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REAL 1820 (10)
Midterm

REAL 1820 Midterm #2.docx

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Department
Real Estate and Housing
Course
REAL 1820
Professor
Troy Riddell
Semester
Fall

Description
Week5RealEstateDevelopmentTheessenceofdevelopmentisaddingtothesupplysideofrealestatemarketTobeasuccessfuldeveloperyouneedtobethefirsttohaveanewdevelopmentideaorbefastsecondsthatissomeonewhoquicklyfollowsthefirstDevelopmentrequiresbothanalyticalandpeopleskillsDevelopmentistheriskiestsectorwithintherealestateindustryItinvolvesalargeamountofcapitalsfundingThedevelopmentprocessislongandcomplicatedthusmoreroomsforerrorsegdemandoverestimatedcompetitionunderestimatedetcDevelopmentProcessRoughlyfivestagesst1inceptionofanideaHaveadevelopmentideaneedpracticalexperiencend2feasibilitystudyEvaluatetheviabilityofyourdevelopmentideard3contractnegotiationSitepurchasewithlandlordLoansfrombanksConstructioncontractwithbuildersPurchaseofpropertyinsuranceth4constructionmakesureconstructionworkonscheduleandwithinbudgetth5completionandformalopeningutilitieshydrowateretcareconnectedbuyersortenantsmoveinTheDevelopmentTeamThedevelopmentisamultifacetedbusinessdesignfinancebuildandleaseorselletcTodoadevelopmentprojectateamneedstobeformedThedeveloperistheleaderoftheteamHeisthedecisionmakerHehiresotherteamplayerstohelpdotheprojectOtherPlayersBuilderstheymakesacontractwiththedevelopertobuildtheprojectAttorneysandaccountantstheyprovidelegalservicesontaxeslandusesleasesetcLeasingagentsandorsalesbrokershelptoleaseorsellspacetotenantsorbuyersAppraisersestimatethevalueoftheprojectfordifferentpurposesliketaxationseekingfinancingandcreditetcFinancialplayersTheyprovideloansfortheprojectEgbankscreditunionsetcMarketresearcherstellwhethersufficientdemandexistsornotthecompetitionhowquicklythespacewillleaseorselletcTheirfindingsareusedforthefeasibilityanalysisoftheprojectMarketingandpublicrelationsconsultantsresponsiblefordesigningamarketingstrategyfortheprojecthelpdevelopersdealwithrelationshipwiththeneighborhoodgovernmentArchitectsUrbandesignersEngineersLandplannersLandscapearchitectsEnvironmentalconsultantsTransportationconsultantsItisnotalwayspossibletodrawaclearlinebetweentheresponsibilitiesoftheaboveplayersOverlapsandcooperationareverycommonFeasibilityAnalysisfordevelopmentprojectFeasibilityanalysisistodetermineanddocumentaprojectsviabilityTheresultsofthisanalysisareusedtomakeadecisionwhetherornottoproceedwiththeprojectRememberthesimplemethodcompareValueCostGoodintheoryButinpracticetwoformalmethodstodofeasibilityStudy1FrontdoormethodweknowthecoststrytofigureouthowmuchrentsorsellingpricetheprojectneedtogenerateinordertobreakevenFrontdoormethodcostsbottomlinerentcomparedtoactualmarketrentifactualmarketrentisgreaterthanbottomlinerentyouwillmakemoneySomeusefulconcepts1LoantovalueratioloanvalueorcostoftheprojectegTheloantovalueratio90implyingthatdevelopersonlygetaloantocover90oftheprojectscostNoteloaniscalledmortgageordebt2DebtcoveragerationetoperatingincomeNOIannualdebtorloanormortgagethehigherthisratiothegreaterabilityyoucanpaybacktheloanGreaterthan1morelikelytoberepaidItmeasurestheabilitytopaybacktheloanLendersusethisratiotodeterminewhetherthepropertywillgenerateenoughincometoretiretheloan3AnnualizedmortgageconstantannualmortgagepaymenttotalmortgageegIfannualizedmortgageconstantis9itmeansthateachyearyouneedtopay9ofyourtotalmortgageuntilallmortgageispaidback2BackdoormethodstartwithmarketrentspossiblythroughmarketsurveysderivethemaximumcostwhichisthemostwecanaffordtoputintothedevelopmentAttheendcanwebuildtheprojectatthiscostorless
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