MODULE 10

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MODULE 10
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Basic Premises

• Risk/Return analysis is critical to establish
  project feasibility
• Financial and ownership structures affect
  participants risks and returns

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Analysis of Alternative Structures

• Importance of Structuring
• The Relative Attraction of Investment in Real
  Estate

4
The Basic Flow of Every Real Estate Transaction

• Capital Structure The Provision of funds
• Equity and Debt
• Cash Flow
• Return Of and On Capital from Operations
• Appreciation Upon Sale or Reversion
• Return on Risk Capital

5
Opportunities in Real Estate The Ultimate
Inefficient Market

• Risk/Return tradeoffs
• Successful projects rely on monopoly and its
  legal

6
Legal Forms of Organization

• Individual
• Co-ownership (3 types of tenancy)
• Group Ownership
• Syndication
• Partnerships and Joint Ventures
• Corporations
• C Corporation
• S Corporation
• LLC
• REITs

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Financial and Ownership Structures

• Real Estate
• Debt
• Equity
• Hybrid

• Corporation
• Bonds
• Stocks
• Preferred Stock

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Alternative Financial Structures

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

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Alternative Ownership Structures

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

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Participating Debt

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

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Convertible Debt

• Conversion of all or part of loan balance to
  equity at predetermined time or event

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Real Estate Investment Trusts (REITs)

• Equity REITs
• Mortgage REITs
• Hybrid REITs

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Equity(Part I)

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

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Equity(Part II)

• Partnerships
• General partnership
• Limited partnership

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Other Shared Risk/Reward Arrangements

• Presale Arrangements
• Participating Management Agreements

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Ownership

• Fee Simple
• Leasehold

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Valuing Fee and Leasehold Interests

• Leased fee interest PV of lease payments PV
  of residual (the reversion)
• Leasehold Interest PV of NOI (-) lease payments
• Leased fee interest leasehold interest value
  of the fee simple

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Lease Leasehold Financing(Part I)

• Ground Leases
• Developer (Lessee)
• Advantages
• Disadvantages
• Land Owner (Lessor)
• Advantages
• Disadvantages
• Subordination

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Lease Leasehold Financing (Part II)

• Participating Ground Leases
• Base Ground Rent
• Participation in Effective Gross Rents
• Participation in Cash Flow
• Participation in Refinance or Sale Proceeds

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Lease Leasehold Financing (Part III)

• Equity Leases (Landlords/Tenants)
• Landlord
• Advantages
• Disadvantages
• Tenants
• Advantages
• Disadvantages
• Critical provisions

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Lease Leasehold Financing (Part IV)

• Sales/Leasebacks
• The Synthetic Lease
• Master Leases

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Recap Financing the Project through its Life
Stages

• Land Acquisition
• Land Development
• Off-sites
• On-sites
• Vertical Construction
• Sales/Lease-up
• Holding (Income properties)
• Final Sale