2. George T. Vallone – MBA, CRE
President
Hoboken Brownstone Company
305 Coles Street
Jersey City, NJ 07310
201-792-3814
GVallone@HBrownstone.com
www.HBrownstone.com
3. ∗An investment where the interest
rate reflects zero risk, including
default risk
∗ United States Treasury Bonds
What is a “Risk Free”
Investment?
4. U.S. Treasury Bill Interest Rates
1-28-2014
TERM RATE
1-Month 0.05%
3-Month 0.05%
6-Month 0.07%
1-Year 0.10%
10-Year 3.41%
20-Year 3.43%
6. 1. Financial Risk
2. Entitlement Risk
3. Environmental Risk
4. Construction Risk
5. Market Risk
II. The Five Major Risk Categories
7. Capital Stack = 100% Project Cost
Layers of the Capital Stack;
Top Layer = Most Risk - Sponsor Equity = 1%
Investor Equity = 9%
Mezzanine Debt = 15%
Bottom Layer = Least Risk - Bank Debt = 75%
Total Capital Stack = 100%
9. A. Cost of Bank Loans
1. Commitment Fees 1-3%
2. Broker Fees 1-3%
3. Interest Rates –
a. Prime Rate + 1-5%
b. Libor Rate + 1-5%
c. T-Bill Rate + 1-5%
B. Mezzanine loans
1. Commitment fees 1-3%
2. Broker Fees 1-3%
3. Interest Rates 10-20%
C. Investor Equity
1. Preferred ROE 8-20% +
2. Profit Share 10-90%
D. Sponsor Equity
(After A+B+C Paid in Full)
1. Preferred ROE 8-20% +
2. Profit Share 90-10%
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
75 %B an kLo a n
15 %Mez zanin e
Lo an
9% I nves tor
Eq uity
1% Sp on sor
Eq uity
Capital Stack & Pricing Model
0
10
20
30
40
50
60
70
80
75%Bank Loan
15%Mezzanine
Loan
9%Investor
Equity
1%Sponsor
Equity
10. There are 11 ways to acquire land in a redevelopment
area without resorting to condemnation.
They all require a land owner to understand what the
various risks and rewards of participating in the
development of the land at the various layers of the
Capital Stack. The objective is for the land owner and
the developer to work together to create a
successful outcome.
The developer’s job is to calibrate the land owners
risk level with his desire to sell his land for more than
the asking price.
11. 1. A full Joint Venture1.
A new LLC is formed the land is contributed as equity;
∗ Seller’s land value is time adjusted (the “Sale Price”)
increases with an annual appreciation rate that is
added to the value of the land contribution
∗ Seller receives a profit share percentage for the land
contribution as equity
∗ Seller receives a Preferred Return on his land
contribution as equity
∗ Developer has time to mitigate risk before the land is
contributed
∗ Developer has substantial Equity Partner with Land
Owner (aka Seller) thus reducing the need for all
equity capital
12. 2. Creative Use of Mezz Financing:
Van Leer Chocolate Factory: A sale contract with formula
pricing based on minimum zoning yield plus bonus payment
for additional zoning over the minimum yield paid to Seller
via Mezzanine financing
∗ Seller Gets Asking Price & Invests Upside Potential
From Zoning Bonus which he ‘loans’ to Developer as
Mezz Layer
∗ Seller’s Mezz Loan usually earns a high interest rate.
∗ Seller’s Mezz Loan is subordinated to the construction
loan thus increasing Developer’s Equity %
∗ Unsecured Mezz rates are 16% to 20%+.
13. 3. A sale contract with more typical
Seller Mezzanine financing
∗ Seller finances 100% of asking price with Mezz
Loan
∗ Mezz Loan is subordinated to the construction
lender’s (and any other secured debt) on the
property adding to Developer’s Equity %.
∗ The Seller PMN takes the place of the Mezz
layer in the capital stack.
∗ Seller earns Unsecured Mezz rate from 16% to
20%+.
14. 4. A sale contract with Seller
secured Junior financing
∗ Purchase Money Note and 2nd
Mortgage
is subordinated to the construction
lender’s first lien on the property.
∗ The PMM may take the place of the
Mezz layer in the capital stack.
∗ Secured Junior loans / Mezz rates are 12%
to 16%.
15. 5. A sale contract with Seller Senior
secured 1st
Mortgage financing.
∗ A Seller Senior secured Purchase money note and 1st
Mortgage not subordinated to the construction lender’s or
any other lien on the property.
∗ Essentially a bridge loan because it will have to be paid off
before construction financing can be placed.
∗ The developer may still need to place a Mezz layer in the
capital stack.
∗ A senior secured mortgage rate today would be in the 6% to
10% range.
16. 6. Option to Purchase in Phases
Developer buys the right to purchase the
property in sections (aka Phases) at a
fixed price for a fixed term
∗ Developer controls entire property and therefore can
obtain entitlements and manage risks.
∗ Seller has to pay taxes, insurance, cut the weeds,
maintain the fence, pay for security, etc.
∗ Developer can walk away only forfeiting option fee(s)
actually paid plus cost of risk management.
∗ Developer can gauge market after each phase and; walk
away, adjust product offering, or renegotiate Sale Terms
17. 7. Sale contract with a phased take down
∗ Like an installment sale.
∗ Seller holds full title for the remaining, un-
purchased, parcels.
∗ Developer must obtain a sub-division approval
– (could trigger need for more variances).
∗ Partial take down pricing can be time
adjustment for each phase.
∗ If Developer defaults, Seller has property with
sub-division and entitlements increasing value
therefore it can be sold off in pieces.
18. 8. Option to purchase the entirety
∗ Developer controls property and therefore can
obtain entitlements and manage risks
∗ Seller gets option fee payment (usually larger
than deposit on contract) & Full Price if
Developer Closes
∗ Seller has to pay taxes, insurance, cut the weeds,
the fence, security, etc.
∗ Developer can walk away forfeiting (larger)
option fee payment and entitlement costs.
19. 9. Sale contract with extended time to
close with contingencies at a fixed price.
∗ Contract of Sale usually requires an at risk deposit
larger than an option fee
∗ Contract of Sale can have an annualized increase
in price to cover inflation.
∗ Developer controls property and has time to
obtain entitlements
∗ Seller has to pay taxes, insurance, cut the weeds,
the fence
∗ Developer can sometimes walk away forfeiting
the larger deposit and entitlement costs but Seller
has right to sue for specific performance
20. 10. Sale contract with extended time to
close with contingencies and a
formula sale price
∗ Better for a Seller than # 9 (fixed price
contract). Therefore it can be a great
tool to convince the Seller to agree to a
long term contract with the Developer
∗ The formula sale price is based on a
fixed price per residential unit (or PSF
for commercial space) times the number
of units approved so neither party loses
21. 11. Sale Contract with a “Responsible
Party” who prefers to remediate itself
prior to transfer of title.
∗ Contract of Sale needs to deal with extent to which RP will
have continuing liability, and limitation of liability of Buyer
for environmental contamination not caused by Buyer.
∗ Developer controls property for purposes of obtaining
entitlements, obtaining land use approvals.
∗ Buyer and Seller resolve who will pay ongoing costs of
property such as taxes, insurance, maintenance, pending
closing.
∗ Developer can walk away if remediation is not undertaken
as per Seller’s commitment (Buyer may sue for specific
performance).
∗ Price to be resolved based on how each of these issue is to
be resolved, and in light of passage of time before closing.
22. 12. All cash, no contingencies,
quick close contract.
∗ Used in instances where the value of the property is
great, there are many bidders, and Seller is inflexible.
∗ The best thing to do is to get Seller to accept a large
non-refundable deposit, sign the contract immediately,
and close as soon as title is clear.
∗ That’s how we got the Maxwell House Deal