Commercial Investment Real Estate Spring 2020 | Page 34

Three tasks can ensure your financing plan is on
point when starting a redevelopment project.
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T
he redevelopment of property is crucial
to a community’s renewal and economic
health. Naturally, commercial real estate
professionals are in business to make a profit,
but revitalizing a property and turning it into
a revenue-generating contribution to a neigh-
borhood is a financial benefit to more than just
the developer.
Before an underutilized property can
be reinvigorated, though, you need the funds
to acquire it. Acquisition can mean more than
just taking the title — it can refer to a lease,
lease-purchase, land lease, or multiple vehicles.
PROJECTING EXPENDITURES AND REVENUE
First things first, in an acquisition, how much
money will you need and where will it come
from? If your redevelopment project will be 100
percent equity, that’s fantastic. But rarely is it so
simple. If you need to include debt, know what
you can afford.
Look at this from the lender’s point of view
to better understand this part of the equation.
In redevelopment, the big payoff is often the last
step in the process. A lender will want to know
if this property can support the loan on its own
until that point. If not, what other property or in-
come do you have that can support your request
if a project eventually requires debt service? You
may have some performance bonds or additional
guarantees, which are the things that you’ll need
prepared for your potential lender.
For example, look at a common approach
to redevelopment where the market conditions
are not yet ready for you to take a product to
market. In this case, from an underwriting stand-
point, you have to be prepared for a long-term
hold. Every project includes the unexpected, but
it’s imperative you know where you’re headed. If
things change, you then know where the exits are
and how to get to them.
Redevelopment projects include acquisi-
tion costs, capital expenditures, and additional
expenses related to holding onto the property.
That is to say, there is substantial negative cash
flow during this stage of development. Dispo-
sition is payday, but the market will determine
when that occurs.
Income could be included in early stages,
including partial sales, if a portion of the initial
acquisition can be sold to finance later phases of
development. Could rental income be a consider-
ation? It can be depressing to stack up the costs
versus income as a project gets started, but this is
why projections are vital to your success.
Looking at the construction phase, as the
developer, who will be handling improvements?
Will the market conditions dictate that you land
COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE
bank it to a point where you can either develop
yourself or sell to a land packager? This is such a
unique stage in the redevelopment process, sim-
ply because it’s when you are game planning the
routes to various exits.
Looking at the overall timeline, at this
point, you haven’t closed on the property, but you
have spent money on feasibility studies and due
diligence. Once you decide to move ahead with a
project, that’s when the big-time dollars are spent
— either through a loan or equity contributions.
FINANCIAL MANAGEMENT AND REPORTING
All capital flows must be managed, funded, distrib-
uted, and reported in a timely way. In this redevel-
opment project, who are the various stakeholders
and what kind of reports are going to be required
by each one of them?
One commandment in real estate develop-
ment is to know thyself. In this regard, be aware
if you are capable of the necessary reporting with
any particular project. (Here’s where it’s vital you
are honest with yourself.) If not, arrange for the
proper personnel to collect the data, create the re-
ports, and distribute them in a timely way.
The general rule is that good real estate proj-
ects have good accounting. Bad real estate projects,
of course, have bad accounting. The developer
is the conductor of the orchestra, who blends the
horns, strings, and percussion at the right time in
the right combination. As a developer, this doesn’t
mean doing all the work — but you need to know
when and how certain things need to be done.
CAPITAL FORMATION AND ACCUMULATION
This step in the process involves digging a bit
deeper into the sources of capital and their uses.
For redevelopment projects especially, valua-
tion can be an obstacle because it requires local
knowledge. For larger developers, revitalization
projects can be unappealing because they require
an understanding of the area — and how the
project will succeed. Often, this leads to teaming
up with community lenders, who specialize in un-
derstanding the local market.
After estimating how the funds will be used,
you need go looking for the source. When I say the
source, I don’t mean necessarily going out and look-
ing for a particular lender; it’s more about project-
ing how much of your funds should be on the equity
side and how much should be on the debt side.
Once you know how much will fall on each
side of the ledger, you can open your little black
book and start contacting potential lenders. For
these conversations, you need to estimate the
construction costs, the potential loan terms, and
what kind of loan — construction versus perma-
nent lending — will best suit your project.
SPRING 2020
By Mark Van Ark, CCIM, SIOR