USP 5 Final Review

8 Stages of Real Estate Development

1. Inception: Idea state; informal , low cost

2. Refinement: organizing idea and research

3. Feasibility: Test if project is possible

4. Contract Negotiation: contract terms are worked out

5. Formal Agreement: Deals are signed; commitments begin

6. Construction: Most expensive stage

7. Property Management: overseeing day-to-day operation

8. Long - term Marking & Asset Management: Sustaining property value and returns

Capital Stack

Layers of financing (equity , preferred equity, mezzanine debt, senior debt)

Cap Rate

NOI / Value: help evaluate value or return

Net Operating Income (NOI) formula and what doesn’t it include?

Gross Income - Operating Expenses (Doesn’t include: mortgage payments, income taxes, capial expenditures)

What is a Ttriple Net Lease (NNN)

Tenant pays taxes, insurance, and maintenance

Low-Income Housing Tax Credit (what are competitive and non taxes rate and for how long)

Helps affordable housing development

competitive: 9%
non-competitive: 4&

Used over 10 years

New Market Tax Credit (NMTC) (taxes rate and for how long)

Helps stimulates investment in low-income communities

Max 20% residential (based on revenue, not units)

Used over 7 years

Preferred Stock

Provides fixed dividends and priority in payouts

Common stock

Represents ownership with potential for growth

Liquidity

Ease of converting property to cash

Leverage vs. Equity

Borrowed money vs. owner’s capital

Mezzanine Financing

Hybrid of debt adn equity; riskier but flexible

General Contract (what do they do, 3 things)

• Manages full construction process

• Hires and oversees subcontractors

  • Coordinates with architect and developer

Subcontractor (2 things)

• Performs specific tasks (plumbing, electrical, HVAC)

• Hired by GC

Design-Build Contractor (2 things)

• Single entity handling both design and construction

• Reduces coordination issues and time delays

Construction Manager at Risk

Commits to delivering project within a guaranteed maximum price (GMP) and acts as both consultant during design phase and general contractor during construction

Mechanics’ Lien

Legal claim for unpaid construction work

Retainage

Final payment held unit the project is verified as completed

Ground Lease (def & ex)

Tenant leases land long-term; McDonalds’s is largest holder

Four Market Drivers

1. Land Use Regulations

2. Lending Practices

3. Construction Litigation

4. Market Forces

Land Use Regulations (3 things)

• Zoning laws, density limits, FAR (floor area ratio)

• Control what can be built, where, and how much

• Directly impact development feasibility and timeline

Lending Practices (3)

• Access to financing and interest rates

• Bank / investor risk tolerance, loan-to-value (LTV), capital stack structure

• Drives the availability and cost of capital for developers

Construction Litigation (3)

• Legal risk tied to design flaws, construction defects, or contract disputes

• Can delay or derail projects

• Affect insurance, contractor bidding, and project costs

Market Forces (3)

• Supply & Demand, rent levels, vacancy rates, population growth

• Determines what types of projects make economic sense.

• Includes trends like remote work, urban migration, and demographic shifts

Deadweight Loss

Loss of efficiency, often due to rent control

Filtering

When properties move from higher to lower income use over time

Absorption

How fast units are sold or leased in the market

Project positioning

How a RE project is presented to the market, helps project align with needs and stand out

Niche in PP

A focused segment of market, helps developers tailor project to those segment’s needs

Repositioning in PP (2)

• Changing the market perception of an existing property

• Used when existing use is underperforming

Branding in PP (2)

• Building recognition and trust around developer

• Establish credibility and connection

Differentiation in PP (2)

• Creating clear distinctions from competitors

• Shows why this development is the best option

REIT

A company that owns, operats, or finances income-producing real estate

Main benefit of REIT compared to owning property

Indirect ownership with less responsibility and greater liquidity

What is real estate syndication?

A partnership between multiple investors who pool resources to purchase and manage a real estate property

What is the main benefit of syndication for passive investors?

Access to larger, professionally managed real estate deals with limited liability and no active management.

What are the three dimensions in the Grasskamp Method and describe each three

1. Physical Space: tangible, measurable characteristics of the property

2. Legal Space: The rights, restrictions, and obligations that affect how the property can be used

3. Financial Space: The investment and economic characteristics, including value, cash flow, financing, risk, and return expectations.

Retainage

The final payment is held until work is 100% done

What does a higher cap rate mean?

Higher return, but more risk (often in less desirable markets)