The Development Process by fionan

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									The Development Process
The housing development process can be separated into five phases with specific tasks that should be performed under each of the phases. It is not a linear process and many of the tasks in one phase will begin while all of the tasks in the previous phase have not yet been completed. However there are some tasks that cannot be completed until tasks in the previous phase have been completed. Below is a summary of each phase of the development process and a side by side comparison of the tasks in each phase for both rental and “for sale” housing. You may guess rental housing is more complex a process than that of “for sale” housing. The process of housing for sale has 55 tasks while that for rental housing has 62 tasks. One of the aspects of rental housing that makes it more complex is the financing needed and how that financing is structured. The Concept Phase The concept phase is critically important; mistakes made in this phase can often be costly down the road. As you can see from the tasks in this phase homeownership is similar to rental housing development, with the major difference being obtaining large amounts of equity as part of the capital structure in the financing of rental housing. Equity is a much larger financing component in rental housing and plays a larger role in the project’s overall feasibility than it does in for sale housing. We use the term “for sale” housing to accurately describe what happens to the housing after it is built; it is sold usually to a person who will occupy the home but sometimes to someone who may rent the home to a third party, however even in that case the capital structure is usually the same as homeownership; the buyer places a down payment of usually less than 10 percent of the value of the house and obtains debt financing for the remaining purchase price. You should also notice one of the most important tasks in the concept phase is identifying sources of financing and creating a conceptualized capital structure for the project. In this writer’s opinion, this task should receive the bulk of attention of all the tasks in this phase of the development process. Without financing you never really advance to the other phases of development. Without a plan and structure for how the project will be financed both short-term, mid-term, and long-term, it will be very difficult to raise the front-end pre-development capital necessary to develop your project. Project Feasibility Phase In this phase of the development process we test and determine whether the project is feasible from an economic point of view. What this means is whether or not we can finance the project in a way that generate rents or sale prices affordable by our target market. This is also the phase where the development team is solidified. The tasks in this phase are very similar in both the “for sale” and rental housing types. The equity component is essential in rental housing, and efforts to secure this equity should be sought early in the process. The largest source of this equity is the Low Income Housing Tax Credit (LIHTC) program which in most states is allocated at the beginning of each year; therefore, the project development timeline will be dictated to some degree by the timing of the LIHTC allocation rounds.

During this phase of the process a financial forecast, also known as a project proforma, should be prepared as a tool to present the proposed financing structure to lenders, equity providers, and subsidy providers. This work should not be done in a vacuum, but based on continual information from all of the aforementioned financing sources. Another important difference between rental and for sale housing is tenant management issues. In many rental properties there are non-housing services provided to the tenants, especially in the case where the housing is developed for a specific special-needs group, such as the physically handicapped, tenants with serious chronic illness, tenants with mental illness, or seniors. Deal Making In this phase the skill of negotiation plays a major role in the development process. Once you have structured the financing of your project in the Project Feasibility phase of the process, you now must negotiate financing and subsidy terms that match what you have forecast in your proforma. Many of these programs are complex, not to mention the management of the relationships you must establish with all of the various agencies both public and private that will be involved in the development of your project. This is also the phase were you finalize your architectural work and close on your construction financing. In rental housing this is also where you finalize your tenant service plan. All zoning approvals must be finalized in this phase. Now you can begin to identify and hire the contractor who will actually build the project. Your appraisals are also finalized during this phase. Tight procedure for monthly disbursement of construction loan and other proceeds are also established during this phase. Construction While the primary activity during this phase is the management of the physical construction, the management of the construction period cash flow is also very important. The Construction phase and the project sales/operation phases can often overlap, thus creating both construction related cash flows as well as sales income, or in the case of rental property interim rental income. Project Sales/Operation During this phase the selling of your houses or the leasing of you units goes into full swing. In the homeowner scenario you would arrange for post-occupancy counseling, which in this writer’s opinion is as important as pre-purchase counseling. In the rental scenario you should manage the lease-up process carefully, especially in a project that uses LIHTC. HOME, CDBG, or tax exempt bond financing as renting to non-income eligible tenants may have dire economic consequences for the investors and owners of your project. It’s during this phase in the rental scenario you close on the equity portion of your financing and a bulk of that equity is paid into the partnership that will own the project.


								
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