Question

1. Describe two ways for a developer to raise equity (initial capital) for a development project.

2. Explain the significance of community residents, local politicians, and approving bodies (i.e. Dept of City Planning, community boards, etc.) in the regulatory process

3. Describe two types of liens, and how each can disrupt a development project. What are some measures a developer or general contractor can take to prevent these?

4. State and describe at least three types of financial institutions that developers typically source loans from.

5. Mezzanine debt is established as an intermediate funding mechanism that usually supplements the equity investment and first mortgage. Any traditional lender may use it in negotiations. Typically, deals with mezzanine debt are structured with a 70 percent mortgage, 5 to 25 percent mezzanine debt, and the remainder from the developer’s equity. Unlike a mortgage, a partnership interest is assigned in case the developer defaults on the loan, making mezzanine a convertible debt-equity instrument. Why might mezzanine debt entice a lender?

6. Describe the function of a construction loan vs. a permanent loan (take-out).

7. Explain the importance of release provisions on purchase money notes (PMNs) when trying to obtain development financing from lenders for land development.

8. When contracts are bid on price per unit, why might a subcontractor deliberately bid high on the item for which the quantity was underestimated? In this case, how is a subcontractor likely to bid on the other (accurately estimated) items?

9. How does a developer assess the accessibility of a prospective development site?

Answer 1

Ways for Developer to raise equity (initial capital) for development project:

Generally in a real-estate development project, 60%-80% of the total capital is funded by banks and other financial institutions as a Loan on which they charge interest i.e. Debt.

Now, the remaining 20%-40% of the total capital is raised by the developer himself as a part of capital i.e. Equity. So generally developers raise equity (initial capital) through the following two major sources.

1. Bootstrapping:

Bootstrapping means funding a development project with your own saved up funds or funds from family members and friends. So, if the developer approaches the right friend and family member he can get funds required for the development project. The major advantages of Bootstrapping are that funds are easily accessible, there are no or little legal obstacles and they are available with flexible payment structure and flexible interest rates. The only major issue is that Bootstrapping will not be able to finance large development projects but can finance only part of the project so developers require other sources to fund their development projects.

2. Private Equity Funds:

Today raising money from individuals is very inefficient and time-intensive, so most of the developers are now raising money from the Private Equity Funds such as High Networth Individuals, Large Investment Funds, etc. who are ready to invest in development projects. They provide funds to the developers and in return developers provide them ownership in the project i.e. Equity. Also these High Networth Individuals, Large Investment Funds, etc. closely monitor the development project they have invested in and their expertise in the field can help in developing the project. The major issue with Private Equity is that developers tend to lose control of the business as Hign Networth Individuals, Large Investments Funds etc. holds the large part of Equity which makes them the owner of the development project.