Case Study 1----BC 6570
CP Communities is a master developer of mixed use properties and has 32 acres under contract at $40,000 per acre to subdivide into four parcels to accommodate a single family detached community, a for-sale town home community, a multifamily rental community and a community retail space. CP only acquires land and installs the necessary infrastructure to subdivide and sell parcels to others that will complete the construction of the communities and buildings. The master plan for the 32 acres allocates 11 acres to a single family detached community that will be developed at 3 units per acre, 7 acres to a town home community that will be developed at 6 units per acre, 11 acres to a multifamily community that will be developed at 10 units per acre, and a 3 acre lot for a retail center that will be developed at a .25 floor area ratio. CP has an appraisal that indicates upon the completion of the development and subdivision process the single family parcel will be valued at $28,000 per unit, the town home community at $19,000 per unit, the multifamily at $10,000 per unit, and the retail parcel at $10 per square foot of allowable building floor area.
The direct development cost to subdivide the land is shown on the attached development budget. The indirect costs will include interest on the primary financing, financing fee and closing cost, property taxes during the period of ownership, and property insurance. Property taxes are based upon an assessed value of 40% of fair market value on January 1 of any given year of ownership, a millage rate of $32 per thousand dollars of assessed value, and are paid on December 31 of each year. Annual insurance cost is 0.5% (zero point 5) of the value of property owned on January 1 of any given year.
Based upon the above developed and subdivided values, CP has negotiated interest only primary A & D financing at 70% LTV at an annual interest rate of 7% with interest paid monthly. The total financing fees and closing costs are 1% of the primary loan amount to be paid at the initial closing along with year one property insurance, both of which are funded at the closing from the primary loan. The primary lender will also fund $1,000,705 of the land purchase price from the loan at the initial closing with the remainder of the cost to close funded from CP equity.
The development work to subdivide the 32 acres will start on January 1 and will take 12 months to complete at which point the four parcels are legal to sell to other developers. CP has all four parcels under contract to other developers with closing dates spread over 2 years at 6 month intervals. The single family parcel will close at the appraised value mentioned above 6 months after the end of CP’s development period. The town home parcel will close 6 months after the single family closing, the mutifamily parcel will close 6 months after the town home closing, and the retail parcel will close 6 months after the multifamily closing. All closing costs associated with the sales of the parcels will be covered by the purchaser with no cost to CP except for CP’s portion of the property taxes based upon the above process with fair market value determined by the sale prices.
CP has an established methodology for release prices and cost basis in this type of subdivision project, and the lender has agreed to use their method. The percentage that each parcel contributes to the overall value of the deal will be utilized to determine the release price of each parcel from the primary loan. The release price will be the percentage of the loan that the appraised value of any individual parcel represents of the completed value of the entire developed project. Further, CP will attribute that same percentage of overall cost to each parcel when determining profit.
The deliverables for this case study include:
• Overall value of the developed subdivision.
• A & D loan amount and release price for each parcel.
• Total interest cost during construction and absorption. Construction interest should be determined by pro forma during construction and graph method for absorption, with the pro forma method used for actual interest cost.
• Detailed calculations of annual costs of property taxes and insurance.
• Total land, direct, and indirect costs.
• Cost basis for each parcel.
• Pro forma outlining net income and internal rate of return in an unlevered and levered scenario.