nj future redevelopment forum 2014 eminent domain vallone
TRANSCRIPT
Redevelopment without Eminent Domain
Understanding the Capital Stack: Equity, Mezzanine, and Debt Financing
Creative Redevelopment Strategies Using:Structured Seller Financing & Joint
Ventures
George T. Vallone – MBA, CRE President
Hoboken Brownstone Company
305 Coles StreetJersey City, NJ 07310
201-792-3814 [email protected]
www.HBrownstone.com
An investment where the interest rate reflects zero risk, including default risk
United States Treasury Bonds
What is a “Risk Free” Investment?
U.S. Treasury Bill Interest Rates 1-28-2014
TERM RATE
1-Month 0.05%
3-Month 0.05%
6-Month 0.07%
1-Year 0.10%
10-Year 3.41%
20-Year 3.43%
1. Identify2. Quantify3. Reducing or Eliminate
Managing Risk
1. Financial Risk
2. Entitlement Risk3. Environmental Risk4. Construction Risk5. Market Risk
II. The Five Major Risk Categories
Capital Stack = 100% Project Cost
Layers of the Capital Stack; Top Layer = Most Risk - Sponsor Equity = 1% Investor Equity = 9% Mezzanine Debt = 15% Bottom Layer = Least Risk - Bank Debt = 75%
Total Capital Stack = 100%
A. Cost of Bank Loans
1. Commitment Fees 1-3%
2. Broker Fees 1-3%
3. Interest Rates – a. Prime Rate +
1-5% b. Libor Rate +
1-5% c. T-Bill Rate +
1-5%
B. Mezzanine loans 1. Commitment
fees 1-3% 2. Broker Fees 1-
3% 3. Interest Rates
10-20%
C. Investor Equity 1. Preferred ROE 8-
20% + 2. Profit Share 10-
90%
D. Sponsor Equity (After A+B+C Paid
in Full) 1. Preferred ROE 8-
20% + 2. Profit Share 90-
10%
0
10
20
30
40
50
60
70
80
75% Bank Loan
15% MezzanineLoan
9% InvestorEquity
1% SponsorEquity
Capital Stack & Pricing Model
0
10
20
30
40
50
60
70
80
75% Bank Loan
15% MezzanineLoan
9% InvestorEquity
1% SponsorEquity
There are 11 ways to acquire land in a redevelopment area without resorting to condemnation.
They all require a land owner to understand what the various risks and rewards of participating in the development of the
land at the various layers of the Capital Stack. The objective is for the land owner and the developer to work together to
create a successful outcome.
The developer’s job is to calibrate the land owners risk level with his desire to sell his land for more than the asking price.
1. A full Joint Venture1.A new LLC is formed the land is contributed as equity;
Seller’s land value is time adjusted (the “Sale Price”) increases with an annual appreciation rate that is added to the value of the land contribution
Seller receives a profit share percentage for the land contribution as equity
Seller receives a Preferred Return on his land contribution as equity
Developer has time to mitigate risk before the land is contributed
Developer has substantial Equity Partner with Land Owner (aka Seller) thus reducing the need for all equity capital
2. Creative Use of Mezz Financing:
Van Leer Chocolate Factory: A sale contract with formula pricing based on minimum zoning yield plus bonus payment for additional zoning over the minimum yield paid to Seller via Mezzanine financing
Seller Gets Asking Price & Invests Upside Potential From Zoning Bonus which he ‘loans’ to Developer as Mezz Layer
Seller’s Mezz Loan usually earns a high interest rate.
Seller’s Mezz Loan is subordinated to the construction loan thus increasing Developer’s Equity %
Unsecured Mezz rates are 16% to 20%+.
3. A sale contract with more typical Seller Mezzanine financing
Seller finances 100% of asking price with Mezz Loan
Mezz Loan is subordinated to the construction lender’s (and any other secured debt) on the property adding to Developer’s Equity %.
The Seller PMN takes the place of the Mezz layer in the capital stack.
Seller earns Unsecured Mezz rate from 16% to 20%+.
4. A sale contract with Seller secured Junior financing
Purchase Money Note and 2nd Mortgage is subordinated to the construction lender’s first lien on the property.
The PMM may take the place of the Mezz layer in the capital stack.
Secured Junior loans / Mezz rates are 12% to 16%.
5. A sale contract with Seller Senior secured 1st Mortgage financing.
A Seller Senior secured Purchase money note and 1st Mortgage not subordinated to the construction lender’s or any other lien on the property.
Essentially a bridge loan because it will have to be paid off before construction financing can be placed.
The developer may still need to place a Mezz layer in the capital stack.
A senior secured mortgage rate today would be in the 6% to 10% range.
6. Option to Purchase in Phases
Developer buys the right to purchase the property in sections (aka Phases) at a fixed price for a fixed term
Developer controls entire property and therefore can obtain entitlements and manage risks.
Seller has to pay taxes, insurance, cut the weeds, maintain the fence, pay for security, etc.
Developer can walk away only forfeiting option fee(s) actually paid plus cost of risk management.
Developer can gauge market after each phase and; walk away, adjust product offering, or renegotiate Sale Terms
7. Sale contract with a phased take down
Like an installment sale. Seller holds full title for the remaining,
un-purchased, parcels. Developer must obtain a sub-division
approval – (could trigger need for more variances).
Partial take down pricing can be time adjustment for each phase.
If Developer defaults, Seller has property with sub-division and entitlements increasing value therefore it can be sold off in pieces.
8. Option to purchase the entirety
Developer controls property and therefore can obtain entitlements and manage risks
Seller gets option fee payment (usually larger than deposit on contract) & Full Price if Developer Closes
Seller has to pay taxes, insurance, cut the weeds, the fence, security, etc.
Developer can walk away forfeiting (larger) option fee payment and entitlement costs.
9. Sale contract with extended time to close with contingencies at a fixed price.
Contract of Sale usually requires an at risk deposit larger than an option fee
Contract of Sale can have an annualized increase in price to cover inflation.
Developer controls property and has time to obtain entitlements
Seller has to pay taxes, insurance, cut the weeds, the fence
Developer can sometimes walk away forfeiting the larger deposit and entitlement costs but Seller has right to sue for specific performance
10. Sale contract with extended time to close with contingencies and a formula sale price
Better for a Seller than # 9 (fixed price contract). Therefore it can be a great tool to convince the Seller to agree to a long term contract with the Developer
The formula sale price is based on a fixed price per residential unit (or PSF for commercial space) times the number of units approved so neither party loses
11. Sale Contract with a “Responsible Party” who prefers to remediate itself prior to transfer of title.
Contract of Sale needs to deal with extent to which RP will have continuing liability, and limitation of liability of Buyer for environmental contamination not caused by Buyer.
Developer controls property for purposes of obtaining entitlements, obtaining land use approvals.
Buyer and Seller resolve who will pay ongoing costs of property such as taxes, insurance, maintenance, pending closing.
Developer can walk away if remediation is not undertaken as per Seller’s commitment (Buyer may sue for specific performance).
Price to be resolved based on how each of these issue is to be resolved, and in light of passage of time before closing.
12. All cash, no contingencies, quick close contract.
Used in instances where the value of the property is great, there are many bidders, and Seller is inflexible.
The best thing to do is to get Seller to accept a large non-refundable deposit, sign the contract immediately, and close as soon as title is clear.
That’s how we got the Maxwell House Deal