifts, are institutions that specialize in home loans. Historically, these banks have held one-third of all mortgages.

✓ Commercial banks control over half of America’s savings and are the largest mortgage lender. They commonly make short-term loans, commercial mortgages, and construction loans.

✓ Mutual savings banks are state-chartered institutions that hold only 10 Percent of mortgages. They are very similar in structure to a savings and loan bank.

✓ Mortgage companies hold very little long-term debt, but they service secondary lenders such as insurance companies and pension funds

✓ Commercial mortgage-backed securities are a vehicle whereby larger commercial mortgages are pooled and sold on the public debt market.

✓ Life insurance companies, handling larger loans, lend money with a primary focus on multifamily housing and commercial properties.

Answer 73

A

Equity is an ownership investment into a project with a projected rate of return and an exit strategy. It bridges the gap between debt financing and the cost of the project. It is subordinate to debt financing, meaning that if the project performs poorly or fails, proceeds go to pay off lenders first. Most commercial lenders will not finance the full cost of the project. Typically lenders will lend up to 60-80% of the total project costs or appraised value. The developer bridges this gap by providing his or her own equity or equity from a partnership or joint venture.

Answer 74

A

✓ Private investors are the source for most equity investment, especially for smaller properties. Private investors often invest through a limited partnerships or limited liability corporations. (see below)

✓ Limited partnership is a joint venture whereby two or more persons pool money together. One partner acts as the general partner who actively manages the partnership. The other partners are limited partners who are passive investors.

✓ Limited Liability Corporation (LLC) provides a flexible structure that allows members to manage the entity or to elect a manager or a group of managers. LLCs typically consist of two or more members, although more states are beginning to allow single member LLCs. All members of a LLC are provided limited liability and tax status similar to a partnership.

✓ Real Estate Corporation is essentially a structure with property or properties as the principal asset. Corporations are set up based on state criteria and have the ability to issue stock.

✓ Real Estate Investment Trusts (REIT) are companies that own, and in most cases, operate income-producing real estate. Some REITs also engage in financing real estate. The shares of many REITs are freely traded, usually on a major stock exchange. To qualify as a REIT, a company must distribute at least 90 percent of its taxable income to its shareholders annually. Unlike a corporation, the REIT does not pay taxes on its income.

✓ Pension funds will invest up to five percent of holdings in real estate. Given that the value of many pension funds is in the trillions of dollars, pension funds tend to invest in larger projects. Most funds invest through pension fund advisors.

Other sources of equity include insurance companies, foreign investors, endowments, and opportunity funds.

Answer 75

A

✓ A developer obtains or contracts to purchase or lease a parcel of land and then prepares a development plan.
✓ The developer secures a long-term, fixed-interest rate mortgage from a long-term lender or institutional investor, such as an insurance company. The developer is expected to provide equity for a certain percentage of the project costs. Normally, a developer secures a letter of intent from an anchor tenant promising to locate in the building when the (re)development is complete. The letter of intent is then used to obtain long-term financing.
✓ With a long-term lending commitment, the developer will go to a commercial bank to obtain a short-term loan for construction or operating capital.
✓ Construction loans are drawn down as construction proceeds. Once construction is complete, long-term capital is used to pay off the construction loan.
✓ A developer may prearrange a budget for the asset once it is completed and operating in a stable manner.

Answer 76

A

Front-end Assistance without Offsetting Guarantee

The most common type of assistance is the land-write down. Other forms can be infrastructure funds, direct initial operating subsidies, planning assistance, land clearance, and remediation. Funding for such activities typically comes from federal and state grants and tax increments. Due to tighter money, fewer communities are able to provide this type of front-end assistance.

Front-end Assistance with Guarantee

The difference between this transaction structure and front-end assistance without an offsetting guarantee is the commitment to repay all or part of the financial assistance provided. The commitment to repay is not the same thing as a subsidy recovery. The commitment to repay may involve higher taxes, the provision of certain amenities and so forth. An example of this type of transaction is low interest loans, which represent a front end subsidy with some potential recovery.

Performance-oriented Assistance with Initial Explicit
Denomination

A performance subsidy means that a developer is able to receive public funds only to the extent that he or she generates them. The most common form of performance-oriented assistance is tax increment financing (TIF). A common mechanism used to structure this type of a transaction is to use a note to denominate the amount to be paid by the public agency to the developer. Payment of the note is contingent on, and limited to, some portion of the amount of revenue generated by the project.

Performance-oriented Assistance without Formal Denomination

This transaction structure is similar to performance-oriented assistance with initial explicit denomination, with the exception that there are no formal denominations as part of the contract between the developer and the public sector.

Answer 77

A

✓	Land use plans
✓	Growth management restrictions
✓	Zoning
✓	Subdivision
✓	Site plan review
✓	Building permits
✓	Occupancy permit

Answer 78

A

✓	Joint-venture agreements
✓	Land acquisition contracts
✓	Lender commitments and loan documents
✓	Architect and engineering agreements
✓	Construction contracts
✓	Lease/Sale contracts

Answer 79

A

One-Stop Business Assistance Center
Often housed in an economic development department, a “one-stop shop” centralizes requirements and regulations so all of the information is in one place. This “one-stop-shop” may include staff or be set up as a resource center.

Facilitated Approval Process
Instead of bringing all of the information into one place, an economic development department may provide staff assistance to facilitate a developer through the process. This staff assistance will often serve as an advocate to ensure that the necessity approvals in various departments are received. Facilitating the process ensures that regulatory approvals will not inhibit or delay the potential development of a project. However, creating this type of service can be expensive and difficult to set up given that various departments operate in unique ways.

Answer 80

A

To fund capital improvements, impact fees and exactions are levied at the time of subdivision or other approval steps. These fees may be set by law or partially or fully negotiated. Developers also may be required to contribute land for public purposes such as schools, parks, or public facilities. Sometimes developers even make the capital improvements themselves. State courts often require tl1at the exactions and impact fees pass a “nexus test”, a ·test that determines whether the fee is reasonable and fair to cover the cost for public services or public improvements needed by the project.
Impact fees typically cover:

✓	Roads;
✓	Parks;
✓	Storm drainage;
✓	Schools;
✓	Public Safety;
✓	Water & sewer;
o	High utility connection fees may or may not be impact fees

Answer 81

A

FAR is the ratio of gross floor area in a building to the total site size. For example, a 100,000 square foot vacant site is subject to a maximum 5 FAR. Therefore, the developer can build a maximum 500,000 sq. ft. building. Local regulations may allow some components, such as underground parking, to be omitted from FAR calculations.

Answer 82

A

Special uses: Uses allowed by zoning subject to special use permit: churches, theaters, etc. If limited in number, these uses are appropriate for a given zoning classification.

Special exceptions: Uses that require special review, e.g. an electric-utility transformer in a residential neighborhood. Typically these are reviewed by a zoning board.

Variances: Modifications to development standards (part of zoning ordinance that deals with measurable requirements for development - height limits, setbacks, seating capacity, etc.). Typically these are used to address unique situations related to lot size, shape or topography.

Modification to a legal nonconforming use: A nonconfining use is a lot or improvement that was present prior to adoption of the zoning ordinance but doesn’t confo1m to that ordinance. Modifications may be allowed if the modification doesn’t impose any greater negative impact than it already does.

Answer 83

A

the process wherein land is subdivided in to 2 or more parcels for lease or sale. This process is also referred to as ‘platting’ and the subdivisions map is a called a plat or ‘plat map’.

Answer 84

A

Developers often enter into joint venture agreements with equity partners. Such partnerships are used to raise equity capital and spread risk among a number of investors. Equity partners are often brought in once the initial feasibility studies have been completed and the project has demonstrated a solid profitability potential. Equity investors are sometimes brought in upon project completion, allowing them to avoid tl1e development risk but reap lower expected returns than they would, had they invested earlier.

The partnership could be comprised of individual or institutional/ cultural partners sharing in decision-making, equity investment and liability risk. Alternatively, the partnership could comprise general and limited partners. The developer is typically the general partner, with the power to manage most aspects of the project without consultation or with pre-approval by the limited partners. The limited partners are passive investors with limited liability and decision-making authority. Most partnerships are organized as limited liability companies.

Answer 85

A

Firm Commitment - A definite offer to make a loan at stated terms and conditions. The borrower need only accept the offer.

Conditional Commitment - An offer subject to certain limitations or provisions, such as the completion of construction.

Take-out Commitment - An agreement by one lender to buy or “take out” a loan, typically a construction loan, from the original lender.

Standby Commitment - Under this commitment, the initial lender states their option to sell the loan to a potential buyer.

Answer 86

A

prime contractors (or general contractors) and subcontractors (or specialty contractors). A single general contractor allows for the centralization of responsibility for construction. However, in the past 10-20 years, building construction has become more specialized and general contractors find themselves subcontracting larger portions of the project to specialty or subcontractors - such as for the purpose of installing electrical/ mechanical systems or setting concrete foundations.

Answer 87

A

✓ Traditional Design- Bid/ Award - Build (Construct)
✓ Construction Management (CM):
o CM as Project Manager and advisor to Owner/Developer,
o CM as the constructor (General Contractor)
✓ Design/Build

Answer 88

A

✓ The owner/ developer engages a prime design professional for architectural/ engineering design, plan and specification documentation, bidding, and construction administration.
✓ A complete set of design/ engineering documents (plans and specifications) is the basis for construction bidding. Construction cost commitments are made on the basis of the documents and the successful bid.
✓ The D-B/ A-B construction option can be contracted for with the successful bid amount established in several ways, including:
o Fixed Price (Lump Sum)
o Cost-Plus
o Guaranteed Maximum Price
✓ The successful bidding contractor assumes responsibility for completing construction to a schedule and subcontracting specialty trade contractors and suppliers.

Answer 89

A

CM-Advisor
CM as Project Manager and advisor is strictly an advisor to the owner/ developer, managing the multiple specialty construction contracts, but assuming no direct fmancial responsibility for the construction. The owner/ developer contracts directly with the specialty contractors and is responsible for insurance, bonding and performance.

CM - Contractor
CM as the constructor is an advisor to the owner/ developer, but effectively becomes the construction contractor, accepting financial responsibility for the construction by establishing the cost of the work by fuced-price, costplus, guaranteed maximum or some other form with the owner/ developer. The CM-Contractor effectively “sub-contracts” to the multiple prime - specialty -contractors and can actually conduct some of the work with his or her workforce. The CM can also be responsible for insurance, bonding and performance.

Answer 90

A

Turnkey -the (D /B) entity provides financing and/ or land acquisition/ development to tum the project over to the owner when construction is complete.

Build-leaseback -The D /B entity retains ownership of the project, leasing it back to the client who commissioned the project initially.

Build-Operate-Transfer: The D /B entity retains ownership of the project, operates it according to the client’s requirements, and receives fees from the client durign the ownership & tranfers ownership to the client at a specified future date.

Answer 91

A

Once a contractor has been selected, the owner/developer must coordinate broad aspects of the construction process as well as oversee the work of the selected general contractor. Project Management is often a consulting service.

Owner must clearly define the project manager’s scope of work, oversight limits, & responsibility in acting on behalf of owner.

Project management services provide the owner/developer many advantages, including:

✓ Serves as the owner’s advocate to plan, coordinate, manage, and implement the project.
✓ Serves as an extension of the owner/ developer’s staff (as dedicated staff or a consultant) to supplement technical skills.
✓ Serves to bring comprehensive insight and expertise to the planning, design/ engineering and constrnction of the project.

Answer 92

A

✓ Project scope changes
✓ Completion schedule overruns: weather delays, labor union disputes, delivery delays
✓ Design and engineering errors and omissions
✓ Licensing and permitting delays or denials
✓ General contractor or subcontractor default
✓ Construction cost overruns, rapidly escalating material costs
✓ Off-site public infrastructure development delays
✓ Finding unknown contamination

Answer 93

A

Who
One must define who the target market is. Is it the citizens in a rural town that need to get educated and excited about rejuvenation efforts in their struggling downtown? Is it independent retail entrepreneurs who might be prospects to lease space in the rural downtown? Is it existing businesses in that rural downtown that need to consider a special taxing district to help pay for staff and a marketing campaign to promote downtown growth? The answer could be all of the above with each having a distinct marketing strategy to achieve a specific objective. The varied objectives might relate to a goal of rejuvenating the downtown with renewed foot traffic, ultimately increasing property and sales taxes for the community.

What
What is the real estate project? What is the overall goal of the project? Is it to expand office employment? What are the saleable aspects of the property? Does it offer proximity to a major interstate or connections to rail? What role will marketing play to sell these attributes?
What is the best avenue to use to achieve your objective? Is it through the brokerage community? Is it via radio, magazines, and newspapers? Is it direct mail? What are the unique characteristics of this project that will help you sell it?

When
Should you begin your marketing campaign before the building is built? When is the best time to go public with the project? When should you develop your marketing plan and budget? When or should you bring in a consultant or a public relations firm? When should you do your market research? When is a good time to follow-up with interested parties?

Where
Where is the competition for your product? Where does your target market live? How can you reach them? Where can you locate a good graphics company to produce your brochures or promotional booklets? Where is the best price point to move your product and still make a good profit? Where is the best location to sell your product (retail strip center, office complex, industrial building, or residential development)?

Why
Why is marketing important? Why target marketing vs. general broadcast marketing? Why do I need to know the product, its design and production before I can effectively sell or lease it? Why do I need a systematic and consistent approach to marketing and sales? How does that relate to my marketing strategy? Why is it important to market both internally as well as externally in my job?

Answer 94

A

One need only compare the approach to building an industrial building or office complex or retail strip center to understand the development of a marketing strategy. A potential need is identified. A feasibility study (including a pro forma) and market analysis is completed. Assuming a green light on the former, contract negotiations and approval are sought. The developer of the project creates a budget and hires an architect to draw up blueprints. A general contractor is hired to coordinate with sub-contractors and works from an established timetable. Construction and marketing begins the process of finding a buyer or lessee. Simultaneously, a marketing and sales component works to locate a buyer or entities to lease space in the project.

The process for establishing a marketing strategy is almost identical. The developer may have an in-house marketing department or contract the duties out to a marketing firm. Either way a specific marketing need is identified. The need may be for an economic development professional in the electric utility field with a goal of assisting a community to build a new industrial park with companies that hopefully have high power needs. Once the team reviews the market analysis and feasibility study and decides to move forward, some entity will be given the task of managing the marketing strategy. The marketing manager reviews the market analysis. A clear understanding of the strengths and weaknesses of the product, the location and pricing is gained to determine the best avenue for promotion. The blueprint is being formulated. The blueprint may entail a trailer with a sales office, or targeted advertising with a mix of media. The blueprint may entail utilizing public relations with a blitz of press releases describing the product with quotes from the Mayor, the developer, and a company CEO already signed up to lease space in the project.

The marketing manager, acting as general contractor, uses the marketing blueprint or plan to establish the budget that may or may not include subcontractors (e.g. graphics, commissioned sales staff, publications, etc.). The construction phase of the building is the nuts and bolts of the marketing campaign. This ‘construction’ may take the form of a spiral bound booklet, letters, television or radio advertisements, grand openings, printed brochures and other materials. The marketing campaign will likely begin before actual ground breaking occurs with the project itself. The timetable with goals and objectives is formulated. Any educational component necessary to train sales staff, brokers or others involved with the marketing strategy is implemented. A method to evaluate the marketing efforts is predetermined so that adjustments can be made to the strategy mirroring the business mantra of “continuous improvement.”

Answer 95

A

✓ Promotion
✓ Price
✓ Product
✓ Place

Promotion probably gets more attention and budget resources than the other marketing “P’s” combined. Typically promotion is the embodiment of the marketing strategy. Promotion can be a market brochure for direct mailing, numerous listings of metatags in search engines describing your product on the Internet, a public relations campaign, broker relations campaign, advertising in various media, newsletters, customer incentives and more.

Price - Always a critical element in marketing your product, be it a lease price for office space or sale price for an industrial building. A comparable sales study of other similar products is one method often used to arrive at a price. Prices may be adjusted during the marketing process. Early tenants or purchasers that commit prior to construction often receive a discounted price.

Product - The critical issue is what is the product? What are its distinguishing features and who will want them? Who is the target market? What distinguishes your product from similar products in your local to international sales arena? Do you really understand the strengths and weaknesses of your product? Perhaps one should conduct a SWOT analysis of the product. This would evaluate the Strengths, Weaknesses, Opportunities, and Threats of the product relative to the marketplace.

Place - Generally refers to the distribution of the product. In real estate development it is not possible to distribute the product on a train or a truck. Place can only refer to the location of the property. Since location is so important in defining the product, it is included as part of the product above.
We have seen a major shift in the past years distributing very detailed pictures with narrative on Internet web sites. One can take a virtual tour of houses, buildings and shopping centers. Site maps, aerials, demographic information and much more is available at the click of a mouse.

Answer 96

A

✓ Tangible Materials - The advancement of the product could be through brochures, a website, a notebook, flashdrives, or a whole family of printed materials with a unified message. The Internet has blossomed as a real estate merchandising tool allowing the consumer to read and print out information from just about anywhere.
✓ Product Itself - No matter what the real estate development or reuse project, the architecture, gateways, signage, parking configuration, landscaping and amenities like public space all help to merchandise the building, industrial park, office complex or shopping center.
✓ Sales Conduits - A sales center can be a good sales conduit but may not be an appropriate merchandising tool for all real estate products. Typically one associates a sales center with residential home and condominium developments. However, sales centers have been successful components of office, industrial and retail developments. Often the design and decoration of the sales center should be contracted out to professionals in the field as the first impressions of potential buyers or lessees are critical in the selling process. The Internet is another example of a sales conduit to merchandise your product to a wide audience. Finally, it is important to work with real estate brokers.

Answer 97

A

✓ Magazines - print quality is superior to newspapers and this medium has a longer shelf life.
✓ Professional Organizations - most professional organizations have newsletters or websites to info1m people of your product or service.

✓ Radio - you may have a captive audience in a vehicle and in an occupation where auto travel is often required. Do you know the channel this target market frequents?
✓ TV /Cable - depending on the product and your target market(s), television can demonstrate your product to a large audience with full sound and color.
✓ Internet - this medium has become increasingly popular in real estate development with websites, broadcast emails, pop-up screens, and social media sites.
✓ Billboards - strategic billboard locations often rate highest in terms of effective advertising in the real estate field as they can not only advertise your product but also give directions to it.

Answer 98

A

✓ What is the purpose of the promotion?
✓ Who are we trying to reach (demographics, their product utilization, etc.)?
✓ What is the best way to reach them (media type, direct contact)?
✓ What is the ideal outcome of the promotion Qease the vacant spaces)?
✓ How will we periodically evaluate and modify our promotional efforts (units sold/leased, phone calls, client visits)?

Answer 99

A

✓ Reducing the development cost lowers a developer’s front-end costs and reduces the amount that has to be financed.
✓ Reducing mortgage-financing costs lowers the debt service of a project.
✓ Reducing operating costs improves the cash flow of a project.
✓ Facilitating the process of redevelopment through programs and policies.

Answer 100

A

First, bonds help communities spread the cost of a project over its expected life span. Second, communities rarely have the cash on hand to cover large-scale capital projects. Public debt, in the form of municipal bonds, provides a community with the ability to build now and repay debt later with future income.
The IRS distinguishes between the following two types of debt: public-use and private activity bonds.

More info - The benefit for issuers of public use bonds is the relatively low interest rate. Because interest from public use bonds is exempt from federal income tax, investors will accept bonds with lower interest rates. Furthermore, public use bonds provide investors with a high degree of security because they are backed by reliable collateral sources. Two common forms of public use bonds include: General and Revenue

Answer 101

A

Qualified redevelopment bonds
Infrastructure projects that do not meet the requirements of government bonds may qualify for tax exemption if they meet several tests of qualified redevelopment bonds, e.g., proceeds used for redevelopment purposes in designated blighted areas.

Qualified exempt small issues
Bonds issued under this category include Industrial Development Bonds (IDBs) for qualified manufacturing projects and bonds used for first-time farmers.

Enterprise zone bonds
Enterprise zone bonds may be issued by designated enterprise communities or empowerment zones. If certain tests are met, bond proceeds may be used to finance projects for commercial facilities as well as manufacturing.

Exempt facility bonds
These are bonds issued to support the development of tax-exempt facilities like airports, docks, wharves, mass commuting facilities, facilities for furnishing water, sewage facilities, and solid waste disposal facilities.

Qualified nonprofit bonds
These bonds are used to finance projects owned and used by nonprofit organizations and typically used for projects such as hospitals, housing, and museums.

Qualified mortgage bond
This single-family mortgage revenue bond program makes below-market interest rate mortgages available to first-time home buyers. (there is also a qualified veteran’s mortgage bond program.)

Qualified student loans
These bonds include those issued by qualified governmental units or by qualified scholarship funding corporations in connection with the Guaranteed Student Loan or Parent Loan of Undergraduate Students programs of the U.S. Department of Education.

Industrial Development Bonds
The most common form of qualified private activity bonds are industrial development bonds (IDBs). IDBs qualify for tax exemption under “Small Issues Exception”. The specific qualifications for an IDB are both complex and company-specific. The following are key considerations:

✓ Does the project involve a manufacturing or processing activity?
Based on the IRS code, tax-exempt financing is only available for manufacturing or processing facilities and equipment. Manufacturing or processing is defined as the production of tangible personal property or value-added processing. Only 25 percent of the bond issue may be used for equipment or facilities that are not directly involved in the manufacturing process.
✓ Are the capital costs of the project less than $10 million?
The IRS code limits the size of bond issues to $10 million. Subtracted from this $10 million cap are the company’s other capital expenditures, no matter how they are funded, incurred in the same city as the project during the period three years before and ilie years after the bonds are issued.
✓ Will the project have some public benefit?
State laws generally require that the project results in some public benefits, such as increased employment, job retention, or some other direct consumer benefit.
✓ Will the project involve the acquisition of an existing building?
The IRS code requires that if bond proceeds are used to acquire an existing building, an amount equal to at least 15 percent of the amount of the bond proceeds used to acquire the existing building be used to rehabilitate tl1e building.
✓ Does the company have any other outstanding tax-exempt bonds?
The IRS code limits the total amount of tax-exempt debt outstanding at any time for a private company to $40 million.

PAB Example:

Project: $100 milllion warehousing & distribution center
$35 million private loans from bank (first position)
$65 million IDB Bond (second position)
Public bond is backed by a letter of credit from the bank in the amount of the bond. Letter of credit is backed by revenue produced, mortgage, and other securities

Answer 102

A

A revolving loan fund (RLF) is a pool of capital in which the funding is recycled to provide future financing. That is, interest and principal payments on outstanding loans made by an RLF are returned to the pool for new lending. The principle behind RLFs is that the loan pool will grow with the interest payments of each generation of borrowers, allowing greater lending ability.

Because the goal of the RLF is to provide gap fmancing, RLFs can finance activities that are unattractive to conventional lenders. RLFs provide more favorable lending conditions such as lower interest rates and longer terms and can take subordinated positions. RLFs can also be used to guarantee portions of loans made by conventional lenders. RLFs can be administered by a city agency or other entity, typically a nonprofit organization.

Through their lending function, RLFs can support redevelopment of blighted land and vacant facilities, as well as small business development and job retention. However, they are typically geared toward job creation or small business development.

Answer 103

A

✓ They offer flexible loan eligibility criteria, assistance, and repayment. Each city or other development agency establishes its own guidelines.
✓ They can provide capital to businesses in support of local development goals and provide eligibility and lending criteria in concert with other development programs.
✓ They can offer favorable interest rates and loan terms.
✓ RLFs reduce the risk of a loan by guaranteeing a specific percentage of that loan

Answer 104

A

✓ RLFs must sometimes stop lending because they are out of funds.

✓ A relatively large amount of capital is necessary to establish the fund

✓ Sophisticated administrative staff is required.

✓ There are restrictions if federal funds are used

Answer 105

A

Evaluate overall existing conditions - blighted or vacant land, community and private financial resources, etc.
Establish goals and objectives for the RLF.
Present the RLF concept to public and private officials.
Investigate local and state statutes applicable to revolving loan activities.
Investigate funding sources available to capitalize the loan pool.
Determine method and type of activities to be funded by RLFs.
Establish loan terms and conditions.
Determine staff requirements & organizational vehicles through which the RLF will function (E.g. a city agency or econ developmet corporation)
Limit amount of loan pool funds that may be committed at any one time.
Fomulate loan review and approval process.
Decide how loans will be executved
determine how RLFs policy development & the continuing revisions to the RLF will be handled.

Answer 106

A

Business facility
Provides credits for new jobs and new investment within a specific type of industry.

Capital investment
provides credits for investment in small businesses in distressed communities

Community bank
Provides credits for investment in a community bank.

Enterprise zone
Provides credit for developments that will provide new jobs and new investment within the zone.

Historic
Provides credit for reuse of historic structures. (see Chapter 12)

New Market Tax Credits
Spurs revitalization efforts of low-income and impoverished communities.

Distressed community
Provides credit for individuals and businesses within a defined “distressed community”.

Low income housing
Provides credits for development and leasing of units at below market rents. (see Chapter 12)

Strengths of tax credits:
✓ Direct incentive for recruiting new development.
✓ For business owners, the credit may provide the needed cash flow to make the project successful.
✓ If the building is empty, certain taxes are not being paid so the local government is not giving up existing revenue.

weaknesses of tax credits:

As credits continue, property owners begin to capitalize the value of credit into the cost of the property.

Answer 107

A

The purpose of the program is to encourage investment and development in low-income communities by lowering the cost for developers and reducing the risk for lenders. Low-income communities under the NMTC are defined as either census tracts with a poverty rate of 20% or higher or census tracts where the median family income is less than 80% of the median family income for that state or region.

Specialized financial institutions known as Community Development Entities (CDEs) are allowed to apply each year for the New Markets Tax Credit allocations. In order to apply, CDEs must be certified beforehand. A certified CDE must be a legal, domestic institution, have a primary mission of serving low-income communities, and maintain accountability to the residents of the community through representation on a board of directors or other governing body. CDEs come in all shapes and sizes: some are small non-profits working on a local or national level, while others are banks or other financial institutions.

When a developer has a project located in a qualified low-income community, then they must apply to a CDE to request a share of the NMTC allocations that CDE was granted for that year. Given the high level of demand for NMTC funding, CDEs are very scrupulous when deciding which projects to provide funding for. The CDE first has to make sure that the developer’s project meets all the low-income community requirements of the NMTC program. Next, a CDE will use its own standards for picking a project based on the community impact it will have and how the project aligns with the overall mission of their organization.

The business developing a project must qualify as a Qualified Active Low Income Community Business (QALICB) in order to receive NMTC funds from a Community Development Entity. Such businesses must have 40% of their property and services located within a low-income community and at least 50% of their gross income must be generated there. In addition, NMTC loans must be used to fund commercial, non-residential, or mixed-use development projects. If the project is a mixed-use facility with rental housing, at least 20% of the gross income it generates must come through non multi-family components.

New Markets Tax Credits provide a federal tax credit of $0.39 per dollar of investment in the CDE, or 39% of the total allocation. This federal tax credit is allocated over the span of 7 years, with 5% being claimed during each of the fast three years and 6% for each of the following years. For example, a $10 million NMTC allocation would receive $3.9 million in federal tax credits over 7 years. The investment in the CDE cannot be redeemed until the end of the 7- year period.

An investor buys the tax credits for $0.65-$0.70 on the dollar, in addition to being charged a fee by the CDE. The CDE’s fee typically costs 3-5% of the total allocation. Taking the $10 million allocation, a credit investor would pay ‘$2.7 million for the credits (70% of $3.9 million) and approximately $500,000 for the CDE fee (5% of $10 million).

Answer 108

A

Tax increment financing (TIF) is a mechanism to encourage private development in a designated area. It does this by capturing the future tax benefits of real estate improvements in the designated area to pay for the present cost of those improvements. A local jurisdiction does this by freezing property tax assessments at a base year. In future years, all the tax revenue up to the base year assessment continues to go to the taxing jurisdictions (city, county, school district, etc.). However, incremental revenue collected from rising property values is allocated to the TIF district. There is generally a requirement for authorities to designate the area as blighted for the area to qualify as a TIF district.

The incremental revenue is often used to pay the debt on bonds that were issued to help fund the redevelopment. The bond proceeds are used to finance public infrastructure development such as parking and road improvements or to support more directly a specific project through feasibility studies, property acquisition, environmental remediation, project financing, or other means.

Side note - the establishment of a TIF district follows or parallels the designation of a redevelopment area. Therefore, the establishment of a redevelopment area provides the framework for TIF. The redevelopment plan typically designates the agency to manage the plan and its powers, a fmancial plan with sources and uses of funds, and a land use and property acquisition strategy.

Answer 109

A

Step 1:
An agency proposes a district to be redeveloped using the criteria established by the state (usually for blighted areas).

Step 2:
The agency develops and approves an area redevelopment plan addressing potential projects, estimated project costs and tax impact, and termination date of the TIF. The creation of the redevelopment plan should include a public participation component. States may limit the number of years a TIF district may exist. TIF districts are typically designated to last for 20-25 years, although they are often able to retire their bonds sooner.

Step 3:
The agency may hold a public hearing before securing city council approval for the TIF, the redevelopment area and the possible sale of bonds. The municipality then enacts an ordinance that authorizes the use of the TIF.

Step 4:
Once the use of TIF is authorized, the current tax base and revenue streams of the area are appraised to determine the original assessed value of the district. Tax revenues exceeding this amount during the life of the TIF district will be distributed to the redevelopment agency. These revenues can then be used to pay for redevelopment or to repay bonds to finance the improvements.

Answer 110

A

✓ Large, diversified districts are preferred. Insurers may require a minimum number of acres (such as 500 acres) and a good mix of residential and nonresidential properties. They also want a diversity of taxpayers; meaning no more than 50 percent of the area’s taxes should be generated by the top 10 taxpayers. Finally, insurers want the project area to be at least 50 percent developed.
✓ Leverage is important as well. Bond insurers want at least 50 percent of the total assessed value to be in the increment. This allows a district to withstand declines in assessed value.
✓ Bond insurers are also concerned with debt coverage, assessment and tax ratios, tax appeals, and tax sharing between jurisdictions. The previous-year TIF revenue should cover the bond debt service by a factor of 1.25
✓ Political stability is especially important for tax collections. If a city dramatically reduces taxes, the tax increment is in jeopardy. Bond insurers will review a jurisdiction’s 10-year tax history to see if assessment and tax ratios are stable. If not, coverage ratios will be adjusted to account for historical fluctuations.

Answer 111

A

✓ Property owners pay the normal tax burden, no more.
✓ The property tax increment is eventually returned to the tax rolls.
✓ TIF bonds are not typically counted against a jurisdiction’s debt caps.
✓ Public funds are not required.
✓ Incremental tax revenues are reinvested back into the targeted redevelopment areas.
✓ TIF can stimulate private development in redevelopment areas.
✓ Tax increment areas can also be used as a performance based benefit if the developer is returned the amount of the increment.
TIF is a reliable local source of funds as federal and state grants become increasingly sparse.

Answer 112

A

✓ In areas where property tax rates are very low, the impact of an increase in an assessment may be marginal, generating little revenue for the redevelopment agency.
✓ TIF is complex and costly to administer.
✓ The project might fail or surrounding property values might not increase.
✓ TIF effectively freezes the tax base for agencies required to provide services to the area. This means that tax revenues necessaty for meeting increased service demands, such as education, police, public transportation, etc., may not be available until the project has been completed and the indebtedness repaid.
✓ Political fallout from school districts.

Answer 113

A

✓ TIF revenue can be directed toward improvements in the redevelopment district or to finance bond debt that does not require a referendum.
✓ TIF activities may only be allocated to projects that support the official redevelopment plan. These include infrastructure improvements, both on-site and off, including new traffic signals, upgrades in parks adjacent to development, road replacement, new parking facilities or site remediation.
✓ TIF funding can also be used to provide matching grants for redevelopment projects, partial financing of private development ventures, funding for acquisition of real property and site preparation.
✓ Projects supported by the TIF may be financed through bonds at the beginning of the project or when the increment becomes available. The second alternative involves reimbursing the developer for expenses agreed to be supported through the TIF. No bonds are necessary.
✓ TIF programs may be set up on a district basis, where the increment from a defined area of a community is used to fund projects in the district.
✓ TIF programs may also be defined by a specific project. In this case, only the increment from the project is used to fund that project.

Answer 114

A

Leases provide several financial advantages to the developer. In the case of the public-sector does not pay taxes on its lease payments. By leasing land to a private developer, the public sector can permit the developer to avoid a major crash outlay while using the property. It also lowers the developer’s tax liability because lease payments are a deductible expense ( from gross income) for tax purposes. In addition, the lease appears as an indirect liability on the developer’s balance sheet, whereas a mortgage appears as a direct liability on the balance sheet and can adversely affect the developer’s ability to obtain future financing by increasing the debt ratio of the firm. Leasehold improvements, the improvements to a leased property made by the lessee, are generally taxdepreciable by the lessee. It is important to note that the terms of the lease can have a significant impact on the ability to finance a project.

Answer 115

A

Ground leases
Long-term ground leases are a financing tool in which the lessee, such as a developer or business, obtains use of a parcel of land from a lessor, such as a municipality, in return’ for periodic rent payments. If there is an improvement on the property, the lease is generally based on that portion of value attributable to land. At the end of the lease, the land and improvements revert to the landowner. Ground leases allow EDOs maintain more control than they do for a transfer of title, and this is important if the project fails.

While the period of the ground lease varies, it is generally long enough to let the developer recover the costs of improvements and a return on his or her investment. Ground leases reduce the cost of capital by eliminating the need to purchase land. The lease also should lower the fixed costs of operation as lease constants are usually lower than debt service constants. For the developer to obtain financing to construct improvements, the land owner may have to subordinate the ground lease payments to the debt obligation.

Sale/lease backs
In sale/lease backs, the public sector purchases an asset from a developer or other party and then leases it back to the developer. The lease is typically a net lease, that is, the lessee not only pays the rent for occupancy, but also pays maintenance and operating expenses such as taxes, utilities, and insurance. The cash secured by the developer from the sale of the property to the public sector can be used for redevelopment purposes.
The lease payments serve to amortize the debt incurred by the public sector to purchase the property, extending until the debt is recovered. The city retains control of the land until the end of the leasing period. After the lease period, the lessee can purchase the building or release the building if both parties agree. Alternatively, the public sector can sell the building or lease it to another party.

The lease terms can be designed to fit the needs of the development or of the developer. Lease term options include:

Percentage Lease With Low Minimum
A lease can require a minimum monthly amount with additional payments based on income production.

Unequal Lease Payments

Similar to loan payments, lease payments can be structured to start out low in the early years of a project and increase when operating performance typically stabilizes.

Answer 116

A

Strengths of leases:
The Developer can more easily avoid large cash outlays.
There are tax advantages for the developer.
Public & private sectors can share the risk.
EDO can maintain more control than in a transfer of title.

Weaknesses of leases:

✓ The developer may default.
✓ The expense incurred by the public sector can be high.
✓ Some lenders are reluctant to lend on improvements with a ground lease.

Answer 117

A

Tax abatements are a reduction or exemption of a taxpayer’s obligation to pay taxes for a specified period of time. The goal of the abatement is to encourage the undertaking of a project by giving a form of tax relief for developers and businesses. The assumption behind tax abatements is that in the long run, the tax base will be strengthened and make up the revenue lost from early abatements. Two common types of abatements are sales and property taxes.

Strengths of tax abatements:
✓ They provide a very direct incentive for recruiting new development.
✓ They are easy to implement.
✓ They are the most direct way ·to counter urban tax disadvantages relative to suburban communities.
✓ If the building is empty, certain taxes are not being paid, so the local government is not giving up existing revenue.

Weaknesses of tax abatements:

✓ There may be a tendency to provide tax abatement to any eligible project, rather than basing decisions on project feasibility and financial necessity.
✓ Once abatements are given, businesses may depend on them and it can be difficult to phase them out
✓ As abatements become more widespread, property owners begin to capitalize the value of abatement into the sales price of the property.
✓ Tax abatement in many jurisdictions has become highly controversial.

Answer 118

A

Special Improvement Districts (SIDs)
Special improvement districts (SIDs), also known as business improvement districts (BIDs) or business improvement zones, are a limited geographic area, primarily commercial in nature, designated to receive a range of enhanced services to improve the local business climate. This process is managed by an organization of local businesses. A BID organization coordinates and directly enacts specific activities and programs, such as marketing and promotion, maintenance, security, policy advocacy, and small-scale capital improvements. SIDs are also referred to as special tax districts, public investment districts, and single-purpose districts.

Typical BID Activities
As a guiding principle, BIDs typically institute efforts that supplement services provided by the public sector. Local governments have a responsibility to provide certain services and BID managers must hold government agencies accountable for these services within the district. Business improvement districts most commonly channel resources into the following types of efforts:

✓ Marketing and Promotion
o Coordinate sales promotions for district businesses
o Host festivals, concerts, and other special events
o Promote tl1e district to prospective new businesses
o Provide maps, banners, and ambassadors to guide visitor
o Publish newsletters

✓	Maintenance/Cleaning - BIDs hire personnel and purchase
equipment to:
  o	Collect trash
  o	Remove litter
   o	Clean graffiti
   o	Scrub sidewalks
  o	Shovel snow
   o	Maintain landscaping

✓ Security - BIDs employ security personnel to patrol district streets, guard against petty crimes, and encourage pedestrian activity. They may also purchase and install surveillance equipment.
✓ Policy Advocacy- BIDs lobby local and state governments on behalf of district businesses and attempt to build community support for policies that could benefit the business climate in the area.
✓ Small-Scale Capital Improvements- BIDs fund and implement capital projects to improve the aesthetic and functional qualities of the district to make it more inviting. Improvements might include streetlights, signs, trees, flowers, bike lanes, street furniture, and facade restorations.

There are several factors that should be taken into consideration when designating special improvement districts, among them:
✓ Whether the tax base is sufficient to raise the required revenues.
✓ The potential for developing a district identity and consensus about needed improvements.

Successful elements of a special improvement district include:
✓ Well-drawn enabling legislation
✓ Agreement on the objectives of the district and the time frame for achieving them
✓ A fully representative board that includes the different interests and groups in the district
✓ Clean procedures for implementation
✓ Pre-established evaluation criteria

Strengths of SIDS:
✓ Steady source of money
✓ Provides organizational structure for the districts

Weaknesses of SIDS:
✓ Can be difficult to establish
✓ District has to be managed

Answer 119

A

✓ For housing rehabilitation, design the space to qualify for low-income housing tax credits or with underwriting criteria that allow mortgages to be sold in the secondary market.
✓ Include new employment to qualify for industrial development bonds.
✓ Offer future tenants rent abatements that equal the cost of tenant improvements in exchange for up-front rent payment.
✓ Attract additional investors. In some cases, the second investor is brought into the project with the assurance that his or her money will be used only when leases are in place, thus reducing risk.

Answer 120

A

The public sector can initiate development by facilitating land assembly. Land assembly is important because the market for larger, assembled properties is much greater than for the small, fragmented properties typically found in older urban areas. By combining smaller sites into larger parcels, a public agency is
much more likely to attract private investment.
Public agencies can acquire land by the following:

✓ Negotiated purchase with a willing seller
✓ Eminent domain or condemnation
✓ Tax foreclosures
✓ Escheat (property not claimed by heirs to an estate)
✓ Land swaps
✓ Surplus city or county property (or other public holdings such as from school districts or public universities)
✓ Foreclosure on demolition liens

Answer 121

A

Most land is assembled through negotiated purchase. Here, the public agency acquires the property under an arms-length market transaction.

Because owners often expect and demand a higher price from public agencies, negotiated purchases are sometimes conducted through straw brokers. Straw brokers are real estate brokers who acquire property on behalf of the agency without the seller knowing the identity of the ultimate buyer. Agencies can acquire a number of properties quickly without going through a public process, which tends to drive up costs and slow down the process.

Answer 122

A

Negotiated purchases and condemnation must be executed for a recognized public purpose as permitted or authorized by state law. When a public agency intends to sell or lease the acquired property for private development, recognized public purposes are often specified by law. Most states accept purposes for the elimination of blight, economic development (e.g., job creation), and housing. Recognized public purposes may be further limited when property is acquired through condemnation, or eminent domain.

Condemnation is the taking of a property upon paying a fair price for the property including relocation costs. Local laws usually require that the agency attempt a negotiated purchase prior to initiating condemnation. If negotiation is unsuccessful, then - depending on laws - condemnation may be initiated. Since condemnation is financially and politically costly as well as time-consuming, it is best avoided unless there is no other way to acquire property.

Land assembly, including condemnation, can be conducted by various entities. Powers may be granted to cities, development authorities or nonprofit EDOs. Even when a nonprofit lacks legal authority to condemn property, they often exercise these powers by retaining the city or another agency to conduct such activities on their behalf.

There are various scenarios for negotiated purchase and condemnation.

✓ A public agency acquires the property through negotiated purchase with no threat of condemnation.
✓ An agency acquires the property through negotiated purchase with a threat of condemnation.
✓ The agency acquires the property through condemnation.
✓ An agency acquires the property with funding from the developer.
✓ The developer acquires the property with public agency condemnation as a lever.

Answer 123

A

Strengths of land assembly (with condemnation):

✓ Land assembly allows for the return of parcels to economic use, supports redevelopment efforts, and helps mitigate blighting forces in the community. It is a valuable tool used in cases when a government deems the acquisition of property vital and necessary to the public interest.
✓ Land assembly encourages private investment by avoiding wasted time and uncertainty on the part of the developer.
✓ Condemnation allows an EDO to assemble abandoned lots and buildings, whose ownership extends back a number of generations, making it difficult to establish a clear title. Without a clear and legal title, the property cannot be transferred or redeveloped.
✓ Land assembly deals with speculative property owners. In many cases, one or two property owners hold up an entire redevelopment project by refusing to sell or demanding a purchase price greatly exceeding market value.

Weaknesses of land assembly (with condemnation):

✓ condemnations is politically controversial
✓ because condemnation requires extensive legal expertise, it can be an expensive & time consuming process.
✓ Laws may prevent or restrict condemnation that is followed by sale to a for-profit entity.
✓ The cost of acquiring a site is often significantly higher when condemnation is used. The relocation of existing tenants and legal fees often raise the purchase price above market value. When this is the case, it is often necessary to have a public subsidy to make the project financially feasible.

Answer 124

A

Step 1: It must be determined that the redevelopment serves a greater public purpose. A public purpose must be determined in cases involving the transfer of land for private development. There are three generally recognized public purposes that a public body may cite to acquire land for private development:

Elimination of blight. The assessment of blight is the most common form of invoking eminent domain. However, the finding of blight is unnecessary for public projects such as roads, parks, or sewers. Condemnation for blight elimination is allowed in most states.

Housing. The creation of housing, often for low- and middle-income residents, is often considered as a legitimate use of eminent domain. Acquisition for housing is allowed in most states.

Economic Development. Job creation is generally recognized as a legitimate public purpose for land assembly, but condemnation for economic development is allowed in only a limited number of states.

Step 2: Before a public agency may claim title to the land, “just compensation” for the property owners, based on an appraisal, must be determined. The agency will have to secure one or more independent appraisals of the fair market value of the property.

Step 3: Once the government agency has determined the amount of just compensation, it will submit a written offer to the property owner. The government agency can then negotiate with the property owner, or with each person who bolds a separate ownership interest. If the parties do not reach an agreement, in some cases (depending on state law) the government agency may take the property and settle the compensation through the courts afterwards. This is commonly called a quick-take condemnation process. If the state does not allow quick take, then the government agency must work through the courts to settle the compensation amount prior to taking the property.

Answer 125

A

Land banking is the public acquisition and reservation of land for future use. Land banks essentially are a municipally owned inventory of land parcels. By continually gathering smaller pieces of land, a city can assemble large parcels of developable land with which it can attract and retain firms. Land banking needs to be strategic. Acquisition should be based on targeted investment rather than random odd lots. Cities that successfully apply this method often establish a permanent fund specifically for this purpose. The fund works like a revolving loan fund; that is, revenue from the sale of a property is used to acquire and improve other land for the bank.

Strengths of land banking:
✓ Land banking can help avoid or mitigate speculative land-price increases in areas slated for redevelopment.
✓ Land banking can help retain control over future uses and design aspects of the property.

Weaknesses of land banking:

✓ To land bank, the acting agency needs to pay the entire land acquisition cost up front unless they can secure the land through non-payment measures.
✓ The cost to maintain the property.
✓ Community concerns over the use of public dollars.

Answer 126

A

An air rights transfer is the transfer of the rights to develop above or below a piece of public land while maintaining public rights to the ground level and/ or underground. This allows a city to maintain some public use of the land, while providing more land for development.

Strengths of air rights:

✓ There are no direct cash outlays.
✓ Agencies are able to provide land for development while still maintaining some public use.

weaknesses of air rights:

✓ When air rights are transferred the community gives up other potential public uses.
✓ Transfer complicates financing and loan securitization.

Answer 127

A

A land write-down is the public sale of land for less than its market value. The difference between the land’s actual value and its sale price is effectively a subsidy, an incentive for developers. When this vehicle is used, a public agency purchases property and sells it for less than acquisition value. The cost of the land write-down to the local development agency is the cost of the acquisition less the disposition value received by the development agency (or city) upon sale of the property.

Strengths of land write-down:

✓ There are no direct cash outlays if the public agency already owns the property.
✓ The public agency that owns the land can maintain some control over development by placing restrictions on reuse at the time of transfer.

Weaknesses of land write-down:

✓ The public agency that purchases the land may have to pay market price.
✓ There is a penalty for added cost and time to manage and potentially sell property owned by public agencies.
✓ Sometimes write-downs are perceived as unfair and are, in fact, illegal in some states.

Answer 128

A

Predevelopment is a critical stage in the real estate development process, and a very important stage for economic development organization involvement. Activities in this stage determine the feasibility of a project - its costs, risks, and benefits. Predevelopment feasibility studies are done for all land development projects, whether first time developments or redevelopments. These studies help developers, investors, and economic development staff to decide whether a particular development project is a “go” or “no go”. Almost all lenders and investors require market and investment feasibility studies on any project before they will invest.

Predevelopment study activities may include:

✓ Site selection and land assembly analysis.
✓ Market analysis.
✓ Traffic/parking analysis.
✓ Conceptual design.
✓ Environmental review.
✓ Engineering analysis, including assessment of soil, topography, and existing utilities.
✓ Political feasibility - community attitude assessment.
✓ Financial feasibility to determine the supportable equity and debt and likely terms and conditions.

Strengths of feasibility study provision:

✓ Determines the feasibility of the project before any major investment is made.
✓ Gives the agency more knowledge to shape the project prior to private participation.

weaknesses of feasibility study provision:

✓ Completing a predevelopment feasibility study can be very expensive.
✓ It is likely to be redundant if the private sector will have to conduct them anyway.

Answer 129

A

Local jurisdictions often provide infrastructure improvements including streetscaping, road construction, and other access improvements as part of redevelopment projects. This type of infrastructure may be required by the zoning code.

There are a number of resources available to help fund public infrastructure development, including:

✓ General obligation bonds
✓ Special assessment districts
✓ Tax increment financing
✓ U.S. Department of Housing and Urban Development Community Development Block Grants and Section 108 guarantees
✓ U.S. Economic Development Administration Title IX grants, Public Works grants, and Development Facility Assistance

strengths of infrastructure provision:
✓ Public infrastructure can provide the physical environment to make the project happen.
✓ Investment in infrastructure may give a public entity more control over the design of the project.
✓ Investment in infrastructure for one project may provide public benefit for the entire community.
✓ An investment, like a parking garage, may provide revenues.

weaknesses of infrastructure provision:

✓ Infrastructure investment can be expensive.
✓ Public infrastructure investment may delay the project, discouraging private investment.
✓ If the project fails, the community may be left with useless infrastructure.
✓ Investment could create issues of fairness. Given limited resources, which projects should be supported with public infrastructure?

Answer 130

A

The zoning ordinance of a community or other jurisdiction determines the type and intensity of development permitted on every parcel of land. They specify the types of use, coverage ratios, setbacks, maximum building heights, the amount of parking required, and so forth. Specific areas can be “rezoned” to encourage new or targeted development to stimulate redevelopment in an area. The most common types of zoning incentives that are used for development include:

Density Bonus
Used to alter height and bulk (density) regulations to encourage certain land uses and project features. Typically, it is used to obtain public benefits such as ground floor retail, affordable housing, open space, transit connections, and/ or art and cultural amenities, in exchange for greater density. For example, additional densities may be permitted in exchange for public benefit, such as building in a blighted area.

✓	Advantages;
   o	No cash outlay
   o	Public benefits
✓	Disadvantages;
   o	Can counter market realities
   o	Too much ground floor retail,
   o	High use can burden infrastructure

Overlay Zoning
Relaxes or modifies existing land use provisions for particular land tracts while maintaining overall citywide limits. For example, an overlay zone may be used to attract developers by allowing them the right to increase plot ratios in a specific area while maintaining overall citywide density limits.

Mixed Use Zoning
Permit the use of real estate for more than one purpose, such as a building that has residential units, office, and retail space. Mixed use can be horizontal (multiple uses in an area or on one block/ site) and/ or vertical (multiple uses in one building).

Answer 131

A

The 504 program provides long-term, fixed-rate financing to small bus’s for major fixed assets such as land, buildings, & equipment. Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender that covers up to 50% of the project cost, a loan secured with the junior lien from the CDC (backed by a 100% SBA-guaranteed debenture) covering up to 40% of the cost, and a contribution of at least 10% equity for the small bus.

The SBA loan is provided by the CDC, which raises its capital by selling SBA guaranteed bonds in the private market. Although the bonds generally carry below-market interest rates, the SBA guarantee increases their attractiveness to investors. The maximum SBA/ CDC loan varies by the type of borrower and the purpose of the loan.

Answer 132

A

The 7(a) loan program is the SBA's general business loan program. It is a zero subsidy loan program financed through fee income to SBA from borrowers and lenders. Small businesses go directly to participating banks to apply for 7(a) loans or for any of the subsidiary programs under 7(a).  There are also several special loan programs offered under the 7(a), which are described below. 
Small businesses are eligible for 7(a) loans if they meet the following criteria:

✓ Good character
✓ Demonstrated record for success
✓ Good credit rating
✓ Sufficient funds to operate the business at a profit
✓ Pledged personal and/ or business assets
✓ Meet SBA size standards

SBA’s lending partners look at slightly different criteria, including the following:

✓	Opportunities in the applicant's market
✓	The business' reputation
✓	Strength of the business
✓	Financial statements
✓	Projections

A typical advantage of the 7(a) loan program over a straight commercial loan from a private lender is an extended repayment term. Working capital loans can have maturities of up to seven years while loans up to 25 years are available to finance fixed assets such as the purchase of real estate. Interest rates are negotiated between the borrower and the lending institution, and are subject to SBA maximums pegged to the Prime Rate Export Working Capital Guarantee Program.

Answer 133

A

The Express Loan Program is a special type of loan offered under the 7 (a) loan program. It offers an expedited review process for loan applications, sending applicants a response within 36 hours of submitting their loan application. There are two types of SBA Express loans: Community Express Loans and Patriot Express Loans.

Community Express Loans are loans up to $25,000 offered to small businesses operating within communities that qualify as Historically Underutilized Business Zones (HUBZones) or as distressed communities according to the Community Reinvestment Act.

Answer 134

A

The Export Working Capital Program is another program under the 7(a) Loan Program, designed to provide financial assistance to export-ready companies. This program is designed to make securing working capital easier for businesses which may not typically be able to secure it to support their export sales. These loans provide up to a 90% guarantee to lenders on an export loan so that they will open up working capital for export businesses. The program is administered by SBA Senior International Credit Officers, who are located at U.S.
Export Assistance Centers around the country.

Exporting businesses can apply for EWCP loans before finalizing an export sale or contract.

Eligible recipients apply for the EWCP directly to lenders, who then review the application and submit the request to the SBA for final approval. Loans using Preferred Lender Program or SBA Express processing cannot be used for this program.

In addition to regular EWCP loans, eligible exporters can apply for the SBA and Export-Import Bank Co-Guarantee Program. This provides a guarantee for much larger loans that the SBA cannot support on its own. These guarantees typically have a maturity of 12 months, though an exporter can reapply after 12 months. Under this guarantee, the total working capital line cannot exceed $2 million.

This loan provides short-term financing to exporters and is intended to be self liquidating through the orderly collection of proceeds from export sales. Because this loan is repaid on completion of the cash conversion cycle of a particular transaction or series of transactions, the program encourages private sector lenders to provide capital for small business exporter deals. The EWCP uses a one-page application form with turnaround usually within 10 working days.

Answer 135

A

CAPLines is the umbrella program for short-term and cyclical working capital needs. A CAPLines loan, except the Small Asset-Based Line, can be for any dollar amount that does not exceed SBA’s limit. (See the 7(a) Loan program for more information on SBA’s Basic Requirements.) CAPLines financing purposes include:

✓ Seasonal working capital needs
✓ Direct costs associated with performing construction, service and supply contract(s)
✓ Direct costs associated with commercial and residential building construction without a firm commitment for purchase
✓ Operating capital from obtaining advances against existing inventory and accounts receivable
✓ Consolidation of short-term debt

There are five distinct short-term working capital loan programs for small businesses under the CAPLines umbrella, including:

Seasonal Line
Designed to assist businesses that experience fluctuations during peak season(s) with advances against inventory and accounts receivable. The line can be revolving or non-revolving.

Contract Line
Designed to finance direct labor and material costs associated with performing assignable contract(s). The line can be revolving or nonrevolving.

Builders Line
Designed to finance direct labor and material costs for small general contractors and builders that construct or renovate commercial or residential buildings. The building project serves as collateral and loans can be revolving or non-revolving.

Standard Asset-Based Line
An asset-based revolving line of credit designed to assist businesses unable to meet long-term credit standards. Repayment comes from converting short-term assets into cash and remitting it to the lender. Businesses continually draw and repay as their cash cycle dictates. This line of credit is generally utilized by businesses that provide credit to other businesses.

Small Asset-Based Line
An asset-based revolving line of credit up to $200,000. Its function is similar to a standard asset-based line, except that some of the stricter servicing requirements are waived, provided that the business can consistently show repayment ability from cash flow for tl1e full amount.

Answer 136

A

The Surety Bond Guarantee (SBG) Program assists small and emerging contractors to obtain bonding that would otherwise be unavailable to them. Under this program, SBA guarantees bid, payment, and performance bonds that are issued by private-sector surety companies, so that small contractors can compete for contract awards up to $2 million. The surety guarantee provides that the SBA will assume a predetermined percentage loss in the event of the contractor breaching the terms of the contract.
Construction contractors and homebuilders who meet SBA’s size and policy standards are eligible for surety bond guarantees if their average annual receipts, including those of their affiliates, for the last three fiscal years do not exceed $6.5 million.

Answer 137

A

The Economic Adjustment Assistance Program funds are used primarily to support projects that build on or create new industry clusters to enhance the competitiveness of that region, support technology-led development, or advance community and faith-based social entrepreneurship in redevelopment strategies for regions in chronic economic distress.

Answer 138

A

Community Development Banks are federally insured and regulated depository institutions that have a primary mission of serving low income individuals and communities.

Community Development Credit Unions (CDCUs) are federally insured and usually state-regulated financial cooperatives that are principally owned and operated by low-income individuals and/ or residents of low-income areas. CDCUs provide members with a range of basic financial services, and many provide equipment and/ or expansion loans to member small businesses.

Community Development Loan Funds aggregate capital and contributions from banks, individual and corporate investors, public sources, and foundations to provide a mix of equity, bridge loans, and other financing for affordable housing, small business development, and community facilities.

Community Development Venture Capital Funds, like their loan fund counterparts, provide a mix of loan and equity capital to small and emerging businesses with the potential to generate significant benefits for low-income individuals and communities.

Answer 139

A

✓ Have a primary mission of community development
✓ Primarily serve an economically distressed “investment area” and/ or a “targeted population” that is low-income or lacks access to conventional capital
✓ Devote the bulk of their resources to financing activities
✓ Provide technical assistance serv1ces to borrowers/investees conjunction with their financing

✓ Maintain accountability to investment area residents or targeted population(s) by having local representatives on its governing board.

Answer 140

A

Eligibility criteria
Owners of potentially certified historic structures may apply for the tax credit. The IRS defines a certified historic structure as “any building and its structural components that is listed in the National Register of Historic Places or located in a registered historic district and certified by the Secretary of Interior as being of historic significance to the district”.

Project must undergo a three-part application process & is eligible if the structure:

Either listed, or potentially eligible for listing, on the National Register of Historic Places (buildings not listed are required to be listed as part of the final certification) or located in a registered historic district or a potentially eligible district (the building must be considered as contributing to the significance of the historic district). It is important to note that buildings must be registered as certified historic structures to be eligible for the credit. This is true even if the building was specifically listed as one of the contributing buildings in the registered historic district nomination.

Depreciable property redeveloped for income-producing purposes, including trade, business, or investment. It must not serve exclusively as the owner’s private residence.

Redevelopment-related activity
This tax credit is said to have spurred the reuse of numerous historic buildings from architecturally significant buildings in downtown districts to barns and historic house museums in more rural areas. Redevelopment activity that makes use of this tax credit must also meet the following criteria:

✓ Project must constitute a “substantial rehabilitation,” meaning that the rehabilitation costs must exceed the greater of the adjusted value of the building or $5,000, within a 24-month period.
✓ Rehabilitation must meet the standards established by the Secretary of the Interior.
✓ Recipient of the tax credit must either own the property or lease the property for a term of 27.5 years or more.
✓ Project must be certified by the National Park Service as having been rehabilitated according to the Secretary of the Interior’s Standards for Rehabilitation.

Analysis
Federal historic rehabilitation tax credits have served as an important financing option for certain sites. The buildings eligible for the credit are often among the more significant civic symbols in their communities, frequently occupying central locations in older downtown areas. As a result, they are often the first buildings considered for reuse and therefore public-sector financing is often easier to secure. Historic designation, a prerequisite for receiving this credit, can sometimes make the reuse process more bureaucratic.

Strengths of HRTC:

✓ Investors can garner significant savings from the tax credit.
✓ State Historic Preservation Officers provide useful service and guidance.
✓ Designation as an historic site can make a project more marketable and and area more appealing for investment.
✓ The physical improvements to the building help reverse blighting forces in the area.
✓ A tax credit functions as cash in that it is a dollar for dollar credit against federal tax liabilities.

Answer 141

A

Glossary Brownfields: real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant.

Answer 142

A

Step 1: Site Assessment & Resuse

Often use Phase I and II Environmental Assessments
Phase 1 is largely research

Step 2: Know about Your State (VCP) - {voluntary cleanup programs}

Step 3 - Identify Other Interested

Step 4: Can Brownfield be easily

Once the initial site assessment regulatory analysis has been completed, consider whether the project could be completed without including the brownfield. Can this project succeed by reconfiguring a site to exclude the contaminated area? Can a barrier such as a parking lot cap the contaminated part of the site? Is the contamination very limited, allowing for quick, low-cost cleanup?

Step 5: Prepare Prelimary

Step 6: Negotiate & Structure

Step 7 : Making the Deal to Purchase/Sell

Step 8: Cleanup

Step 9: Monitoring Contamination

Acronyms: ASTM - American Society for Testing & Materials

Risk-based corrective action (RBCA)

convenant no to sue (CNTS)

no further action (NFA)

Answer 143

A

✓ Remediation agreements.
These are contractual agreements between two or more parties that lay out specific obligations for each in term of assessment and cleanup. Liability is delegated among the parties for their activities.
✓ Representation and warranties.
In this section of the sales contract, the seller “represents” the condition of the property at the time of sale. These agreements will typically make the buyer responsible for any contamination after the sale is consummated.
✓ Indemnification.
This portion of a contract is an agreement that the seller will indemnify, or repay, the buyer for any damages associated with activities of the seller.
✓ Insurance.
This details the kind of environmental insurance that will be purchased, if any, and who will purchase it.

There are also several public assurances provided by federal and state governments:

✓ Letter of completion or no further action.
This document is usually issued by the state VCP or sometimes a certified private consultant. It states that no further action is required on the site regarding the remedial action just completed. This type of closure letter does not address any other contamination on the site.
✓ Comfort letters.
These letters are issued by environmental regulatory agencies to advise future owners that the government has no interest in taking action with respect to environmental issues at a particular site. Unfortunately, these letters do not guarantee “no enforcement,” but they can be helpful to buyers.
✓ Prospective purchaser agreements.
These are detailed agreements with the federal government that indemnify liability on Superfund and RCRA sites for purchasers. They are extremely useful agreements, but very time-consuming to reach.
✓ Indemnification.
Some federal agencies (including the Department of Energy and the Department of Defense) can also offer indemnifications.
✓ Covenant not to sue.
A strong form of closure document, binding all state and local agencies, promising that no further legal action or remediation is needed once the approved remediation plan for a site has been satisfactorily completed, subject to certain conditions. None of these provide assurances against third-party lawsuits.

Answer 144

A

Glossary- Absorption is the rate at which space is leased or sold.

Investopia: What Is the Absorption Rate?

The absorption rate in the real estate market is used to evaluate the rate at which available homes are sold in a specific market during a given time period. It is calculated by dividing the number of homes sold in the allotted time period by the total number of available homes. This equation can also be reversed to identify the amount of time it would take for the supply to be sold.

KEY TAKEAWAYS
The absorption rate is a term most commonly used in the real estate market.
Evaluating the rate at which available homes are sold in a specific market during a given time period is the purpose of the absorption rate.
Traditionally, an absorption rate above 20% has signaled a seller’s market and an absorption rate below 15% is an indicator of a buyer’s market.

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