Comprehensive financial package

Fordham University Real Estate Accounting &Taxation

School of Continuing and Professional Studies Course #REAL 5004-01

TERM PROJECT

The purpose of the term project is to provide the student with the experience of preparing a

comprehensive financial package, detailing a potential real estate development. Project data

should be prepared in standard industry format, as is typically required by lenders and investors.

You have decided to buy land with a building shell (fire gutted). The property is located in

Queens, New York, and you plan to demolish the existing building and construct a new building.

Assume you may build a maximum of 98,000 sq. ft.

The development will consist of 90 rental apartments, 50 one-bedroom, 40 two-bedroom, and 2

retail stores.

Retail space comprises no more than 9% of gross rentable square feet.

The cost of the land and shell is $1,000,000 and upon signing the contract you must provide a

10% deposit. Construction loan will be obtained equal to 90% of total construction costs as

detailed on your Project Costs Schedule. Investors will provide the balance in form of equity.

The permanent loan amount will be calculated at 80% of the property’s value at the end of

construction. The method for valuing the property for permanent loan purposes will be 120% of

the total cost of the property (land and development costs) upon placement in service.

The timetable is as follows:

You have located in completed the underwriting of the property by September 2019.

You report to your equity investors in early October 2019. Soon thereafter you enter into a

contract to purchase the land. You close on the land purchase by November 15th. You arrange

for construction financing and a permanent loan take out commitment over the next 45 days and

you close with the construction lender on December 31, 2019. The permanent loan will close on

December 31, 2020, at the end of the construction.

2020 is construction year

2021 is lease-up year

2022 is stabilization year

2023-2025 are operational years

The property is sold on December 31, 2025 at 8% cap rate, with costs of sales at 5% of gross sale

price.

You have met with a few potential investors and creditors who are interested in this

development opportunity. They have requested that you provide them with the following

information:

A) A description of the project including a financial analysis, and the proposed deal terms offered to both the investors and the creditors. Be specific as to how much initial equity

and financing is required and be sure equity is available to fund the acquisition of land,

securing a permanent loan commitment (all permanent loan costs should be part of

equity), construction financing and predevelopment costs. Include a schedule of investor

returns and rates of return.

B) A detailed project budget. In spreadsheet format, please detail all costs including land acquisition price and associated costs, pre-development costs, construction costs (hard

and soft), construction period interest (carry), construction period taxes, construction loan

fees. Please provide a time frame for the development. Show all costs in total and per

square foot.

C) A pro forma income and expense analysis for the holding period (after substantial completion). Your analysis should be both pre-tax and after-tax.

D) A discussion of your choice of entity, its tax advantages to investors.

E) The returns (pre-tax and after-tax) that the developer and investors can expect through the end of the deal. Specifically, Cash-On Cash, IRR and NPV – to be detailed within your

spreadsheet work. Use a discount rate of 12% to calculate NPV.

F) Please list all assumptions on a proforma spread sheet and construction draw schedule.

The following assumptions should be incorporated into your project:

1) Closing costs connected with the land purchase will be 6% of the purchase price. Land closing will be prior to the closing of the construction loan. Remember that the total cost

of land and capitalized costs represents part of equity contributions and should be

included in your budget.

2) Total hard construction costs will be $150 per buildable foot (excluding tenant improvements – retail – which will be done by commercial tenants.) $350,000 will be

additional demolition costs (and included in Land costs) Soft costs (not including

construction interest) are calculated at 10% of hard costs. The pre-development costs

which are in addition to all other sq. ft. costs will include:

Engineer, design, architects, fees and costs $500,000

NYC plumbing, water, steam connection permits $ 75,000

Land, soil tests, environmental testing $ 25,000

Total $600,000

Construction period interest must be calculated on a separate draw schedule and shown

as part of the budget.

.

Please use an annual interest rate of 10% for the construction loan. Allow 12 months

total for construction through substantial completion of the project. Assume

construction costs will be paid 50% ratably over the first 4 months and 50% ratably over

the next 7 months, with 10% of construction mortgage retained and paid on Final Draw in

the 12th month. Note: Although construction interest is included in Project Costs, in order

to avoid a “circular reference “calculate the interest on Project Costs without interest and

then after calculation insert the interest. (Will discuss further in class)

3) You may assume that the permanent loan will take out the construction loan at the end of the 12-month period. For the permanent loan, please use the following information:

Rate 5.5% Term 25 Years, Amortized monthly over 25 years.

4) You may assume a strong rental market, with preleasing activity of residential and retail space. Please present a separate schedule for lease-up year, detailing by month, phase-in

of units, show # of units occupied and prorate rents accordingly. By the end of the first

year (lease up year) all units should be occupied. Incorporate lease-up year figures into

your proforma income and expense analysis for the entire holding period.

5) Rent-up charges consist primarily of leasing commissions and are estimated at 5% of effective gross income in 2021 the lease-up year. Stabilization will be in year 2022

Please note that leasing commissions are paid out when due and are treated differently

for accounting and tax purposes. You may assume that all residential leases are for 1-

year periods, retail leases will be for 6-years. Residential leases increase by 3% at the

end of lease term. Leasing Commission Costs on renewal are 2% of effective gross

income.

6) Fees connected with the permanent mortgage commitment letter received at the beginning of the project will include: a charge for issuing the commitment letter of 1%

of total permanent mortgage; a legal fee of $60,000 and other costs (credit search, title

exam, etc.) of $30,000. Borrower’s costs including legal fees are $70,000.

7) Fees connected with the construction loan will be $40,000 for points; $20,000 for lender’s legal fees; $10,000 for an engineering review and $15,000 for borrower’s legal

fees. All costs of obtaining the construction loan should be capitalized and included in

your Project Costs Schedule.

8) Permanent Loan closing fees will include: loan points at 1% of permanent loan; borrower’s legal fees of $30,000; lender’s legal fees of $20,000; and other fees to lender

(such as inspecting architect, appraisal, engineering, audit, lender’s package fee, etc.) of

$48,000. All costs of obtaining the Permanent Loan are to be amortized over the term of

the mortgage (including costs in Paragraph #6).

9) Current market rates for rentals are:

One-bedroom $3000 per month **See note on Property Tax

Two-bedroom $5000 per month page re: affordable rent option

Commercial Rents are $30,000 total per month in the aggregate for the retail stores.

10) Operating expenses, excluding property taxes, will be 30% of effective gross income

during the lease-up year and 35% in the stabilized year. All expenses, excluding real

estate taxes, escalate at 2% per annum, after stabilized year.

11) Real estate taxes on land and building are initially $50,000 per year. They will remain the

same during construction, and the lease-up year. Thereafter you should calculate yearly

real estate taxes based upon available NYC formulas, see below.

12) Lenders require a 1% vacancy and credit loss on retail space, and 2% on residential, and

should be incorporated into the pro-forma..

13) If your chosen entity will involve taxation of the individual, it will be at the maximum

applicable rate of 37%, plus 23.8% long-term capital gain and 25% depreciation

recapture.

All givens and assumptions must be stated in a separate “Assumptions” section.

In addition to the specific items to be presented to the investors as noted above, please include

the following schedules in your analysis: (1) amortization schedule for mortgage balance, (2)

reversion year sale and the gain (loss) on the investment, (3) depreciation expense schedules.

Please be specific about all applicable taxes and rates; please show derivation calculations of all

key taxes upon sale (end of holding period).

With the exception of entity discussion, your work must be done on a computerized

spreadsheet. Any project submitted in a canned format will not be accepted.

Each student must hand in his/her own project. You may, of course, confer with your

classmates. However, your completed project must be based solely on your own work. The

Fordham University policy on plagiarism will be strictly enforced. This project requires skills

and knowledge that will be fundamental to your success in the balance of this Masters Degree

Program.

REAL ESTATE PROPERTY TAX NOTES:

Calculation for STABILIZED YEAR real estate taxes (as of January 1st) on the land and building

should be based on NYC formulas:

ASSESSED VALUATION = Land &Associated Costs + (Total Construction Costs x

45%)

REAL PROPERTY TAX = (Assessed Valuation ) x 10.514% (Tax Rate)

NOTE:

The Development Project has qualified under a local law granting partial Real Estate Tax

Exemption for newly constructed multiple dwellings. In order to qualify the Developer can

reserve 10% of the apartments for low income qualifying tenants who will pay 20% of the

market rent.

The Real Estate Tax Exemption is as follows:

Year Following Percent of

Lease year

Exemption

1 & 2 100%

3 & 4 70%

5 & 6 50%

7 & 8 40%

9 & 10 20%