The final course of the specialization expands the knowledge of a construction project manager to include an understanding of economics and the mathematics of money, an essential component of every construction project. Topics covered include the time value of money, the definition and calculation of the types of interest rates, and the importance of Cash Flow Diagrams.

从本节课中

Real Estate Finance for Development Projects

Professor Anthony Webster introduces real estate finance providing an overview of the real estate project lifecycle, a discussion on zoning code parameters, and examples of estimating the sales price of a property.

Instructor, Department of Civil Engineering and Engineering Mechanics, Columbia University Director of Research and Founder, Global Leaders in Construction Management

So the next thing that CAG is going to have to consider, again,

their goal here is they want to act as a developer of this property only.

So they're going to buy the property.

They're going to morph that property into this wonderful

one-acre lot with a multifamily rental building with 34 two-bedroom

apartments aimed at the graduate student demographic.

And so to get everything figured out, they need to have an estimate.

They need to know how much it's going to cost them, which we just looked at.

But they also need to know how much they think they can sell the completed

building for, to again,

someone whose mission in life is managing properties with folks in them.

Collecting those rents and enjoying those cash flows, okay?

So in this case, for developers in this country,

the most real estate development is taxed as

ordinary income, not capital gain.

So what we'll postulate here is that, and this is very common for

developers, that the land and construction costs for CAG are considered

very similar to what you call inventory in a financial accounting class.

So all these things can only be expensed when the building is sold, not as

incurred, the same way inventory works for anything else in financial accounting.

And then CAG is going to have to pay tax on the sale price,

what they get for this building, minus their inventory costs,

which are essentially almost all the costs incurred

getting the building into a completed form.

That said, real-estate taxation is very, very complicated.

It's one of the most complicated areas of tax in the US.

So for a careful cost estimate,

you want to work with a real-estate tax-accounting specialist.

Okay, so what we've got for CAG is,

CAG is an LLC, which means that the LLC

itself is not going to pay this tax.

The LLC has to report to the IRS how much this project cost and

how much they got for it, and how many partners they have.

And so the gain, which is what they got for it minus all the costs,

would be divided by four, for example, if they had four equal partners.

And then those equal partners have to pay tax on that gain

on their personal tax return.

I told you it was complicated.

This is life in America.

It's a little complicated,

but it avoids a problem that we have in America called double taxation.

So it's very common for developers to be organized in this way.

So we're assuming that the owners, on their personal tax returns,

are being taxed at 35%,

which is close to the highest rate possible in this country right now.

Okay, so how that we looked at how they're estimating

the cost of this project, now we want to think about how

are they going to estimate the sales price of the project?

There are three common ways to estimate

the sale price of any real estate asset, okay?

The first one is comparable properties.

The second one is called capitalization rate, or cap rate.

And the third one is using discounted cash flow methods, or

DCF methods, which are common to any problem in finance, real estate or not.

And let's take these one at a time here.

If we look at our sale price first by

analysis with comparables, what we want to do

is go out into the Lewiston area and look at records.

These records are publicly available, usually in county offices,

of properties that we think are comparable in terms of quality,

in terms of newness, in terms of the demographic that they're catering to.

I.e., graduate students or possibly undergrads in this case,

because there aren't many grads out there in Lewiston yet.

And we'll see how much these properties sold for, normalize

them by the amount of square feet of these properties, and go from there.

So let me show you how it works, okay?

So Apex, we don't know what its sale price is going to be.

That's what we're trying to estimate here.

But we know it's 33,600 and change square feet.

So we go out, we look around.

Again, this takes time, maybe a week altogether,

because you need to find properties in the county records.

And you need to go out and look at them and make sure they're actually comparable.

So we've got three properties that we found.

And the sale price for 251 Falls Road is 4 million and change.

It's almost 29,000 square feet.

So we divide the price by the square feet and

that equals $145 per square foot.

These are all recent sales within the past six months.

The 280 Jenkins Lane, same thing,

we divide the sale price by the square feet and get dollars per square foot.

So we've got something that's normalized.

And we do the same thing with our third property here.

So what we're finding, on average,

is about $138 per square foot, and

the average square feet is very similar to the Apex property.

So we're sort of comfortable with that.

It would be better to have six, but we're doing a feasibility study,

we're moving very quickly.

Other places you can look for comps prices are you can ask

local realtors about properties they have on the market that are for sale and

what they think they're actually going to go for.

You can see asking prices, Trulia, Zillow, Loopnet, Cityfeet, etc., etc.

And once again, your searching capabilities are crucial in all of this.

Okay, so now let's use that information,

the average sales price per square foot of comparable properties in the area,

to estimate a sales price for Apex, okay?

One thing that we should say right up front is that all

of these properties are what's called seasoned properties.

A seasoned property has been occupied for at least a year.

Okay, seasoned properties sell for a little more than unseasoned properties,

because it takes about a year to have a shakedown occurrence with a property,

make sure all the little problems are solved, that sort of thing.

You typically may get some water leaks in the roof, some problems with the plumbing.

Hopefully you're not going to have anything like foundations settling, but

that could crop up, etc.

So folks will pay a premium for

buildings that have been occupied for at least a year.

So what we've got here is we've got our expected sale,

which is the average of our comps in dollars per square foot.

And now just jumping back up here to get my best price,

I'm just taking the best one I found from the comps.

And the worst price, I'm just taking the worst one I found from the comps.

So this would be our target sale or our expected

value sale, about $138 per square foot.

We're going to give that a haircut of 10% because the Apex property

won't be seasoned on sale.

So we get a sales price.

Multiplying that by the number of square feet in the Apex project,

33,660, and get our 4.2 million sale price.

Okay, so we have great sale price,

expected sale price, and bad situation sale price.

So this is a great thing, this is not that hard to do.

I like comps-based sale prices a lot because they actually

represent what actually has been happening recently in the market in the area,

which I think is great and important.

Okay, so now that we've got that, now we can start thinking about

what the gain and return are going to be for CAG.

What do we mean by gain and return?

Well, gain is defined to be what CAG gets in from selling this property

minus all of their expenditures for making this property happen.

And return is defined to be gain over all their expenditures, okay?

So both of these are good things to know.

So we need to get this on a post-tax basis, and

that's going to be important throughout real estate finance.

We're always, at the end of the day, looking for after-tax numbers, okay?

So I've got, based on the sale price and the cost we computed up above,

I've got my pre-tax gain, okay, which again,

is revenue minus all expenses for all three cases.

The tax is going to be 35%,

Of the gain.

Okay, so we subtract that from the pre-tax gain,

so this minus the tax is equal to post-tax gain.

Okay, and I have a return in each of these three scenarios.

Return, again, means gain divided by all of our expenditures for this project.

And notice how it's plus in all three situations.

So that's sort of starting to give me warm and fuzzy feelings about this project.

Remember, this feasibility study, we are assuming that there is no financing.

And generally projects will look no, sorry, no lending financing.

Projects generally tend to look better whenever we do have some leverage or

some lending type of stuff going on, which we will get to shortly.

All right, so using this conservative methodology,

although clearly a quick and dirty methodology,

it looks like it might be profitable,

have a positive return under most reasonable circumstances.