Pencil Out Model

Answering three questions:

1. How much cash do I have?
2. How much of a mortgage can I obtain?
3. What's it going to be worth in the market place?

Inputs:

• Unit Type
• Parcel Size
  
• Density (comes from current or perspective zoning ordinance)
• Parking spaces per Unit (zoning ordinance will tell you--generally one to two per unit)
• Average Unit Size: (go online and see the exchanges online Institute of Real Estate Management, Buildings Owners and Managers Association). (2 bedroom 850-1300, 1 bedroom 600-800, (in residential world it is units per acre, in commercial FAR)
• Common Area Percentage: 5-15%
  

Development Cost Structure

• Land Cost/SQFT
• Construction Cost/SQFT (find in exchange reports or in a cost estimating manual RS Meads and be sure to look at the local cost multiplier at the back of the book)
• http://www.meanscostworks.com/
  
• Parking Cost/Space: 2,000 for gravel, 5,000/normal outdoor parking space; structured--20-25,000. The zoning of the site, and the market study will determine what you deliver. 400-450 sqft/space.
  
• Soft Costs as % of Construction Costs: payments to architects, engineers, contingencies/services that produce the project. This is a percentage that is typically 25-35% of hard costs.

Financing

• Required Debt-Coverage Ratio:
• annual interest rate
• 30 year fixed rate
• underwrite it with debt service coverage ratio which is equal to [(rents-expenses)/yearly debt service]--> the bank will make you a loan such that the yearly debt service is 80% or less of your rents-expenses = debt service coverage ratio
• you want to barrow as much as possible
• lenders competing for your business
• lenders want the most coverage they can get
  
• DSC is not negotiable (you have to look around with other lenders)
• therefore, DSC's come from lenders
  
• Interest Rate (%):
• Term (years):
• Cap Rate: Rate at which the real estate market converts current income into future value.
  
• Appraisers know this shit, or you can go online, but make sure the site knows whats up.
• A building's cap rate is (NOI/transaction price)
• as a developer you want small cap rates
• correlates closely with interest rates
  

Operating Cost Structure

• Stabilized Vacancy Rate
• frictional vacancy rate : 1-2%
• systemic vacancy rate: 0-10%
• find these online
• appraisers
• brokerage agencies
• Prudential Fox Roach for Philly
  
• Expense Ratio
• Rents-Expenses
• 25-40% of your rents typically

Rent

• market price
• ask the interweb for answers

**it should take a day or two to get this info

• formula's are on hand out on blackboard
• Assume value = Cost
• SOP and divide it by cap rate to get price (5.7 million in his example)
  

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