SINGLE FAMILY DEVELOPMENT
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HOW IS SINGLE FAMILY THE SAME AS MULTIFAMILY?
• They are residential properties • Market Demand is influenced by
– Population growth (job growth) – Income Levels of the families
• Loan Budgets include
– Land cost – Construction Costs • Material • Labor – Financing Costs – Other Soft Costs
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HOW IS SINGLE FAMILY DIFFERENT FROM MULTIFAMILY?
Multifamily
• How much will the units RENT for? What size term loan(s) can be supported by this rental income? The developer generally earns his/her developer fees during construction and/or later as “earn-out” from property cash flow
Single family
• What will the SALE prices be?
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What size mortgage can each home buyer qualify for based on his/her income? The developer earns his/her developer fee from the profit margin on the sales of the individual units
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SINGLE FAMILY versus MULTIFAMILY
continued
Multifamily
• The entire interim financing is generally repaid at one point in time The interim loan’s source of repayment is a commercial term loan
Single family
• The interim financing is usually paid incrementally as each home sale closes The interim loan’s sources of repayment will be the consumer mortgage loans made to the home buyers The term lender’s sources of repayment is the consumer’s income
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The term lender’s source of repayment is the NOI on the property
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SINGLE FAMILY versus MULTIFAMILY
continued
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Multifamily
• Outside of developer fees on projects under construction, a developer’s portfolio can be a source of “recurring” cash flow as shown below
Single-family
The Single Family developer’s cash flow is generally not considered recurring in this same sense; homes must continue to be built and sold profitably in order for the developer to continue generating cash flow Equation Sales Price “Costs of Goods Sold” = Gross Profit = Contribution Profit = Net Profit
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Equation Rent = EGI = NOI = Cash Flow after debt service
“PROFIT” versus “MARGIN”
“PROFIT” is a NUMBER $ whereas “MARGIN” is a PERCENTAGE %
(GROSS PROFIT) / (SALES REVENUE) = (GROSS MARGIN)
(CONTRIBUTION PROFIT) / (SALES REVENUE) = (CONTRIBUTION MARGIN)
(NET PROFIT) / (SALES REVENUE) = (NET MARGIN)
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MISSING VARIABLES - THE BALANCE SHEET
DEBT and INVENTORY
• EQUITY $ • EQUITY % • LOAN TO COST RATIO • VALUE = IS OFTEN THE LESSER OF APPRAISED VALUE OR SALES PRICE • LOAN TO VALUE RATIO
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LOANS
“PRORATA LOAN AMOUNT”
LOAN AMOUNT / # UNITS OF INVENTORY = “PRORATA" LOAN AMOUNT
(also called “PAR" VALUE)
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CONTINUED
“RELEASE MULTIPLE and RELEASE PRICE”
(Release Price is sometimes referred to as Release “Provision”)
LOANS
The RELEASE MULTIPLE is the FACTOR by which you multiply the PRORATA loan amount to derive the RELEASE PRICE
The RELEASE PRICE is the $ amount required by the lender to release its lien on the subject collateral.
Often a Release Price may be defined as the greatest of a number of different amounts, such as: • Net proceeds • Release multiple X prorata loan amount • Specific amount designated
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WHAT IF THERE IS A RANGE OF DIFFERENT INDIVIDUAL UNITS PRICES?
LIST PRICE OF EACH UNIT / AGGREGATE LIST PRICE OF ALL UNITS = PERCENTAGE THAT EACH UNIT CONTRIBUTES TO THE AGGREGATE VALUE
EACH UNIT'S PERCENTAGE X AGGREGATE LOAN AMOUNT = THAT UNIT'S "PRORATA" LOAN AMOUNT
EACH UNIT'S PRORATA LOAN AMOUNT X = RELEASE PRICE OF THAT UNIT
RELEASE MULTIPLE
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INVENTORY
(UNIT INVENTORY VOLUME) / (CLOSINGS VOLUME (during “x” period)) X ("x" period) = MONTHS SUPPLY OF HOMES
(LOT INVENTORY VOLUME) / (STARTS VOLUME (during “x” period)) X ("x" period) = MONTHS SUPPLY OF LOTS
(ANNUAL # OR $ CLOSINGS) / (AVERAGE # OR AVG. $ COMMITTED) = INVENTORY TURNOVER
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WHY MIGHT INVENTORY TURNOVER BE IMPORTANT?
RELATIONSHIP BETWEEN TURNOVER AND BANK YIELD ON FEE INCOME LINE AMOUNT COMMITTED DURING THE YEAR INVENTORY TURNOVER FEE INCOME @ 1% PER $ COMMITTED $5,000,000 AVERAGE OUTSTANDINGS
(if line remains “full” throughout the entire period and about 50% of committed will be outstanding at any given time)
$10,000,000 $20,000,000 2X $200,000
YIELD ON OUTSTANDINGS is $200,000 / $5,000,000
4%
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LOAN STRUCTURING
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SAMPLE LOAN FOR A HOUSE
BUDGET CATEGORIES LOT HARD COSTS FINANCING COSTS OTHER SOFT COSTS TOTAL TOTAL $20,000 $80,000 $15,000 $5,000 $120,000 LOAN $20,000 $80,000 $15,000 $5,000 $120,000 EQUITY $0 $0 $0 $0 $0
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SAMPLE PROFIT SUMMARY FROM THE SALE OF THIS HOUSE
Sales Price = Gross Profit = Contribution Profit = Net Profit $ 150,000 <$ 120,000> $ 30,000 <$ 7,500> = $ 22,500 <$ 10,000> = $ 12,500
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SAMPLE LOAN FOR A PANEL OF 10 HOUSES
BUDGET CATEGORIES LOTS HARD COSTS FINANCING COSTS OTHER SOFT COSTS TOTAL TOTAL $200,000 $800,000 $150,000 $50,000 $1,200,000 LOAN $200,000 $800,000 $150,000 $50,000 $1,200,000 EQUITY $0 $0 $0 $0 $0
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HOW TO MANAGE CAPACITY
• Use an aggregate loan sizing with defined “start” limitations
EXAMPLE – $2,000,000 loan to build 20 houses of $100,000 each – Have a clause in the Loan Agreement which the limits the maximum number of houses allowed at any given time to 10 units
– Use a “revolver”
EXAMPLE – $1,000,000 revolver – Each loan for each house will equal $100,000 – Therefore, you can have 10 houses under construction at any given time
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THE RISK OF LOT INVENTORY
Lot “takedown” schedule VERSUS Using a line of credit (or paying cash out of pocket) to hold lot inventory
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SAMPLE LOAN TO DEVELOP 50 LOTS AND TO BUILD 50 HOUSES
BUDGET CATEGORIES LAND (Acquisition and
Development or A&D)
TOTAL $1,000,000 $4,000,000 $ 750,000 $ 250,000 $6,000,000
LOAN $600,000 $4,000,000 $ 750,000 $ 250,000 $5,600,000
EQUITY $400,000 $0 $0 $0 $400,000
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HARD COSTS FINANCING COSTS OTHER SOFT COSTS TOTAL
STRUCTURING AS 1 LOAN OR 2
VERTICAL Portion Release Multiple = 1.00x Release Price = $100,000 A&D Portion Release multiple = 1.25x Release Price per lot = $600,000 / 50 x 1.25 = $15,000 TOTAL Release Price = $115,000
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PROFITABILITY versus CASH FLOW
PER UNIT PROFIT Sale Price Cost Gross Profit Sales Costs Contribution Profit $150,000
<$120,000>
PER UNIT CASH FLOW Sale Price $150,000 Loan Paydown <$115,000> Gross Cash Flow per unit $ 35,000 Sales Costs Net Cash Flow per unit
Is this true for all 50 houses? When does the A&D loan get repaid? What is the reciprocal of the Release Multiple?
$ 30,000 <$ 7,500> $ 22,500
<$ 7,500> $ 27,500
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WHAT IS THE CASH FLOW FOR EACH HOUSE AFTER THE A&D LOAN GETS REPAID?
Sale Price Loan Paydown Gross Cash Flow per unit Sales Costs Net Cash Flow per unit $ 150,000 <$100,000> $ 50,000 <$ 7,500> $ 42,500
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SO, WHAT IS THE CASH FLOW FOR ALL 50 HOUSES?
$27,500 per unit X + $42,500 per unit x = TOTAL 40 units 10 units = = = $1,100,000 $ 425,000 $1,525,000
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WHAT IS THE AGGREGATE PROFIT ON ALL 50 HOUSES?
$150,000 x <$120,000> x $ 30,000 x <$ 7,500> $ 22,500 x x 50 50 50 50 50 $ 7,500,000 $ 6,000,000 $ 1,500,000 $ 375,000 $ 1,125,000
Why doesn’t this number equal the Cash Flow number we derived on the previous page?
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WHAT IS THE DIFFERENCE?
The “Cash Flow” Page The “Profit” Page The Difference = = = $1,125,000 $1,525,000 $ 400,000
Does this number look familiar? What do you think it is?
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SO, THE NET CASH FLOW LOOKS LIKE THIS
< $ 400,000> + $1,100,000 + $ 425,000 = $1,125,000 Equity at A&D loan closing $27,500 per house for 40 houses $42,500 per house for 10 houses Aggregate Cash Flow
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MARKET versus AFFORDABLE
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MARKET SINGLE FAMILY
TARGET MARKET LOCATION
VARIOUS PRICE RANGES
AFFORDABLE SINGLE FAMILY
AFFORDABLE HOUSING
PRIMARILY NEW SUBURBAN SUBDIVISIONS
INFILL INCLUDED
TYPICAL DEAL STRUCTURE MARKET ANALYSIS
REVOLVING FACILITY
"STAND-ALONE" LOANS FOR SPECIFIC PROJECTS MICRO • DEMAND MAY NOT BE NECESSARILY CORRELATE WITH OVERALL INMIGRATION • TRANSITIONING FROM RENTAL HOUSING PROJECTED PROFITABILITY AND CASHFLOW OF SPECIFIC PROJECT DEVELOPMENTS
MACRO • POPULATION AND JOB GROWTH • OVERALL MARKET CLOSINGS VOLUME VS- STARTS VOLUME
DEAL ANALYSIS
OVERALL COMPANY PROFITABILITY AND FINANCIAL CAPACITY • BREAK-EVEN • BACKLOG • INVENTORY COMPOSITION MANY SUBDIVISIONS WILL HAVE MULIPLE BUILDERS CONVENTIONAL MORTGAGE FINANCING
SUBDIVISIONS
GENERALLY ONE BUILDER CONTROLLING THE PROJECT WILL OFTEN INCLUDE 2ND LIENS ND/OR DOWNPAYMENT ASSISTANCE
SOURCE OF REPAYMENT
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HOME SALES
HOW CAN YOU MAKE THE PRICE OF “AFFORDABLY” PRICED SINGLE FAMILY HOUSES LESS EXPENSIVE THAN THE PRICE OF “MARKET” PRICED SINGLE FAMILY HOUSES
1. LOWER COSTS TO BUILD • GRANTS OF LAND • CONTRIBUTED LABOR • LOWER INTERIM CONSTUCTION FINANCING COSTS LOWER INTEREST RATES FOR THE HOMEOWNER’S MORTGAGES • BLENDED RATES DUE TO COMBINING SEVRAL SOURCES • OTHER INTEREST RATE “BUYDOWNS”
2.
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RECONCILING HOME PRICES MORTGAGE QUALIFICATION AND AMI THRESHOLDS
AMI 80% of AMI X 80% $80,000 $76,000 $72,000 $68,000 $64,000 $60,000 $56,000 $52,000 $48,000 $44,000 $40,000 $36,000 $32,000 $28,000 $24,000 $20,000 $16,000 $12,000 $8,000 $4,000 Monthly X 12 $6,667 $6,333 $6,000 $5,667 $5,333 $5,000 $4,667 $4,333 $4,000 $3,667 $3,333 $3,000 $2,667 $2,333 $2,000 $1,667 $1,333 $1,000 $667 $333 Max PITI / 36% $2,400 $2,280 $2,160 $2,040 $1,920 $1,800 $1,680 $1,560 $1,440 $1,320 $1,200 $1,080 $960 $840 $720 $600 $480 $360 $240 $120 Max P&I / 75% $1,800 $1,710 $1,620 $1,530 $1,440 $1,350 $1,260 $1,170 $1,080 $990 $900 $810 $720 $630 $540 $450 $360 $270 $180 $90 Max Mtg 30-year X 8.000% $245,310 $233,045 $220,779 $208,514 $196,248 $183,983 $171,717 $159,452 $147,186 $134,921 $122,655 $110,390 $98,124 $85,859 $73,593 $61,328 $49,062 $36,797 $24,531 $12,266 House Price X 95% $258,221 $245,310 $232,399 $219,488 $206,577 $193,666 $180,755 $167,844 $154,933 $142,022 $129,111 $116,200 $103,289 $90,377 $77,466 $64,555 $51,644 $38,733 $25,822 $12,911
$100,000 $95,000 $90,000 $85,000 $80,000 $75,000 $70,000 $65,000 $60,000 $55,000 $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000
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RECONCILING HOME PRICES, MORTGAGE QUALIFICATION AND AMI THRESHOLDS
CONTINUED
Example of the effect of a lower blended interest rate for the term debt
1st Lien Loan Amount
$38,500
10.000% $337.87 $125 $462.87 35% 40% $15,870 $13,886
PERMANENT LOAN AMOUNT PER UNIT
MINIMUM INCOME REQUIRED MINIMUM INCOME REQUIRED
1st Lien P&I Est. T&I Est. Total PITI At At
Subordinate Lien
$12,500
2.000% $46.20
PERMANENT LOAN AMOUNT PER UNIT
Subordinate Liens P&I 1st Lien 1st Lien P&I Est. T&I Est. Total PITI
$26,000
10.000% $228.17 $125 $399.37 35% 40% $13,693 $11,981
MINIMUM INCOME REQUIRED MINIMUM INCOME REQUIRED
At At
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CASE STUDY - STEP 1 - Facts
Ima Builder was recently contacted by a real estate broker who was representing a local land developer who owned a parcel of land and wanted to begin developing it into single family lots. Because the land developer was not a home builder, her intent was to sell the developed lots to home builders in the area. among other requirements, the lot developer's interim lender was the lots to be under contract to evidence the market demand for the lots. The parcel of land is five acres and the land is zoned and deed restricted for single family use at a density of 10 lots per acre. The developer had acquired the land for a very low price a number of years earlier, so believes that she can develop the lots at a cost such that she will be able to sell them for $20,000 each in order to clear a nice profit. Ima Builder is very risk averse, so she is not interested in owning an uncomfortably large inventory of lots. Additionally, Ima is already actively building in several other communities and does not want to risk becoming "stretched too thin". Therefore, she signs a contract with the developer which allows her to take down individual lots over a period of two year. Ima's plan is to enter into contracts with potential homebuyers and to take down the lots to begin construction of the houses only after the homebuyers have been pre-qualified for their mortgages. When she sell houses to homebuyers, she typically pays a broker's commission and the cost of a title policy, the total of which is 5% of sale price. Ima further feels that she has the capacity to have no more than 10 houses under construction at any given time. It only takes her about 120 days to complete a house once she begins construction, so she feels that she should be able to take down the lots and build and sell the houses well within the two period on her lot purchase contract. Ima is prudent and is always thinking ahead, so she approaches an interim lender to arrange for her interim construction financing before the lots are ready to take down. She has done her market research and has studied the building restrictions closely and has concluded that she will be able to build houses that she sell for $100,000. She thinks that her cost to build each will be $60,000, excluding the cost of taking down the lots. She has a good track record and maintains a good relationship with her bankers, so she is sure that she will be able to borrow 100% of her costs. 32
CASE STUDY - STEP 1 - Questions
1. What size Revolving Loan will she need from her interim construction lender? 2. How much will she plan to borrow in the aggregate under that Revolving Loan? 3. What will the loan to cost ratio be for each house? 4. What will the loan to value ratio be for each house? 5. What will her gross profit be for each house? 6. What about in the aggregate? 7. What will her gross profit margin be for each house? 8. What about in the aggregate? 9. What will her contribution profit be for each house? 10. What about in the aggregate? 11. What will her contribution profit margin be for each house? 12. What about in the aggregate?
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CASE STUDY - STEP 2 - Facts
Shortly after Ms. Developer signed a forward purchase contract to sell the tobe-developed lots to Ima Builder, she has decided that she would prefer to sell the raw land parcel instead of developing the lots. Because Ima Builder has land development experience and is capable of developing the lots herself, she negotiates a purchase contract with the Ms. Developer to close on the land immediately and to develop the lots herself. Although she is risk averse and wants to avoid getting "stretched too thin", she feel that this is a manageable development and if she can get the land for a good enough price, she should be able to make a larger profit in the end. In her usual diligent manner, she does her homework thoroughly and decides that she can buy the land and develop the lost for a total cost of $750,000. She will need to get a loan for the development of the land as well as for the home building activity discussed in Step 1. She is elated when she finds that she will be able to borrow 100% of the cost, although the lender will require an accelerated release price of 125% on the lots. The lender will only require a 100% prorata release price for the homes. Please use all of the same assumptions that were described in Step 1 to continue.
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CASE STUDY - STEP 2 - Questions
1. What size loan will Ima developer be seeking now? 2. What is the maximum amount that will be committed under the loan? 3. What will her gross profit be for each house? 4. What will her gross profit margin be for each house? 5. What will her contribution profit be for each house? 6. What will her contribution profit margin be for each house?
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CASE STUDY - STEP 3 - Facts
Now assume that Ima's interim lender was able to lend 100% of the cost of building the houses, but required a $250,000 equity contribution on the lot development loan. Assume that Ima is willing and able to do so.
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CASE STUDY - STEP 3 - Questions
1. What size loan will Ima developer be seeking now? 2. What is the maximum amount that will be committed under the loan? 3. What will her gross profit be for each house? 4. What will her gross profit margin be for each house? 5. What will her contribution profit be for each house? 6. What will her contribution profit margin be for each house?
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