Hi, my name is Anthony Webster. I'm Chair of NYU's Bachelor of Science in Real Estate Program at its School of Professional Studies. I'm also president of West End Advisors which is a financial consulting firm that provides consulting services to real estate firms and high net worth individuals. Okay, so enough about me, let's get started with our real estate finance modules. We're going to be starting with financing of real estate development projects. And I'd like to start with a little bit of review, make sure we're all on the same page. So I want to make sure that we all understand where we are in the overall life cycle of real estate. What I do, and what we do at my firm, is we parse real estate projects overall into four main areas. The design area, build, operate or manage, and recycle. And design and build usually come together to be called development, okay? And that's what we're going to be focusing on, is design and build. A little bit on recycling, because I find with my students sometimes that's not so clear to them. What do we mean by recycling? Well in general, when a project is at the end of its useful life, it's usually not optimal just to completely tear it down, demolish it and start from scratch. Sometimes it is, but sometimes you can do better. A good example of doing better is seen in Manhattan's High Line. The Manhattan High Line is an elevated railway which you can see at the top image here, was derelict for many years after World War II. And actually as a teenager and a young man I would climb up there with other near dwells and run around and look at things and have fun. But it was not open to the public, it was dangerous, etc. That has since been Transformed by Diller Scofidio Architects and money from the city and a lot of other people into what has become arguably Manhattan's most successful park. Definitely if you're in Manhattan and have a chance I would recommend visiting it. It gives you an extraordinary interesting window into lower Manhattan from a perspective that is unique and completely unavailable in most other cities. Okay, so enough on that. Let's get one more thing out of the way here. I'd like to tell you about a couple of useful materials for all of my modules. These are not required but they are recommended. The first one is completely self-serving and gratuitous, and it is my own Introduction to Business Finance Package, published by Applied Finance, LLC. It is available at appliedfinance.fliprocket.com. And the second thing which is, I think very helpful is Introduction to Real Estate Finance by Edward Glickman at NYU. Okay, so if you're interested you can pick up those things either in online versions, or for a Glickman's text also in a paper print version. So let's get moving into financing of real estate development. We're going to do this from the perspective of developers, which I've found is extremely helpful for construction management professionals. So, who's doing development? Who are you going to be working with as a construction manager? Individuals, and small offices, these folks typically design and build one project at a time. They might be trained as architects, engineers, real estate developers, or may be completely untrained. Moving to a slightly larger scale, there are some real estate investment trusts that specialize largely in the design and build of real estate projects of various types. Other firms design and build a lot of properties to add to their portfolio of properties under management. And then next step, and finally we have large development corporations. Such as, in particular ones I'm familiar with, Bluegreen, and Fluor, and Bechtel, and these folks, some of them do construction management as well. They have a lot of properties under development at a given time, including everything from multi-family, to office, to industrial, to infrastructure projects. Okay. So from a financial perspective, what are we interested in vis-a-vis design, build? Ultimately, our objective, again, speaking as a developer or a sponsor, a sponsor in real estate finance is synonym for a developer. We ultimately want to estimate the target value of the project for all our stakeholders. And in finance, there are essentially always only two stakeholders. Owners, who are going to be in this case developers or sponsors, and they're more generally in finance called the equity player, the equity holders. And lenders, which can be banks for cash flow producing properties, it could be bond holders, that sort of thing. But for development, usually banks and some unusual types of financers like hedge funds and things like that. And the second thing that we want to do, so our target value is our best estimate of what this property is going to be worth. What does that mean? Well if we're developing and selling, it means that what we're going to get out of selling this property after we develop it as a new store for writing, or something like that. Minus all the money that we put in to make net development happen. So that's our best estimate, the target value. Next, we want to consider the variability to that best estimate, which is also known as the risk, the financial risk to that best estimate. So we want to be careful to model in things like construction cost overruns. What if we're doing a family property rental building and the occupancy goes more slowly than we hope? What if the local economic situation in the neighborhood changes, and market rents go down between the time we start the project and when it's ready to start taking on tenants? What if there's a big spike one way or another in energy costs, etc.? Okay, and then finally, we're going to use our estimated target value, and our modeling of variability to get a better sense of value, risk weighted value, to all the stakeholders. And we use all this information to create what we call a Go or NoGo decision. And what we do in my office and I believe many other offices, is we try to stage this viability analysis which we attest to our Go/NoGo decision into two separate stages. First, a feasibility study which is all internal, it's all within our office, very quick and dirty. And assuming the potential project passes the feasibility study stage, we move on to the next stage which is the financial plan. This is something we will share with potential vendors, other equity investors, that sort of thing. It's much more detailed and we've gotta be much more careful about everything here. The rationale for staging things in this way is in finance generally, in real estate finance in particular, our most important asset is our time. So this methodology allows us to very quickly jettison projects that are not going to be financially rewarding enough to make it worth our while.
