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505 Congress StreetSouth Boston
RECREATE, LLCTim Johnson, Jennifer Balkcom, Scott Nguyen, Arvind Pai, Alison Novak, Charu Singh
Re-imagining the Boston Waterfront
Vision
Vision• Emerging urban neighborhood
complimented by near natural amenities• Dense living in a green building• Target young professionals
Product • Multi-family residential for rent with on-
demand office space
Create an innovative living space to take advantage of transitioning, well-located neighborhood.
Young development team seeking experience.
Team Goals
• Establish foothold in Boston real estate market & South Boston
• Gain development experience
• Build reputation
• Make money
Agenda
Site ContextMarket AnalysisRegulatory ProcessSite Design Construction TimelineCapital Budget Financial Analysis
8.8 million SF in development pipeline signals emerging market.
Context
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
T
T
T
Convention Center
Downtown
The Boston Economy
• Recovering from a period of negative growth• All demand drivers are stable• Vacancy rate is forecasted at less than 5%• Positive real rent growth projected• Leading growth industries
Stable economy.
Source: Torto-Wheaton Research 2005
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Supply
Limited existing supply Extensive projected development
2,600 residential unitsMostly for sale
High metro-area demand for residential
4.45% cap rate
Time project before market saturation but after pioneering projects.
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Market Area
The target population is well represented within a 5 mile radius of the site.
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Residential Target Market
Residential Target Group• $65,000-125,000 income range• Service-based employment• Upwardly mobile
Target underserved market segment
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Office Target Market
Site is well located to meet temporary office needs.
On-demand office space is ideal for companies who desire: Proximity to the convention center Location close to downtown Flexible office space
T
Convention Center
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Regulatory Process
Article 80: BRA Review
• Large Project Review
• Boston Civic Design Commission
Area is slated for large-scale development, site use flexible
Article 27P
• Flexible open space and FAR requirements due to IPOD zoning
• Affordable housing and street improvement requirements
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Regulatory Analysis
Areas of concern
• Site coverage ratio relief may trigger exaction fee
• Meeting EPA & HUD standards for air quality and noise
• Unspecified fee schedule
Although FAR is by-right, the public process is unpredictable.
Strategies
• Foster relationships with relevant BRA staff, neighborhood groups, and environmental NGO
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
505 Congress St. is well-located but has many challenging site conditions.
Opportunities & Challenges
Adjacent to Central Artery Tunnel
Vent Building
High Traffic FlowsOdd-shaped parcel
Shallow depth 100’
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Site Plan
Residential Tower
Service Area
Ingress
Egress Drop Off PointOffice-on-Demand
Retail Ground Floor Uses
Landscaped Park
Creative design optimizes this constrained site.
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Elevation
Mixed Use design.
Residential Tower12 stories117 units89,023 net rentable sf
Office-on-Demand1st Floor Podium19,843 net rentable sf
ParkingBelow grade structure77 parking spaces
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Lifestyle amenities compliment project.
Design Elements
Building Amenities• 24 hr. concierge• Landscaped roof garden• On-site parking garage• Zip-Car® available• Indoor bicycle storage• Coffee shop &
dry cleaning services
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Interior Finishes
Apartment Features• Energy Star®
appliances• Ceramic tiled floors
(kitchen & bath)• Non-toxic carpeting• FSC certified wood
cabinets• Designer hardware• Elegant, energy
efficient light fixtures• High speed Internet
access, cable TV, multiple phone lines
Modern & sustainable living space.
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
LEED Elements
LEED certified design.
Photovoltaic panels
Green roof
Low-E glass
Energy efficient systems
Energy Star appliances
Low VOC materials
Dual-flush toilets
Maximizing daylighting
Indoor air quality improvement systems
Indoor Technologies
Rainwater Collection System
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
LEED Elements
Cost NeutralSustainable Site Selection Urban RedevelopmentExterior Landscape DesignPublic TransportationBicycle StorageParking CapacityWater Efficient LandscapingWater Use Reduction (20%)Construction Waste
ManagementRecycled Content MaterialsRegional MaterialsLow VOC paints &
adhesives/sealantsDay-lighting
Cost Premium Roof Landscape DesignRain Collection SystemAdvanced HVAC SystemsLow-E GlassBuilding CommissioningHalon/HCFC-free fire
systemsPhotovoltaics PanelsCO2 MonitoringLow VOC Carpets
Many Cost Premium items will pay for themselves.
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Construction Timeline
Month in Project Timeline:
Prep
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72
Weeks in Construction Timeline:
32 332622 2523 24
Interior (8)
1918 20 21 34 35
Site
30 31
Exterior (4)
Permit
Excav (2)Foundation (2)
Structural (3.5)
Elevator/Stairs (6)
36
Electrical (11)HVAC (11)
Plumbing (11)Fire Protection (6)
28 2927
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Construction Cost BreakdownCost Total Cost Duration[$/sf] [$] [months]
Site Prep 1 $126,740 0.5Site Excavation 3 $380,220 2
Site Improvements 2 $253,480 1TOTAL 6 $760,440Total Site Development Costs = $760,440
RESIDENTIALStructural Systems [SHELL]
Foundation 5 $494,570 2Structure (Steel & Concrete) 30 $2,967,420 3.5
Exterior Envelope (Façade & Roof) 40 $3,956,560 4Interior Finishes (Residential) 50 $4,945,700 9
Building Systems [CORE] $0Electrical 27 $2,670,678 11
HVAC 33 $3,264,162 11Plumbing 15 $1,483,710 11
Fire Protection 5 $494,570 6Elevators/Stairs 5 $494,570 6
RESIDENTIAL SUBTOTAL 210 $20,771,940OFFICE
Shell & Core (minus interior) 145 $3,309,770 15Interior Fit-Out 80 $1,826,080 8
OFFICE SUBTOTAL 225 $5,135,850Total Shell & Core Costs= $25,907,790
Green Building Premium (5%) = $1,295,390 15
[$/space]Parking Costs = 40000 $3,080,000 3
Total Construction Cost = $30,283,180
$31,043,620
CONSTRUCTION COSTS
SITE DEVELOPMENT
TOTAL =
SHELL & CORE
GREEN PREMIUM
PARKING
Construction Draw Schedule
$0.00
$1,000,000.00
$2,000,000.00
$3,000,000.00
$4,000,000.00
$5,000,000.00
$6,000,000.00
$7,000,000.00
$8,000,000.00
1 2 3 4 5 6
Construction Quarter
Construction Costs
Gross SF98914 Residential22826 Office126740 Total
77 Parking Spaces
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Capital Budget
Total Development Cost is $280/sf.
Site Improvements/Site Prep $760,440Construction Cost $30,283,180Hard Cost Contingency 5.0% $1,552,181SUBTOTAL HARD COSTS = $32,595,800
A&E 5% $1,629,790FF&E 0.5% $162,979LEED Certification 0.5% $162,979Taxes/insurance/legal fees 3% $977,874Preconstruction Svcs 0.15% $48,894Project Manager 1.5% $488,937Rent-up, mktg 3% $977,874Developer's OH 2% $651,916Soft Cost Contingency 5% $255,062Construction Interest $1,531,303Prepaids $337,192Construction Guarantee $312,192Environmental Impact Guarantee 0.5% $162,979Balance Sheet Guarantee $780,480SUBTOTAL SOFT COSTS = $8,480,451
TAC $41,076,251
HARD COSTS
SOFT COSTS
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Project Timeline
Pre
Lease-up
Design/Pre-Construction
Permitting
Year
Construction
1 2 3 4
18 months
18 months
> 18 months
12 months
4 years until project stabilizes.
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Project Timeline
Early team formation facilitates integrated design.
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Assumptions
• Escalation for construction cost = 5% annually
• Absorption rates = one year (ReCreate market research)
• Rental growth = 4% (TWR Fall 2005 )
• Op Ex growth = inflation rate (new building)
• Vacancy = 5% apartments, 12.3% office (TWR Fall 2005 )
• Going in cap rate = 6.96% office, 4.45% residential (NCREIF Boston)
• Going in/out cap rate spread = 30bps office and 97 bps residential (Korpacz 2005)
Conservative Assumptions.
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Rental Assumptions
Unit Rent Sq. Feet DistributionStudio 1,450$ 500 20%1 BR 2,175$ 750 40%2 BR 2,610$ 900 40%
Mix of Market, Affordable and Office Components
Market Apartments: average rent $2,200/month
• Apartment Operating Expenses + Taxes are $10.5 PSF• Green building reduces expense on utilities – Lower effective rents to tenants• Parking Rent is $225 per spot (NNN)
Office Rents: $35 PSF Gross
• Office Operating Expense + Taxes are $17 PSF
Apartment Assumptions - Affordable - % of units 13%0-BR 1-BR 2-BR
# Occupants 1 1.5 22005 Income Limit 28,950$ 31,025$ 33,100$ Projected 2008 Limits 31,634$ 33,902$ 36,169$ Rent 791$ 848$ 904$ Apt distribution - affordable 3 6 6Avg Affordable Rent 859$
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Financing
Green financing allows lower equity returns.
Total Project Cost including land @ time 0: $46,400,000
Construction Loan: $33,400,000• Key Bank: 18 month term, 75% LTC, floating interest rate 6.54%Permanent Loan takes out construction loan• Deutsche Bank: 10 year balloon, 30 year amortization, 80% LTC, fixed interest rate 5.6%, Required DSCR 1.25Equity Partners• Key Bank, Investor’s Circle, ReCreate: 19.3% blended return
• Initial Hurdle: Pari passu up to 15%• 82 – 10 - 8 after 15% hurdle is achieved
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Returns
Hold Period [email protected]% OCC Project IRR
Upon Stabilization 2,400,000$ 16.10%
Sell upon stabilization.
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
• Project provides minimal positive NPV
• Proposed equity splits compensate developer after meeting 15% initial hurdle
EQUITY INVESTORS
Investor's Circle KeyBank Recreate Total Equity
Amount $ 2,000,000 $10,712,613 $ 300,000 13,012,613
Required Return (10 yr hold) 9.5% 15% 20% 14.3%
Required Return (Development) 15% 20% 25% 19.3%
% Of equity 15.4% 82.3% 2.3% 100.0%
Residual Splits 10.00% 82.00% 8.00%
A very sensitive project but our numbers are conservative.
Sensitivity Analysis
Varying Rents - Constant Construction Cost
Monthly Rent Residual Land Value
2100 $ 192,000
2200 $ 2,400,000
2300 $ 4,600,000
Varying Construction Cost Escalation - Constant Rents
Escalation Residual Land Value
0% 5,000,000
5% 2,400,000
10% (181,000)
15% (2,800,000)
Varying rents with constant construction costs
Varying construction cost escalation with constant rents
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Mitigating Risk
Minimizing temporal uncertainty
• Pre-leasing office space
• Sale after stabilization will take advantage of low cap rates now and reduce future risk of unknown market in 10 years
Mitigating risk for construction
• Construction escalation of 5% built in until GMP
• GMP contract will mitigate further price increases
• Confirmed timeline feasibility
Built-in leeway for uncertainty.
CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL
Alternative Strategies
Examined strategies for increasing returns
Considered:
• Extending construction loan to cover lease-up period?
• Whether rents were too conservative?
• Taking developer’s fee as return on equity instead of project cost?
• Getting land value contributed as equity?
• Reducing construction costs – How cheaply can we build? Which green building components can be achieved at lowest cost?
• Increasing FAR beyond as-of-right?
• Sale as condos (option valuation)CONTEXT MARKET REGULATORY DESIGN CONSTRUCTION CAPITAL BUDGET FINANCIAL