My Master Thesis

Miami Life Apartments Bridging People and Potential

Kelvin Xuna/MDesS Candidate/Fall 2008

Miami Low-Income Multi-Family Development Analysis Based on Exploration of the Broad Implementation Process

By

Kelvin R. Xuna

Master in Design Studies, Harvard University, 2008

Submitted in partial fulfillment of the requirements for the degree of

Master in Design Studies Urbanization & Housing Studies

At the Harvard University Graduate School of Design

January 2008

Copyright © 2008 by Kelvin R. Xuna

The author hereby grants Harvard University permission to reproduce and distribute copies of this

thesis document, in whole or in part for educational purposes.

Signature of the Author………………………………………………………………………………………… Kelvin R. Xuna Harvard University Graduate School of Design Certified by…………………………………………………………………………………………………………… Bing Wang Lecturer in Urban Planning and Design Scholarly Paper Advisor Accepted by………………………………………………………………………………………………………….. Daniel Schodek Master in Design Studies, Program Chair Kumagai Professor of Architectural Technology

TABLE OF CONTEXT Introduction

a. Summary………………………………………………………………………………………………………………………1 b. Author’s Short Bio.………………………………………………………………..…………………………….……….2

Executive Summary

a. Goals and objectives………………………………………………………………………………………….…………3 b. Methods of analysis…………………………………………………………………….…………………….…………4

Risk Factors

a. Due Diligence……………………………………………………….……………….…………………………..…………7 b. Partnerships……………………………………………………………………………….……………………..…………7 c. Site Control…………………………………………………………………………………………..………..……………9 d. Construction……………………………………………………………………………………………….…..…………10 e. New Construction…………………………………………………………………………………….……..…………10 f. To‐be‐Developed……………………………………………………………………………………………..…………11 g. Adaptive Reuse………………………………………………………………………………………………..…………12 h. Time…………………………………………………………………………………………………………………..…….…12 i. Lenders…………………………………………………………………………………………………………………….…12 j. Interest Rates………………………………………………………………………………………………..……………13 k. Design…………………………………………………………………………………………………………………………14 l. Manufactured Housing……………………………………………………………………………………….………14 m. Capital……………………………………………………………………………………………………………..…………14 n. Risk & Mitigation Concluded………………………………………………………………………………………15

Market Overview

a. National Overview and Key Demand Areas……………………………………………………………….17 b. Regional Economic Outlook…………………………………………………………………….……………..….23 c. Local Economy………………………………………………………………………….………….……………………30 d. Affordable Development Incentives…………………………………………………….……………………31 e. Public and Private Development…………………………………………………………..…………………..38 f. Assumptions…………………………………………………………………………………..…………………………40 g. Concerns………………………………………………………………………………………………..…………………42 h. Market Delineation and Site Analysis…………………………………………………………..…………..44

Analysis of demand

a. Projected overall demand………………………………………………………………………………………..45 b. Analysis of absorption………………………………………………………………………………………………47

Analysis of supply

a. Existing Stock, Past Trends, And Future Supply………………………………………………………..48 b. Exiting Zoning And Possible Changes………………………………………………………………….…….49

Analysis of capture rate (marketability Study)

a. Competitive Advantages…………………………………………………………………………..……………..50 b. Market Segmentation………………………………………………………………………………………………51

Project Contexts: Site 1 a. Current Use……………………………………………………………………………………………..………………53 b. Geographic Location………………………………………………………………………………..………………53 c. Status \ Price \ Seller………………………………………………………………………………....……………54 d. Zoning………………………………………………………………………………………………………………………54

e. Concerns & Mitigation……………………………………………………………….……………………………55 f. Proposed Program & Land use……………………………………………….………………………………56 g. Market Rate Pro‐formas…………………………………………………………………………….……………58 h. Affordable Pro‐formas…………………………………………………………………………………….………60 i. Assumptions……………………………………………………………………………………………………………60 j. Sustainability……………………………………………………………………………………………………..……61

Project Contexts: Site 2

a. Current Use……………………………………………………………………………………………….……..………61 b. Geographic Location………………………………………………………………………………….………………61 c. Status \ Price \ Seller……………………………………………………………………………….………..………62 d. Zoning…………………………………………………………………………………………………………….…………63 e. Proposed Program & Land use………………………………………………….………………………………63 f. Concerns & Mitigation………………………………………………………………………………………………64 g. Market Rate Pro‐formas……………………………………………………………………………………………64

Result Comparisons

a. Least Risk……………………………………………………………………………………………………………………66 b. Most Profit……………………………………………………………………………………………………………….…66 c. Most Probable…………………………………………………………………………………………………….………67 d. Chosen Selection…………………………………………………………………………………………………………67

Reevaluation

a. Field Study…………………………………………………………………………………………………………………68 b. Physical Design…………………………………………………………………………….………………………….…69 c. LEED: Sustainable Building Design………………………………………………..……………………………74 d. LEED: Environmental Site Design………………………………………………………….……………………75 e. Environmental Management………………………………………………………………….…………………76 f. 9 Points of Smart Growth………………………………………………………………………………….………77

Project Financing a. Stage 1 Analysis……………………………………………………………………………………………….…………80 b. Pro‐Forma……………………………………………………………………………………………………….…………81 c. Capital Budget……………………………………………………………………………………………………………82 d. Mortgages……………………………………………………………………………………………………………….…83 e. Projected Setup……………………………………………………………………………………………….…………84 f. Net Cash from Sale………………………………………………………………………………………………..……85 g. DCF, NPV, and IRR………………………………………………………………………………………………………86 h. Cash Flows During Construction…………………………………………………………………………………87 i. Relationship to the Competition……………………………………………………..…………………………88 j. Analysis of Market Segmentation………………………………………………………………………………88 k. Sensitivity Analysis…………………………..…………………………………………………………………………89 l. Assumptions………………………………………………………………………………………………………………89 m. Joint Venture Analysis…………………………………………………………………………..……………………90 n. Sources & Uses……………………………………………………………………………………………..……………91 o. Request for Proposals…………………………………………………………………………………..……………95 p. Concerns……………………………………………………………………………………………………………….……96 q. Timeline………………………………………………………………………………………………………………..……96 r. Marketing………………………………………………………………………………………………………………..…97 s. Exit Strategies…………………………………………………………………………………………………..…………98 t. Future Market Assumptions………………………………………………………………………..………………99 u. Conclusion…………………………………………………………………………………………………………………100 v. Bibliography………………………………………………………………………………………………………………101 w. Acknowledgements & Sources……………………………………………………..……………………………103

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Introduction

SUMMARY‐

When I was brainstorming with ideas for a thesis, I came up with a couple of interesting

research topics that I began evaluating. But then I realized that if instead of a standard thesis, I

were to work ‐while still a graduate student‐ on a formal business project for a multi‐family

housing development, I could then have a head start for an interesting future business venture.

In addition, I would be able to use the multitude of resources available to us here at Harvard

University. Furthermore, professionals and experts in the field would not mind sharing their

knowledge, techniques and vision with a graduate student. Once I am in the field as a potential

competitor to them, it would be expected that they might not be so forthcoming and candid

with their inputs.

I travel often to South Florida because several family members of mine live there. On one

occasion, I visited a few poor suburbs in South and West Miami. It called my attention the

agglomeration of ‘mostly’ new immigrants in these poor areas, the lack of affordable and

decent housing in those areas, and the pitiful and desperate look that some of those

neighborhoods had. As they are at present, you could say that those decrepit structures are

“tourist eyesores”. I realized that with not much investment, dramatic improvements could be

done to a few dilapidated plots of land. By doing so, not only we could do a positive

metamorphosis of the business appeal of those centrally‐located blocks, but at the same time a

much better quality of life could be offered to those families and individuals who are now living

in conditions more typical of a developing country, rather than American suburbs. I could not

get those images out of my mind, so putting my thoughts together, I decided to embark on this

“urban development study”, choosing that option rather than a more academically oriented

thesis.

On the first pages of this analysis and study, I present the difficulties encountered and solutions

‐whether technical, environmental or financial‐ to some of those hurdles. I am using a large

number of graphs and calculations to support my business study and to give backbone to my

development proposal. Finally, I conclude that this project is doable, but it requires a relatively

moderate investment, part of which can be obtained via grants and subsidies from municipal

departments, as well as from non‐governmental agencies.

From the beginning it has been an extraordinary educational experience, and now that I have

finished this research, I am more committed than ever to move to an implementation phase to

make this dream and hope a reality.

I thank from my heart all those peers and professors for their support and input, without them I

would probably had to reduce the scope of the project. I also found great support from

community activists, and received very candid and unselfish information from many

professionals in several fields related to the housing development industry, for what I am really

thankful. Ultimately, thanks to Harvard University’s Graduate School of Design for this great

opportunity.

AUTHOR’S SHORT BIO‐

I am originally from Puerto Rico, and speak fluent Spanish. I enlisted in

the US Army at 17 and served in the Army Corp of Engineers. Later, I

received a B.A. in Architecture from the University of Colorado, where I

concentrated in sustainable and green design. Before graduation, I began

a design/build company named Internship Designs, and later began

another business in residential property management called ID

Management. I am currently in my final year at the Harvard Graduate

School of Design as a candidate for a Master’s in Design Studies under the Housing and

Urbanization discipline.

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Executive Summary

GOALS AND OBJECTIVES‐

My goal is to understand the complexity of the development process. Implementation will be

done using a current –for sale‐ vacant lot in Miami, creating set‐ups/pro‐formas for a 12 unit

residential building with ground floor retail stores. I will also try to find a building that I could

also modify for adaptive reuse. I will contrast feasibility studies against different scenarios such

that the site with the least risk and highest appeal will be further analyzed in greater detail.

Comparison will be generated for several scenarios: 1) low‐income units vs. market rate, 2)

adaptive reuse vs. new construction, 3) for rent vs. for sale. The evaluation will also include the

amounts and distribution of types of units and retail spaces. If the chosen method of analysis

and resulting proposal is accurate, feasible, and realistic; then that would be the most

rewarding result of this project.

Developing this proposal while still in school provided me with an educational experience like

no other. Investing some of my own financial resources on this project makes it also a personal

venture, with every additional incentive to absorb information at the highest level possible.

Applying the research into my Scholarly Paper Study requirement allowed me to take

advantage of a broad range of resources that only a university as this one can provide.

For validation, it is my intention to select –next semester‐‐ a team of 5 to 8 individuals to closely

review all the work and focus on a strategic approach for the presentation of the proposal in

order to be submitted to lenders, investors, and the appropriate municipalities by June of 2008.

Since this is my first project of such caliber, my main concern is to gain knowledge and earn

credibility that would be needed for larger projects I foresee in the future of my career. I am

not worried with financial compensation, as long as it covers my basic needs. One of the

golden rules of builders is: Final value of property needs to exceed all construction costs. The

rule of thumb being $1.20 value per $1 cost. (Marchant) I will be positive to share the developer’s

fee (as well as any other profit in the form of percentage points) with those future team

members who helped me make this vision a reality. Furthermore, I would be interested in

analyzing the possibility of holding one of the twelve uunniittss ffoorr mmyy ppeerrssoonnaall uussee, and as a result

divide my share of the developer’s fee to increase the reward to the partners to continue in

good terms with them for future endeavors. It is very important to try to stay with the same

partners to reduce the amount of time and risk of working with unknown individuals every time

I begin a new project.

METHODS OF ANALYSIS‐

I will first determine the average cost of rent and sale per square foot for residential and retail

space in the area. Then I will contact local brokers to help me determine a realistic cap rate. For

the affordable housing set up I will contact HUD and other NGOs in the area to determine what

subsidies the project could qualify for. Talking to developers, I will organize the hard and soft

costs and other operation costs such as fees, insurance (which at present is really high in

Miami) and will contact lenders to determine the details on types of loans available (with their

interest, payments, and likely terms of the loan). When sufficient data has been collected, then

a 10 year forecast will be generated showing IRR and NPV as to determine if this would be a

good investment in the long run. Those critical parameters will help me determine the

maximum value that can –profitably‐ be invested on that site. Hurdle rate and feasibility studies

will be reviewed several times as we move ahead through the different constructions phases.

Schematic designs of the setups that look most beneficial will be created, and they would be

properly organized within the following research as to continuously document the feasibility

and viability of the project.

Contacting people personally, helps maximize validity of data, such as from bias or favoritism

towards suppliers, middlemen, contractors, etc. This being said, I should add that I apply four

different methods to develop contacts. The first is extensive internet searches; looking up

companies or municipal departments followed by browsing their websites, after locating their

contacts tab, copy and paste of potentially good resources is done on a list on a separate

document. The second method is “word of mouth”, that is, simply asking people for references,

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suggestions, or advice. Initially began with peers and faculty at Harvard, then I sent emails

requesting such referral from people I was not that acquaintented with. One example is the

Graduate School of Design’s entire school’s forwarding email system (called Student

Announce). The third method, and I would say most valuable for contacting people within the

realm of my study, was actually attending networking events and workshops many of which

were held right here in the university although I also attended a few outside the campus. Of

critical importance is networking, that is, knowing of enough individuals who have the

knowledge, means, or charisma to bring together the different expertise that complement each

other, with a purpose in materializing a vision. With these networking events I was able to

make a small collection of business cards of persons who either where the direct contact or

simply facilitated the creation of a relationship conducive to other third parties who were of

more relevance to my study.

There was no need to call banks; instead I called on mortgage brokers. A good broker knows the

market and has an early insight on when buildings are coming out before they do (Marchant). I

used local real estate brokers to solicit to Investors keen on financially rewarding opportunities.

I found out that a good approach to locate investment is to hire politically‐involved consultants

to audit my study, since they can help deliver it to the market through their connections. The

analyst will measure if that is the best use and can also figure out the as‐is value. Ask lawyers

about titles, and not about real estate. CDC’s help socio‐economically disadvantaged areas.

Performing this first hand analysis, these insights mentioned are all examples of what I have

learned as far as what the roles of these players should be.

The most reliable data could be obtained through the public sector because they are

responsible for the zoning and building codes. Another thing I learned is to be aware that all

data must be looked at with a critical, skeptic eye. Even when the people who volunteer info

were brokers, developers, appraisers, and consultants; I noticed that sometimes they fabricate

it. Therefore, it requires a strategy and methodology to detect the incongruence. I found out

that persistence in questioning is the best antidote to protect myself from bogus information.

A technique I found effective was to get familiar with some of their recent press releases.

Based on those I would ask them about details, using accurate terminology, while trying to

deliver my question of raw data with ease. Often I would call someone only to be referred

somewhere else. Yet, I began to write down everyone’s names. Eventually I would tell them I

had been specifically referred by a person whom they knew.

I found distressed properties through Banks and lenders; they maintain REO (real estate

owned) lists that are usually made available upon request. REO listings are also held by

institutions such as: FHA insurance, VA guarantee, and HUD affordable housing programs whom

I also contacted. If the value of a property is close to the mortgage balance, the bank might also

bid for it, in order to put on the REO list. I even searched other means available to the mass

public like Craigslist, because many individual property owners advertise their sales privately to

not have to foreclose and thus keep their reputation. Of course this is more common with small

developments like 20 units or less.

Auction properties would be nice, but when researching these properties I spent tedious time

investigating the title record to find out that they were not clean and thus will take time and

money to clear the title. Even if I were the winning bidder, the old borrower can reclaim it if

they come up with all the debt they owe, as well as the new fees to the bank associated with

the default.

In order to find the appropriate sites for acquisitions, I searched for the ones with the lowest

yield expectations, an area with high cap‐rate. But it was very complicated because to

determine a cap rate, so many factors need to be compared. Not just the quality, of

construction, size, age, functionality, location, and operating efficiency, but also comparing the

terms of the lease maturities, lease options, rent escalators, and any other major lease

attributes such as easements, title restrictions, and so on. A simple solution I used was to find

the amount of tenants being leased to and if they were in a long‐term or short term contract.

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This was a basic and generic remedy, but in reality, it is said by many that it’s worth paying for

the expertise where it counts, such as a Market Analysis. In conclusion, assigning the correct

cap rate is difficult and an incorrect one could result in a serious pricing error.

Risk Factors

My research emphasizes the mitigation of risk since this would be my first project, to taint my

reputation at this early stage of my career would derail my future endeavors. The following will

focus on risk factors during every stage in my process, and the possibilities of how the risk could

be remedied. Risks need to be closely evaluated to deconstruct them and determine the

specific issues that pose the threat. The final challenge it to then find a solution to avoid or at

least minimize the probability of that risk occurring. One rule of thumb for me is to always have

a plan B, because even when appropriately planning for risks, there are always uncertainties

that may not have been accounted for and must be prepared for by other means.

DUE DILLIGENCE‐

The most important factor for the reduction of risk is proper due diligence. The more accurate

is the research, market, and feasibility study, the less risk the project will ultimately have. With

more accurate numbers and calculations the initial market risk that would create a snowball

effect of continuously increasing uncertainties will be diminished.

PARTNERSHIPS‐

Partners are necessary when forgoing a large project, or any scale project for my case. In a joint

venture, it is critical for me to have similar goals with similar level of risk take with my team.

When possible, I shall record meetings or agreements with other parties to verify the correct

communications. Repeat relationships are said to always be easier. When looking for a partner I

need someone who has experience, political attachments, reputation and is reasonable. In

emerging markets, it is said not to have an LLP with a local entrepreneur because if there was a

problem, the court would probably favor the local individual instead of the ‘out‐of‐towner’.

There are all sorts of models of joint ventures. It all comes down to how the profits are split. It

should be all done up‐front and very clearly defined. Put maximums on fees, negotiate the exit

strategy, and a mechanism for when things don’t work out. One golden rule is whoever puts up

the most cash, gets the preferred return ‐a threshold return before the other partner gets

anything.

A possible problem is if the majority partner stops paying on the loans for any reason and I have

25% ownership and want to continue on the project. This is a form of embezzlement and it

would result in long and expensive legal battles. The way to minimize the potential dangers in

this matter is by partnering with professionals who have the credentials and reputations. A very

detailed outline of how they conduct their business practice should be requested from them.

I am intrigued by the S Corporation method because equity funds are raised by selling limited

partnership interest. This concept can be beneficial in that I would be consolidating all my

partners into one entity thus reducing the possibility of conflicts associated with working with

several people. Yet at the beginning of this venture, it would be imperative that I hire a tax

expert or consultant to figure out all the details for, what I think, is a complicated form of

partnership that requires professional expertise. In a Limited Liability Partnership all involved

have rights in the management say and can bind the company by contract.

Another joint venture option which I am pursuing is to partner with the land owner as a Silent

Partnership. If I can bring in the land owner as a partner, then that satisfies my down payment

for the loan. I have identified four possible methods of accomplishing this. The first is to create

a Limited Liability Partnership with the land owner such that they will receive a certain

percentage of the profits. The second is a land option or easement, which would allow me to

negotiate with the land owner possible terms and conditions to use the properties documents

for application processing. If I can option the land, great, because it is worth the flexibility to

improve the feasibility study and proceed with caution –yellow light, red light means stop,

green light go. Reds are easy, greens are rare, and yellows are common. (Marchant)

9

A third way, and something I would like to attempt, is to try to do a sort of creative financing

where the seller helps the buyer by paying his points or discount fees it is a common source of

financing for land called a purchase money mortgage‐ a loan taken back by the seller of the

land. As the buyer develops the land, new financing is obtained and the seller is paid off. Still

lenders normally require title insurance in case of problems. The fourth would be for the land

owner to get a second mortgage at a below‐market rate of interest which would reduce the

borrower/buyers monthly payments and ultimately the cost of financing the property.

Land leasing is also an important way to gain income on the land. The closing date would be

made for as long term as possible. Condos may not be allowed to be built on leased land but

apartments certainly can. To induce the land owner I would just mention that if I lease the land

for say, $50,000 a year, and the owner still sells for his asking price of $1million, say a year later,

the relationship of his gain is 5%.

To mitigate some of these involved risk with the sites, I selected sites that are surrounded by

other vacant lots or the same can be said with possible building acquisitions. In other words, if

the subject property is sold by the time I conclude my project or if I encounter a red light, there

will be ‘plan B’ sites that can work with the market research I have conducted.

SITE CONTROL‐

From my research I learned that affordable housing is a great way of minimizing uncertainty

risk. Government subsidies minimize the developer’s soft costs which has significant influence

in the overall total development cost. The subsidies will cover such line‐items as impact fees,

property taxes, and even marketing. As mentioned before, the problem is that I would need site

control to apply for low‐income housing subsidies. This entails higher risk because I would be

buying the property without knowing the probability of being awarded my assumed subsidies.

If I am not awarded on the first round, I would need to wait to reapply which could be 12

months. The site acquisition carrying cost will continue to accumulate increasing the project’s

cost substantially. Site control is not just necessary for affordable housing but also any other

type of development so that property inspections can be done prior. While having the right to

conduct test, I will not only check environmental issues like lead paint, asbestos, prior chemical

storage, but also foundation, drainage, building quality and building code compliance, etc. For a

simple site control, I need to negotiate with the land owner if I can pay the lands taxes or their

financial burdens related to the site, in order to obtain the owner’s documents.

CONSTRUCTION‐

With the development of a building we see the construction risks in a wide array of forms,

especially when comparing new construction to existing or defaulted construction properties.

Either way, performance bonds or completion bonds from the contractor might be requested

to reduce some of the risk. (R. Peiser) Performance bonds are required for public buildings for the

public entity’s defense, but the same cannot be said for private based construction. On very

large projects, the lender will require it, such as, 2% of the cost in order to buy the necessary

insurance bond. If the contractor doesn’t finish, the bonding company will pay for another

contractor to come in and finish the project, but will not recapture the time delays and other

discrepancies involved with the transaction. Deep pockets can be helpful when the contractors

call a change order. Since I don’t have deep pockets, I just have to fix it affordably or just ignore

the inconvenience and try to adapt and incorporate it into my master plan. If I try to sue the

contractor or architect, it can take months of timely and expensive trouble which I should

always try to avoid. One way to delude the contractor problem is to not pay them upfront. Pay

them as work is being completed such that I can dispense the contractor team if needed.

NEW CONSTRUCTION‐

With new construction, the process for developing raw land requires grading the land where

necessary, obtaining rezoning approval, installing utilities, sewers, streets and sidewalks. Also,

some of the most common unforeseen complications come from the infrastructure risks. As

mentioned earlier, to minimize this risk, it is imperative that when I soil test, I should not just

evaluate to see if the soil is contaminated, but also determine the type of foundation that will

be necessary. The prior due diligence should accordingly include what can and can’t be done on

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to its outstanding loan, lenders are doubtful and thus will have interest rates at one to four

points above the prime. These ‘to‐be‐developed properties’ are complicated to foresee. Unless

I buy after the completion of the project, I would be dealing with the risk of not knowing what I

am paying for. Due diligence of the previous developer’s background is my priority so that I may

rest assured that they do not walk away from the deal or go belly up from another project they

might be involved with. When analyzing a for‐sale building prior to its completion, I can

minimize the leasing risk by attempting to have the seller guarantee at least a 93% occupancy

upon its completion. Lenders can give a “special warranty deed”‐ to warrant the title against

liens and encumbrances that occurred while they held it. (Brueggeman, Fisher and Irwin) I shall be careful

if the property defaults for little money, especially near the end of its loan period because by

law the owner could easily recover it after they financially recuperate.

ADAPTIVE REUSE‐

Rehabilitating buildings can have less construction uncertainty associated with it because, as

mentioned earlier, a major risk involved with new construction is the creation of the foundation

on unknown soil. The renovation of an existing building may have many unforeseen

complication lying behind its walls, but when I purchase the asset, costly uncertainties will be

more physically apparent then starting from nothing. Construction time is also less, thus reduce

the amount of time that uncertainties could arise in the future.

TIME‐

Time efficiency is crucial and can also decrease the risk involved with financing. Generally, rates

are chosen as measures of the perceived risk at that given point in time. To reduce reoccurring

expenses along with the lender’s monthly yield, my development will be carried out with

strategic coordination to reduce construction time.

LENDERS‐

Major corporations like GE borrow in the billions, and are the criteria for the “preferred

borrower” because they are low risk. The larger a firm the more creditworthy they are to a

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lender. That entails that my proposal will be the exact opposite, thus lenders will view me as

high‐risk. The prime rate is considered the average interest rate that banks give to their most

credit worthy commercial borrowers. What is left goes to the smaller corporations until the

available financing is filtered all the way to private builders and developers. As a result, almost

anything available for my scale of project will be above prime. Mortgage companies lend, but

they don’t have FDIC or CRA obligations, thus they are not regulated and can lead to predatory

lending. Many of the predatory lenders are in the form of subprime lenders, sometimes there’s

good ones, but most of the time they falsely interpret the interest to the borrower where it can

never be paid off. Yet interest only loans are highly sought after for short term investments,

and are the norm for construction loans.

INTEREST RATES‐

Interest rates vary widely because of supply and demand, yet the Federal Reserve has policies

in place to mitigate swift changes. When the economy is expanding rapidly, it increases the

demand which raises the rates on large commercial loans for developers as well as expanding

businesses.

To come up with an interest rate, lenders look at the particular type of property, its rental and

operating projections, its physical condition, current and projected interest rates, and the

involved investor’s expectations. Other types of lenders might base the interest rate on the

possible returns in light of alternative investment opportunities. (Financial Analysis of Real Property

Investments) The Interest can also be calculated to assume all the risks associated with it such as

default risk, interest risk (anticipated and unanticipated inflation), prepayment risk, legislative

risk, and liquidity risk. Such that i=r+p+f, where r=opportunity value, p=high premium incase of

default, f=inflation (Brueggeman, Fisher and Irwin).

DESIGN‐

When I send preliminary plans to a contractor, they might give me a high quote because of any

possible uncertainties in the blue prints. This is especially true with innovative designs, or any

design that is new or difficult for them. Even with the new technology of Building Information

Modeling, some contractors are still not used to reading the prints and will raise the price on

any irregularity from their usual routine.

MANUFACTURED HOUSING‐

Manufactured housing may reduce the cost of construction as well as the construction risk due

to weather set backs or faulty craftsmanship. Stacking modular sections on top of one another

also helps reduce noise levels for the tenets because of the additional space between floor

joists and marriage walls. The fast growing potential of prefab may even allow the use of

contemporary and abstract design at a competitive price.

Currently the realm of prefab is finding a niche business practice in the high‐speed construction

of the world. By introducing mass production manufacturing with the latest technologies, they

are making it easier and less expensive consequently bringing familiarity of their product types

to the contractor and end users. Many manufacturers are introducing their product with at

LEED certification quality. The companies will provide the structure to the site, but the façade,

landscaping and interior will have to be all tied together by a general contractor. As soon as this

product becomes more widely used, it will be essential for developers who want to reduce their

costs.

CAPITAL‐

The most risk capital is right at the beginning; personal equity and reputations are at stake. A

recourse loan will even recapture assets not related to the venture. Some peers’ advice is to

give everything to the spouse. Being that I don’t have any assets, I don’t see a dilemma, yet the

lending institution might decline me because of that same reason.

15

With uncertainties, the developer should place a high premium on the discount rate. FIRE‐

Financial Insurance for Real Estate can be purchased if I only put down 5% equity for a loan.

Title insurance would work similarly for rehab properties and can even take out the need for an

attorney in some cases.

RISK & MITIGATION CONCLUDED‐

In conclusion, clearly you can see that with proper due diligence and risk mitigation, the project

holds more merit for being successful.

(Joint Center for Housing Studies)

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17

20% of the population needs housing, 8% needs affordable housing, and 28% need low‐income.

(Joint Center for Housing Studies of Harvard University) State and local governments make it difficult to build

affordable housing by limiting the land available for it, imposing impact fees, and subdivision

requirements all which raise production costs. Restrictive land use regulations and little

increase in income for the people in the lower tier have made it complicated to heal

affordability problems. Housing affordability is the nation’s largest housing challenge. (the US Census

Bureau) Unless local governments ease regulatory constraints, developers can do little to supply

additional affordable units.


19


The nation’s housing stock is divided up by 65% owners 35% renters. (Stockard) Despite record‐

breaking national trends on mortgage foreclosures, the apartment market remains strong.

These people who default on mortgages will ultimately need alternate means of housing, which

the most fitting for their situation is rental. With rents steadily increasing, the net operating

income of apartment properties finally rebounded. Primarily, the new multifamily rentals met

replacement demand. Apartments are currently the 2nd best market while condos are the least

successful of all sectors. (ULI and PCW)

(ULI and PCW)

For the for‐sale market to have a good recovery, the home starts would need to reduce to 1.55

million and manufactured home placement down to 100,000 annually. Current distressed for‐

sale properties may be made to rental to become successful.

Lenders like to match the maturities of their assets (loans) with their liabilities (deposits):

commercial banks for construction loans and life insurance for long‐term loans. In general, the

life companies are doing well in relation to other types of lending such as commercial banks.

(Miles) Yet in Miami they are having a hard time supplying loans, and are offering 70% LTV.

(ULI and PCW)

As you can note above, pension funds maintain the potential to be a huge strength behind the

real estate debt and equity markets. (Miles)

Entertainment retail is a big trend worldwide and especially in Florida. From Disney World to

high grossing dance clubs, the amusement business is doing well and should be further studied

to incorporate similar attributes of smaller scale into my project.

23

REGIONAL ECONOMIC OUTLOOK ‐

The term bubble is used to describe when home buyers and speculators/investors take

advantage of fast appreciation. So much so, that the rates are too high to work and the bubble

bursts. A straightforward calculation of how that happens is the following: too easy to get a

mortgage = appreciation = low interest =bubble pop.

Because of Florida’s oversupplied housing reinforced with its low employment growths it will

take a long time to recover. With 30,190 foreclosures last year, the state lands in third for most

foreclosures in the nation. (the US Census Bureau) Many are acting on this trend and are beginning to

convert condos to apartments in mass numbers. The ability to adapt and take advantage of

short‐term downturns and to be able to hold property long‐term has been said to be the key to

success in real estate. (R. Peiser) Condo developers have had to stop mid‐way on construction

because their funding seized due to lenders wariness of the over‐saturated market. In Miami,

40,000 new condominium units will go online by next year. If we divide that by the ability to

absorb, the result shows six years of oversupply.

(Marksjarvis)

Converting a project to other uses would cost a lot of time and thus money for these developer

who were already consumed by their existing project. As a result, fresh other investors are

taking over the project to condo conversions, consequently others now fear the over saturation

of the apartment market.

The quality of condos are substantially better than those of typical apartments because they

are meant to sell the appeal of the unit using such things as granite counter tops, instead of low

cost materials for renters who are trying to save. In some cases, higher income renters that

could buy homes prefer to rent because of lifestyles that have easy access to work and the

25

amenities of cities. The combination of these two factors will result in large quantities of Class A

apartments to be released into the Miami market in the months to come.

This significance of the oversupplied markets has allowed me to seize further research on the

condominium sector as well as high class apartments. Even though, there is always demand for

for‐sale affordable housing, the onslaught of foreclosure properties and the depreciation of

homes will decrease enough to house some of those financially restrained.

(Marksjarvis)

The current slow trend for the condo market might pick up if interest rates decline and job

growth picks up. The economy/GDP is directly related to unemployment rates. In laymen’s

terms, if everyone has jobs, then the GDP is good.

In the state, the site costs have gone way up and soft cost keep increasing because the

complexity of new and changing laws and codes. Yet the labor cost has not climbed in

comparison, most likely due to the fast growth of immigration. Florida along with Arizona, and

Georgia, are the fastest growing states in the country due to migration of foreign born. In

Miami immigrants contributed to 40% of household formations between 2000 and 2005.

(Urban Land Institute)

In Florida, 20% of recent homebuyers and 25% of renters are foreign born. Two out of three

renters in Miami are minorities. During 1994 to 2004, the number of minority renters rose by 3

million households, offsetting a comparable decline in the number of Caucasian renters. The

number of legal immigrants has reached almost 1 million annually. (the US Census Bureau)

Additional demand for rental units and starter homes will come from the echo boomers as they

move into the peak household formation years. (Miles) The following graphs are provided by

Harvard University’s Joint Center for Housing Studies ‐The State of the Nation Housing report.

They clearly depict the influence of minorities in the housing markets.

29

Days On Market –DOM‐ is a good indication of how a market’s doing. Single‐family homes went

from 72 to 110 DOM while in the same time period condominiums went from 72 to 127.

according to the Realtor Association of Greater Fort Myers and The Beach, the value per rental

unit in Jacksonville was $125,436, cap rates for class A were 4.25 to 5.25, class B was 5‐6%, and

class C 6‐7%. In Miami cap rates are show in the graph below.

(Real Estate Research Corporation)

Additionally, in Miami, East Kendall has the least amount of vacancy and Hialeah has the

highest absorption. ((RealQuest))

Construction demand will be weighted toward luxury homes, major remodeling projects, senior

housing, and secondary homes (CB Richard Ellis) thus mainly fulfilling the ‘dream’, not the need

for housing. Major cities like Miami are introducing housing price contracts to sell to

homeowners in order for their home value not to decrease. The way the contract works is that

they are for a fixed amount and guarantee a price per contract, for example you can buy 200

contracts for $250 each guaranteeing a value of $50,000 on your home.

LOCAL ECONOMY‐

An area of more than 5,000 square miles, and a population surpassing 5.5 million full‐time

residents, makes South Florida one of the largest consumer markets in the US. It is the seventh

largest metropolitan area in the US with an average household income of over $72,000.

Many international companies enter the United States by establishing their first operations in

South Florida. The cost of operating a business there is highly competitive compared to other

major metropolitan areas. There is a low tax structure with no state or local income tax, and

corporate income tax at 5.5%. Property taxes are currently among the lowest of major US

metropolitan areas.

The notion of “hybrid” buildings is being introduced in the city, in which I found to be an

intriguing concept. The idea of a big box store being wrapped in residential or smaller

commercial establishments has great potential there. This is useful in places like Miami who

have a strict “MiMo” (Miami Modern) design on all buildings and the sight of a Wal‐Mart or

Costco would take away from that uniqueness.

With the median population being made up of young professional and retired elderly, the

municipality is not concerned about families that have children which require schools and other

expensive legal requirements with no economic gain in return. Units over two bedrooms in size,

usually means kids, which communities like Miami might be trying to avoid. Yet, providing more

rooms in apartments would allow for the target consumer young professionals to share them

with roommates to reduce cost burdens or just create a leisurely office space.

Location is defined by where the jobs, schools, transportation, and health service are. This is

why property values are more expensive in the center core and as a result renters are more

likely to live near the downtown than homeowners are. (Joint Center for Housing Studies)

31

Buying bulk land then selling parcels of it with new zoning is currently a popular trend in the

county. Many are finding small scale building and rezoning profitable from small deteriorated

homes with large lots. Then they build out the plot to the maximum units allowable to resale it.

The city inspector told me to apply for rezoning I only need to meet one of the following

criteria, 40,000 square foot minimum lot size, 200 feet of frontage area, or if the property is

adjacent to sites with other zoning. If I don’t satisfy the conditions above, I can ask the

neighbors to fill out a joint applicant to meet at least one of those requirements.

With the ongoing large scale condo conversions, I see the local economy being oversupplied

with Class A apartments in the near future. This will leave the market demand open for less

expensive apartments. The only imperfection to this may be that developers are building with

such high density that repositioning lower class apartments may be made financially rewarding

by compressed yield over time. I have learned that any class condo conversion that becomes

available is highly sought after. CBRE states that you can get Class A and Class B at 10‐15%

below the replacement cost. The latest market data from CBRE also claims, that new deliveries

will come online in 2008 and 2009 with 25% differential in affective rental rates.

Currently there is an oversupply of distressed properties in the city ‐those for auction and

rehab. These building foreclosures are occurring as borrowers are more commonly unable to

make the mortgage payments, or when the market value is less than the remaining loan

balance –which in the field they call it underwater or upside‐down properties. Construction

lenders have tightened up on their loans due to this economical downturn and are mostly

giving variable rates which are unfavorable in an unstable market like Miami. If rates are

expected to go up, it is beneficial to have a slow moving index like the Treasury bill, yet they are

commonly based on the easily fluctuating LIBOR.

AFFORDABLE DEVELOPMENT INCENTIVES‐

Every project needs a story to help it get funding, and what better story than helping the

unfortunate. To have a strategic approach, when I apply, I will explain what my competitive

edge is, and how I am going to beat out the others. The demand for affordability is always there

as the following image depicts, the problem is the complexities involved with the

implementation.


Public bonds can be given for a “public purpose” in Miami. The way the bonds work can be illustrated in layman’s terms:

Investor ↑ ↓ ↑

$+i $ Bonds ↖ ↗

Housing Finance Agency ↑ ↓

$+i $ ↑ ↓ Borrower

33

Other subsidies that may be available when applying are described below. From the IRS

Treasury there is income tax assistance, reduced real estate taxes, mortgage interest

alleviation, and of course the largest subsidy of all, the Low Income Housing Tax Credit.

The US department of Housing and Urban Development, more commonly referred to as HUD,

provide resident based Section 8. The money is collected by public housing authorities and then

distributed to applicants by lottery. The approved applicants only have to pay 30% of their

income and the Section 8 subsidy pays the remainder of the rent. They don’t have to tell the

landlord they are Section 8 until they sign the lease. It is illegal to refuse a Section 8 renter.

Insurance will cover the damages that they will most likely make due to letting other families

move in to save even more money. They can only have the eligibility paper 90 days before they

have to return the eligibility to HUD. It’s available to about 25% of eligible applicants. Not

available to full time students, but maybe part time. If income is less than 80% AMI, they can

negotiate with the land lord to raise the rent and HUD pays the difference because they don’t

pay more than 30% their income. Many people may keep from working more so they stay

eligible, but no one can ever know if this is true because they are not going to say; yes I have

been staying home some days because I don’t want to make more. The City of Miami

Department of Community Development states that, “Once Section 8 families find a good place

to live, they tend to stay, which translates to less turnover. As a result, landlords have fewer

operating costs and are able to make more of a profit.” The tenant’s certificate will cover 80%

of the fair market rent. I may want to tell my lender that I will have a guaranteed source of

income from the units that are low income because for every certificate, HUD has 5 applicants.

(Marchant)

Site‐based Section 8 is also provided by HUD. 15% of HUD’s Section 8 stock needs to be given to

landlords for site base use. It is said that some HUD branches give more than allowed to

developers because giving them out arbitrarily to people is not as effective. That HUD branch

can later send a letter to their head quarters claiming they lost or misplaced the additional

certificates. (Stockard)

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35

According to a statement given by the mayor earlier this year, they will encourage joint

ventures between for‐profit developers and non‐profit agencies, taking politicians out of the

contract award process. They will also put a professional loan committee in place and bring in

major private affordable housing developers, as well as, work closely with HUD to ensure

program compliance.

The housing authority is appointed by the mayor, but it is funded and regulated by the federal

government, so the federal government will have the ultimate say in what they do. When

applying to government subsidies, one should be aware that senators have a longer term

objective than congressmen do.

Last year, the mayor’s efforts resulted in the best allocation year on record with 10 projects,

that represented 1,104 new units and over $277 million in additional affordable housing

projects. The city has a goal to develop $1 billion in affordable housing by 2010, and since the

beginning of the decade they have spent $557 million to show their commitment.

The Economic Development Department created a Community Development Entity (CDE) for

purposes of applying and allocating New Markets Tax Credits. The New Markets Tax Credit

(NMTCs) program is recognized for steering low interest, private capital into distressed

communities to acquire capital for commercial and residential projects that are hard to fund.

Similarly, the HRV Hampton Roads Venture is a community development investment firm that

has partnered with the City of Miami to help attract private sector investment capital to apply,

specifically towards innovative real estate projects in lower income neighborhoods. They are

expected to apply for a $75 million allocation exclusively for Miami.

Massachusetts has a very effective affordable housing vehicle called Chapter 40B. It is a state

statute that enables local zoning boards to approve affordable housing developments under

flexible rules. 40B is triggered by having a community with less than 10% of its housing stock

affordable. As of now, the City of Miami requires a minimum of 15% of units to be affordable

within a 10 mile radius. Unfortunately, Miami does not have a 40B requirement which

ultimately speed up and facilitates the implementation. In 2000, Miami assigned an exclusive

“in‐house permit expediter” for affordable housing. However the biggest subsidy with 40B is

the density bonus, because you can reduce the development cost per unit, which the in‐house

permit expediter does not provide. If there was something similar, a developer could seek a

property with low density zoning to capitalize that benefit. Without the 40B as well as no ‘one‐

stop application’ the permit expediter may not be sufficient. Miami has a Universal Application

Cycle for many of their subsidies. For the other subsidies I will have to identify the exact

deadlines of each and assign someone the rigorous task of applying.

Mayor Diaz efforts have also allowed the city to agree to transfer infill lots for just one dollar to

affordable housing developers, but only on an RFP process. In‐fill housing virtually eliminated

the city’s inventory of available vacant lots by designating them for affordable housing. Because

of all the new construction they have compiled a map to keep track of the number of units and

other data. The map on the following page is the City of Miami’s Developments of Regional

Impacts (DRI) which identifies all new developments to make sure the city’s municipalities are

working collaboratively.

Mayor Diaz said in a news paper interview, “We are committed to continue reforming a once

broken system and staying focused on our goal of a $1 billion of affordable housing by 2010.”

When crunching the numbers, affordable housing is all about filling the gap. Sources and uses

are to equal each other, to break‐even. To visualize the idea for me, taxi drivers work for the

concept of breaking even. They call it the nut when they make the amount of money they owe

for lending their vehicle.

PUBLIC AND PRIVATE DEVELOPMENT‐

The Miami‐Dade County has allocated regions within their political map as distressed areas.

These areas have been designated as Enterprise or Empowerment Zones. An Empowerment

Zone is a federal designation to create economic opportunities. Businesses locating there will

obtain many governmental benefits such as sales and corporate tax credits and tax exempt

bond financing. It is considered, without a doubt, the most powerful engine for the economic

revitalization of inner city areas.

39

Doing business in Enterprise Zones will qualify for tax exemptions among many other things.

There are several sectors where the two intersect one another. This is beneficial for me as the

developer as well as a lucrative investment for the ground floor retail.

ASSUMPTIONS‐ The Fitch and Moddy Report said that the typical loans in Florida will cover 80% of value, have

high interest, 10 year terms, may be interest only, and a 1.00 debt service coverage factor.

Affordability products such as interest only loans and payment options mortgages have gone

from nothing to being large shares of the market. (Joint Center for Housing Studies)

Leverage risk will decrease in 2008 since this is a highly liquid and stable debt market. Lower

interest rates and the weak dollar will prop up the economy.

It’s a high priority for the new governor to have some insurance alleviation signed in 2008. A

possible $32 billion reinsurance will improve availability, direct competition with other

companies, and will expand Citizens policy offerings. (CB Richard Ellis) Resources suggest that Citizens

will insure anyone. Private capital entities have to pay $2000 insurance per unit while

institutional buyers are paying $600‐1000.

The belo

other me

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emonstrates

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s that Miami still has goood economic potential i

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41

on to

CONCERNS‐ Lenders are becoming more cautious, banks are giving more scrutiny to deals, land costs have

become very expensive, and the Miami 21 are all effects that I should be concerned about. The

Miami 21 is the rewriting of the city’s zoning code to better regulate development. This may, or

may not be beneficial and only time will tell.

Any good plot of land will base the value on its highest and best use. If the residual land value

based on retail is greater than say office, the owner will sell for that maximum price. Because of

this, land prices are high and keep rising. CBRE states, “Stubbornly high development land

prices, construction costs, and impact fees will most likely limit new apartment unit

development for the foreseeable future.”

43

An additional concern is the average 12‐18 months it takes to approve documents and break

ground. From my research I understand that several months may be shaved off by partnering

with local companies and firms that are familiar with the process and have close political ties.

Finally, people have said that holding the asset for a long period of time as I planed is a bad

idea. Cash in pocket now is better in order to reinvest. Another reason is because more

competitive properties may be developed, thereby increasing the supply thus increasing

vacancy. Eventually the place will become older and its function and style may become

obsolete, but that’s the least of my worries at this time. With all these possible predictions, I am

still determined to hold on to the asset as long as possible because the value and rents will keep

appreciating while the taxes and finance will steadily decrease.

The following image depicts the riskiness of a venture in Miami.

MARKET DELINEATION AND SITE ANALYSIS‐ Architects and contractors need specific licenses to practice in the state of Florida. It has been

found to be complicated since the state has many retirees incoming; they have to save the local

businesses from an influx of life insurance establishments, civil attorneys, pharmaceutical

outlets, and other like‐companies chasing them.

Office and industrial space require white and blue collar employment, retail depends on income

generating communities, and residential depends more on household formation. (Peiser and Frej)

Multi‐family housing in the city is good for the economy because the municipality does not

have to spread out their infrastructure and services to distant vacant land which we see

occurring in massive numbers for single family housing in Florida.

Four out of five apartment tenants come from the local area in Miami. (Joint Center for Housing Studies)

This demonstrates the target consumer would be local residents looking to move to higher

quality or less expensive units.

45

Analysis of demand

PROJECTED OVERALL DEMAND –

Downtown areas have the greatest demand for housing, but of course, the land value will be

associated with the location. By introducing retail at $35 per square foot, it may absorb the

extra costs that will be required for the land. The retail rent can also be based on that

merchants monthly income of sales, such that NOI x 5% = rent, then just choose whichever is a

greater sum. Studies show that the demand will always stay strong with waterfront properties,

thus the two sites that I am researching for possible development are both located on the

water’s edge. Demand may strengthen even more if interest rates decline or job growth picks

up.

The greater the public transportation investment by the government, the longer lasting it will

be, and the longer a building located near it will retain its value.

The following images depict the vacancies for different types of units.

(ULI and PCW)

(Joint Center for Housing Studies of Harvard University)

(the US Census Bureau)

Statistics show that 95% of people who apply for apartments previously resided within one mile

of that location, and even more so for low‐income. (Joint Center for Housing Studies) This is possibly due

to those people having close familiarity with the neighborhood.

47

Also, as mentioned earlier, the demand for affordable housing is always there. With the new

construction of thousands of market rate units, the city needs to make it feasible for developers

to provide 10% affordable. If the affordable housing threshold is met, and new construction

seizes, that would be the day that there is no demand. In other words, with a fast growing

population, Florida will continue to build, and the oversupplied market will eventually be

absorbed to generate demand again.

ABSORPTION‐

The two most important factors are the absorption and the influence of future cash flows;

these will be continuously examined throughout my project. Absorption equals the net change

of occupied space, or the total space available less vacated less space coming online. People say

it is typically the most poorly calculated and hard to get accurate.

Analysis of Supply

EXISTING STOCK, PAST TRENDS, AND FUTURE SUPPLY‐

In the late 1980's Miami was overbuilding multi‐family apartments, now it is infamously the

condominiums. This is why I have diverted my study away from the condominium sector early

on in my project. My market research showed that the apartment supply should stay in‐par

with the demand for the near future.

Statistics show that smaller buildings are in higher demand than large scale apartment

complexes, (Joint Center for Housing Studies) which is beneficial for me since my project is considered

undersized.



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Analysis of Capture Rate (Marketability Study)

Scientific studies have shown that what stimulate occupancy in buildings are seaports, minerals,

low‐cost energy, and beaches. Additional studies have also shown that a highly trained and

educated workforce, universities, transportation hubs, high tech research and development, oil

and gas exploration, communication and computer assembly, medical technology/clinics, and

entertainment all foster to the tenant market. (Brueggeman, Fisher and Irwin) Luckily, Miami and Florida

as a whole often rank highly in the nation for the above stated categories.

COMPETITIVE ADVANTAGES‐

From my research, I found that there are typically no concessions provided, however I will try to

include one free month’s rent or possibly included appliances or furniture if possible to induce

prospective tenants to sign a lease.

The big developers out there are my competition because their experienced and advanced

delivery systems will consume the demand. By avoiding where they build will give my specific

project a competitive advantage. The next maps show the amount of rehabs and new units

coming online which for me translates to more competition.

(Miami Dade)

51

MARKET SEGMENTATION‐ Location quotients can be used to calculate the economic base of a specific geographical area.

The variables from the results demonstrate incomes and how much consumers can afford. This

study will be conducted when I have concluded which of the two following sites I will work

with, and define the best use for that particular site. Nevertheless, the following charts and

graphs show that immigrants are a likely candidate for tenants, and Hispanics dominate the

demand.




Project Contexts

My preliminary due diligence was done by using real and current for sale lots. Yet they are just

for establishing the numbers and considered ‘hypothetical’ because the chances of the sites still

being there when the project is complete is minimal. Because of this the sites I located were

either surrounded by other vacant plots where if they were taken by the time I needed it, I

would have other options. They are both waterfront acre plots of land. One located on the

Miami River just north of little Havana, and the other is a site on the Intercontinental Waterway

on an artificial island. The first site is vacant and has recently been rezoned for affordable

housing. The second property is an existing 12 unit condominium with more than half of the

unit’s bank owned. As I concluded earlier, condos are not a viable market and the possibility

can be omitted from my study. I will focus my attention on the rental market for new

construction vs. existing property at the following sites.

53

SITE 1

CURRENT USE‐

The subject property, Rollins Land, is currently 2.11 acres of vacant waterfront land. It has over

385 feet of frontage on the Miami River and has recently been HUD approved for an affordable

housing site. There are certain environmental challenges, which include remediation and

continued monitoring, but this is a developable site, with great visibility. It has recently been

taken off the market but they are still accepting offers. Additionally, it was said that the owner

might have listed the property just to get a free appraisal based on what offers they received.

GEOGRAPHIC LOCATION‐

1950 NW 27 Avenue is located on the Miami River adjacent to the bridge at the North West

intersection of 20th street and the 27th Avenue. It is close to Miami downtown, little Havana,

and the Airport. Being between SR 112 and 836, major commuter routes, the site has great

relation to the city center, transportation, circulation, accessibility, exposure. It also has easy

access to all major highways in one of the most densely populated areas of Miami.

STATUS \ PRICE \ SELLER‐ The owner is Rollins Inc. “The leader in pest control” or better known as Orkin. The seller is

Harper Realty, Inc. I have been communicating with Rick Harper via phone and email at (813)

243‐1223 and [email protected]. They are asking $3,000,000 for the 2.11 acres, such that

it is $1,421,801 per acre. I was considering offering $1,000,000 for just half an acre.

ZONING‐ The Zoning is considered Liberal Commercial. The city has indicated affordable housing, mixed

use retail/multi‐family and or office/retail would be preferred uses for this site. Many variances

such as height, density, etc. were applied for and put in place by a prior contract holder. The

water on the site could also be used for a boatyard or marina development. There are permits

in place for 25 boat slips. The below land‐use map shows that the site is immediately

surrounded by industrial, a trailer park across the river, and single family housing across the

retail‐busy 27th avenue.

55

CONCERNS & MITIGATION‐

Site control for me is a financial concern. Also the zoning could get complicated with setbacks

from road and other detailed requirements that are unknown at this point. Preliminary designs

showed that 12 units per acre is a low density for this building type.

Thus attempting to acquire only half of an acre for more than its value per acre is a negotiation

that might run into some trouble because the developer might not want to break up the parcel.

PROPOSED PROGRAM & LAND USE‐

My calculations showed that the apartment

rent is insufficient to cover the cost of

financing the mortgage so I had to introduce

ground floor retail to balance the costs.

Retail is a superior market in Miami and generally a very profitable sector in Real Estate. (CB

Richard Ellis) Yet, I should not build any retail unless I have a preliminary contract with a tenant,

this way I can build it to some specified requirements.

I would be interested in a specialty retailer

like Whole Foods, but since they are a fast

growing company, it is hard to allocate them

as tenants. As I understand, they are in high

demand and would only approve very low

discounted rents, high income environment,

or areas with fast growing economical

potential. These types of ‘anchor’ tenants

only rent instead of own because of their

ability to find extremely low rents.

(ULI and PCW)

57

Below grade parking costs $38,000 per spot, and less than half that when above grade. Yet with

affordable housing, the city allows the reduction of parking requirements. Apartments typically

have only one car but anymore that I can provide over the minimum will be beneficial.


I will attempt to provide only as many that will fit along the west side of the building and rent

them out for an additional fee to tenants.

*The following will be my developed baseline data, projected trend conjecture, and assumed

sources of discontinuity. Set up formulas have been designed for the benefit of the doubt.

MARKET RATE

*In this spreadsheet, the red is just to signify the impact fees if the development was in Downtown Miami which is just a mile and a half away from the site.

Another method to save on my operations cost would be triplenet leasing. This would lose

some prospective tenants, but it will reduce operating costs substantially long‐term.

Furthermore, to guarantee the NOI from declining I will use an expense stop. This is a

predetermined amount that the developer will not pay in excess of from operations, the tenant

will take on the additional expenses.

AFFORDABLE

ASSUMPTIONS‐

The window of affordability is 70% of 80% of the AMI, and then the tenant can pay 30% of that

per month.

(US Department of Housing and Urban Development )

61

My research has shown that smaller units will generate more per square foot which in turn will

have all the big developers providing them, but by having tax exempt financing I may be able to

supply larger units that are not being supplied in the market place.

SUSTAINABILITY‐

A city requirement is that the units need to remain affordable for a minimum of 15 years. The

tax credits will be distributed over a period of 10 years and will not adjust with inflation.

Site 2

CURRENT USE‐

The next site being surveyed is an existing 12 unit condominium on the waterfront of the

intercontinental waterway. It was built in 1953. Because of the housing bubble, the majority of

the condominiums are being foreclosed on. The units are all 2 bedroom 2 bath and range

around 1120 square feet. My research showed that many of the neighboring multi‐family

buildings are at 100% occupancy.

GEOGRAPHIC LOCATION‐

250 S. Shore Drive is within the South Shore Yacht and Golf Club perimeter ‐an exclusive and

high class association. It has access to the intercontinental waterway and is minutes from South

Beach. Its relation to the city center is more distant. It may take longer to get to downtown

than my previous studied location, which is a concern for me because the intended users will

most likely work in downtown. The property is only accessible through the bridge that connects

downtown to South Beach. There is much circulation through this avenue and has great

exposure. It is also very accessible from major tourist destinations and the great beaches.

(MapQuest) (Google)

(Miami Dade) (Google)

STATUS \ PRICE \ SELLER‐

The individual units are averaging at $340,000 and the distressed properties are being

mortgaged through mainly one bank, Wells Fargo. The typical sales comparison approach is the

most accurate way to measure the value of this building. There are other methods such as “the

cost approach” ‐putting a value on the assets and the income approach‐ using the gross rent

multiplier; calculating it based on how much the place could rent for monthly and multiplying

that by 116 months.

63

ZONING‐

It is currently zoned for multi‐family, medium density residential.

(Miami Dade)

PROPOSED PROGRAM & LAND USE ‐

The building itself needs some work and there is a pool on‐site that could be capitalized. There

is some possibility of negotiating boat slips, but that is still to be determined.

If I were to buy more than half the units, I would hold the majority vote on building decisions

and thus do the tenant improvements necessary for rehabilitating it. I would have to raise the

condo fee which opposing neighbors would foresee at first thought. For those who do not want

to sell their mortgage to me will generate appreciated value of their homes. Since the

properties are mostly owned by one bank, it might be easy to convince the bank to sell them all

to one entity such as myself, at a reasonable price.

Building efficiency ratio‐ the ratio of the net leasable area to gross leasable area, was studied

when looking at existing buildings for sale. It is possible that once I buy most of the building I

could manipulate the way the square feet where measured, such as including halls, stairs,

elevators. Yet this is purely speculation until the specific building is closely analyzed.

CONCERNS & MITIGATION‐

A slight concern is that to finance or close on this property, it may take about 60 to 90 days. A

major concern is the nimbyism of the existing occupants who will not see the valuable

appreciation of their own units by updating the building and will oppose the lengthy

construction and mostly the increase of the condo association fee.

MARKET RATE

*There are no impact fees because I am not introducing demand that was not prior before.

65

*The red indicates how the financing would make this project unfeasible. Income generated

would be less than the annual mortgage payment.

*Further study of the site concluded that affordable housing subsidies would not be applicable

at this location, thus eliminating the possibility of Low‐income rental.

Result Comparisons

LEAST RISK –

The option with the least risk will be to develop a new building with low‐income units. Affordable

housing will provide the developer a source of finance and constant flow of tenants. Because of the new

and durable materials that will be used, the construction will allow for less maintenance therefore

lasting affordability than that of the rehabilitated one.

Surrounding cap rates are a good measure of risk involved, and currently the high cap rates in Miami

mean less risk. A 12% unleveraged IRR will be acceptable for a low risk venture, ,however some

significant investors might not be interested in anything less than 15% IRR.

MOST PROFIT‐

Usually the more risk, the greater reward. Thus, new construction of market rate housing would depict

the highest profitability. Also, it is proven that there is higher demand for new construction than existing

buildings as the below graph shows.


67

The graph to the right was presented

in a student publication for the Joint

Center for Housing. It depicts that

neither high class nor low class has

the best return, yet something

around a B+ level of quality will

return the most cash on cash value.

MOST PROBABLE‐

The most realistic scenario would be to convert the existing condo units into high class rental

properties. There would be less financial investment for the construction process, and as

shown before, there is an attractive availability of loans for such conversions. The only problem

is that it could get too problematical dealing with the existing tenants. This might not be the

right choice for me due to that simple reason. Most people are afraid of “change” and indeed

they should be in this case. To rehab a their building would raise their rents or condo fees.

Nimbyism might be too much for me to handle on my first project in the field.

CHOSEN SELECTION‐

Affordable housing in new construction has just the right amount of risk and reward that I am

looking for. The site at hand has already been pre‐zoned for retail and multi‐family which would

save me complications with the city. It is near Little Havana which is a lower income Cuban

neighborhood which, as stated before, the Hampton Roads Venture has a $75 million dollar

objective to aid economically distressed areas. Local brokers have said to me in conversation

that there is economic potential in this particular site because it is located on the busy 27th

avenue with great visibility.

Reevaluation‐

In the following I will further analyze Site 1 as a potential proposal for a low‐income development. I shall

also increase the amount of units to 23 to increase the ROE for investors. I will also assume the half acre

parcel to be at the streets edge for visibility.

FIELD STUDY When conducting a site visit, I noticed a that it was literally a waste of space. With no enclosures, a

homeless man has made a squater shack and it looked like people have been dumping trash there

regularly.

Similarly surounding businesses have been using it to work on their machinery leaving oil stains and

possibly chemical hazardus waste on the site.

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The structure as a whole will have a whimsical design reminiscent of typical Caribbean

architecture and will be called The MLife, short for The Miami Life Apartments.

The most functional floor plan is the double‐loaded corridor design. I calculated that the

minimum width for units would be 25 feet and a hallway at 6 feet so the overall building width

would be 25’+25’+6’=55’. It could go bigger if I included underground parking because that

influences how the building goes up. From my massing schematic designs, I found that the

maximum width is 80 feet. Any wider would not be as functional.

The structure will be considered a Garden Style Building because it is below five stories.

Anything above that would be considered a mid to high rise and would require an elevator

which can cost $35,000 per floor. I designed it based on the criteria required for manufactured

housing. That is to say, in segments that the maximum width does not exceeded 16 feet. This is

the maximum size load that can be transported on Florida’s interstates.

71

The plan is basic but functional. Its symmetry and repetition of units will allow for quick and

easy construction.

One issue with pre‐fab companies is that their construction quote does not include the

following (based on Southern Structures, Inc):

• Permits

• Foundation – engineering and

construction

• Site Plan – ingress & egress to

property by large trucks &

equipment

• Crane Rental

• Strapping building to foundation

• Septic/sewage to property and

connection to building

• Power and water to the property

and connection to building

• Setting & Connection of A/C

condenser (included) to building

• Run telephone wire and TV cable (is

offered as an option for plant

installation)

• Exterior stairs

Decks and porches that are not

included in the plan

• Driveways and walkways

• Landscaping

• Porta‐potty (if required)

• Dumpster (if required)

To get accurate construction numbers I had to contact a general contractor that specializes in

merging prefab shipments with the site built necessities. Ultimately, I was given a ‘turn‐key

quote’ at $120 per square foot.

Since I plan to hold the property for several years, it will not be advantageous to use less

expensive materials because efficient materials will reduce the cost of operation, maintenance

and replacement reserves.

With low‐income housing, I will want to put a good percentage of the construction cost into the

inside of the building. If I give a poor family the option between a good design versus a cheap

design, they might choose the cheaper one no matter if it’s irregular or any other negativity

associated with it. Improved amenities such as cabinets and elaborate storage spaces, rather

than making the outside look better, may raise occupancy levels.

Also, low income families may like to have their cars nearby and visible because to some of

them that is their most important asset. Because of this assumption, I will have the parking

immediately surrounding the west façade of the building.

73

For Section 8 approval, the area where I plan to develop requires several different

specifications. One such example would be window bars. I hope to resolve this by using Spanish

wrought iron balconies to disguise the potential negative appeal.

Out of 23 units, only three of them will be three bedroom. This is because anything over two

bedrooms means ‘kids’ to a city who might be trying to avoid residents that do not advance the

economic base. The three bedroom units will be on the third floor to discourage large families

which may not want to climb all the stairs on the move in date. In turn, it will make it available

to young professionals who don’t mind an extra workout, will most likely have few personal

belongings, and may even rent each room individually.

LEED: SUSTAINABLE BUILDING DESIGN‐

• Implementation of sustainable and green building materials including: energy efficient

windows and high-performance building envelopes.

• Photovoltaic solar panels generate a large percentage of mixed-use developments’ energy

needs.

• Green-roofs and light-colored roofing (varied according to structural feasibility).

• Elimination of A/C ventilation through tight building envelope construction.

• Environmentally friendly finishes and floor coverings.

• Energy Star appliances and light fixtures.

Miami Life Apartments will incorporate cost-effective high-performance envelopes. In order to

maximize day-lighting while minimizing solar heat gain, I will use low-E windows with

fiberglass window panes; the exterior will be covered with environmentally friendly wood-

alternative siding outside of a spray application insulation layer [this increases performance]. I

have reviewed various green agencies to maximize use of recycled or renewable materials.

Green roofs will be utilized on the lower roof levels while light-colored roofing will be used on

the top roof. There will also be PV solar panels atop the building that may be donated by

Kyocera Solar Inc.

75

Within the building, units will come equipped with energy saving appliances and infrastructure.

Only carpeting and other interior materials with little to no volatile organic compound (VOC)

have been specified. Finally, units will include energy-saving components such as Energy Star

lights and appliances, automatically controlled light dimmers, and adjustable thermostats.

LEED: ENVIRONMENTAL SITE DESIGN-

• Light-colored paving where paving is necessary.

• Implementation of underground canals that guide storm water runoff into the river.

• Use of native and robust plant species as well as preservation of existing trees where

possible.

• Provide amenities for alternative modes of transportation.

• Grey water retention and reuse.

The landscape design adheres to best management practices. Storm water management

strategies will slow and decrease the amount of urban run-off produced by the site. In particular,

the use of a swale running along the back of the parcel treats storm water with gravel and

vegetation and catches the water before it flows into the neighboring proprieties so that the water

is diverted to storm water pipes without being diverted to a contaminated area.

Strategic landscaping will utilize native plant species that minimize irrigation needs. Miami Life

Apartments will specify Kentucky Blue Grass because it requires no herbicide or fertilizer to

maintain. The site’s existing trees as the one described before will be preserved.

Finally, the development supports alternative and non-mechanized transportation modes. The

mixed use aspect of the project encourages walking. Covered and secure bike racks will be

provided on the north and south side of the building near the retail frontage.

ENVIRONMENTAL MANAGEMENT-

The impact of construction will be monitored throughout all development phases. The site’s air

quality will be strictly controlled for emissions. The dust generated from construction will be

reduced by placing a 10 foot corridor of gravel two inches in depth in front of all site entrances.

This tactic will prevent tracking dirt onto public ways. Street and sidewalk cleanings will take

place at the end of each week with regenerative vacuum sweepers to trap airborne particles and

prevent sediment from entering the storm water system. Water is generally accessible at the

location and will be used to water the earth, materials, or equipment when necessary in order to

keep dust from leaving the site. Construction waste will be properly sorted into bins for

reprocessing, recycling, and reuse. I plan to purchase public transit-pass subsidies for all

employees during construction in order to discourage additional traffic and pollution in the area.

77

9 POINTS OF SMART GROWTH ‐

1 Create Walkable Neighborhoods

The area will establish a much higher level of pedestrian‐friendliness than currently

exists. Additionally, sidewalk improvements with the addition of the bike lanes, new

lighting, and ground floor retail will make walking a safer and more inviting experience.

2 Mix Land Uses

The development includes a mix of residential types and market types, as well as local

retail and prominent community spaces.

3 Provide a Variety of Transportation Choices

As a TOD development, this site offers a unique opportunity for fostering a variety of

transportation choices. Taking initiative of creating a continuous bicycle path into the

center of Miami might be too optimistic but a great idea.

4 Encourage Community & Stakeholder Collaboration

The proposed design emerged from extensive research of the area and its roots. This

project will continue to involve the community throughout the project development.

5 Take Advantage of Compact Building Design

My project utilizes efficient building typologies with small footprints relative to its

density. This is not only an ecologically‐aware tactic but also encourages a new

neighborhood that is friendly and walkable in scale.

6 Make Development Decisions Predictable, Fair, and Cost Effective

Neighborhood residents feel increasingly pressured by gentrification and rising home

prices. These residents look to the Melrose Neighborhood Development Corporation to

address the community’s growing need for affordable housing. By serving the mission

of the MNDC, the design program seeks to reflect the inherent fairness that affordable

housing and sustainable development represent.

79

7 Foster Distinctive, Attractive Communities with a Strong Sense of Place

The architectural design and scale of the buildings takes cues from existing structures in

the neighborhood. The design seeks to capitalize on ‘green’ as a place‐making identity,

building on the abundance of the Miami River; the name Miami Life Apartments

signifies my ambition to shape the site as a neighborhood connector encouraging a

positive local identity.

8 Create a Range of Housing Opportunities and Choices

My design ensures that overall site development creates opportunities for a diverse

range of income groups and family structures. Miami Life will serve as a positive

environment for its residents located in a well‐designed building close to retail, transit

services, and the Miami River.

9 Strengthen and direct development towards existing communities

The development has been designed with the utmost consideration for its positive

potential in serving the local community. The incorporation of diverse‐income housing,

the new urban connector bicycle track, and small‐scale retail all provide previously

unavailable benefits for the current community and its future.

When tenants begin to move in, MLife Apartment’s property management will include a tenant

transportation coordination program to organize potential car pools, create “guaranteed ride

home” programs, or promote special events like National Bike Week. Each residence will be

encouraged to recycle and recycle bins will be provided to them to help facilitate that

responsibility. There will be large containers near the service docs for other miscellaneous

articles to engage the community as well. To assist tenants in keeping up the green standards of

the development, each occupant will be given a tutorial on and copy of “Living Green,” a

manual published by Enterprise. Finally, I will create a tenant based organization to monitor

the applied systems as well as attend to the needs of building a strong community within the

environment.

With all of the above stated LEED information, I have revised a scoring sheet which would MLife

Apartments would receive a LEED certification of Silver. However, do to the additional

application costs for processing and periodic building inspections, I will not apply.

• Certified - 26-32 points • Silver - 33-38 points • Gold - 39-51 points • Platinum - 52-69 points

Project Financing

STAGE 1 ANALYSIS‐

To help me reevaluate my work to insure accuracy I followed what the book Real Estate Finance

and Investments defines as abuses common in pro forma cash flow projections:

1. Mismatched growth rates between rental income and expenses.

2. Failure to consider rental concessions and effective rents.

3. Absence of lease‐by‐lease analysis in properties encumbered by long‐term

leases.

4. Projection for expense recovery income that increases at the same growth rate

as other expenses for a property encumbered by gross leases with expense

stops.

5. Projections for vacancy and collection losses that are not synchronized with

market conditions

6. Omitting outlays for non operating expenses such as tenant improvements and

leasing commissions.

81

7. Unsupported use of terminal capitalization rates that are lower than “going in”

cap rates. Terminal cap rates should be related to the property’s age and

remaining economic life.

8. Underestimation of selling expenses.

9. Use of an inappropriate IRR (discount rate)

10. Failure to recognize capital outlays for renovations needed to maintain a

property.

PRO FORMA‐

CAPITAL BUDGET‐

83

CONSTRUCTION LOAN‐

Some permanent loans might have the clause that a certain amount of units are rented prior to

completion and will disburse money accordingly. This is called a floor‐to‐ceiling loan. The

lender will not disburse the entire loan until it is 70% or 80% occupied to insure that it will be

PERMANENT LOAN‐ returned. Since I will pay the construction loan with the

permanent loan, this is a

concern of mine and it may

require having a commitment

letter from the permanent

lender, a “Takeout

commitment.” On a fixed rate

mortgage the higher the rate,

the faster it increases with

inflation. Thus the present

values of the future payments

decrease more rapidly. Tax

increment financing would be

favorable because it has pre‐

determined and exact tax

rates, other types create

uncertainty which then create

risk.

FEATURES, FUNCTIONS AND BENEFITS OF THE PROJECT IN RELATION TO THE COMPETITION. Major developers do ‘market wants’ research to show what amenities might also sell more

homes, for example, people in sub‐tropic climate will pay $200 more per month for air

conditioners. I will use a professional in this field to find out what other incentives are valuable

for me to provide, such as microwaves or other appliances that are not commonly included.

Since units may be used for temporary transitions, it could be beneficial to furnish them with

basic essentials.

Also, there are several buildings going up backed by the name Trump. I understand he is not

too involved in those projects but just retains a cash value for the local developer to use the

brand name. His buildings are more commonly noticed with signature designs like gold

windows. I shall try to do a similar approach with a key feature to begin to make a name for

myself.

ANALYSIS OF MARKET SEGMENTATION‐

Based on the competition’s absorption and absorption schedule by market segment, I can find

the best marketable advantages. Yet it would require an expensive professional to find out the

private financial documentation of competing properties. Luckily, both the county and city

mayors are Cuban, 35% of the population is Cuban, and the site at the border of Little Havana.

Do to this I will hint to that specific ethnic group. Special considerations for several subsidies

are given to developments that target specific groups and areas. Tenants are expected to come

from the local area. (Joint Center for Housing Studies)

Younger people might appreciate the

ability to live with others like them

who share common interest, not a

wide variety of ages, but that might

result complicated to maintain in the

long run.

89

SENSATIVITY ANALYSIS‐

My strategy to do the feasibility study was to adjust cap rate, construction cost, and rents then

give it a percent of the TDC to each section to see where the development cost is being

distributed. When adjusting these I only changed one at a time such that I kept a benchmark

and was able to determine which have the greatest impact. A rule of thumb can be to have 75%

of TDC for Hard Cost, and 25 % for soft costs. The feasibility study will continuously be adjusted

during and even after the project has been completed.

ASSUMPTIONS –

Establishing a hurdle rate is one of the toughest in a feasibility study. The hurdle rate on a 10

year period should exceed the present value of the interest of a 10 year treasury bond, a 10

year commercial mortgage loan, or the weighted average of corporate bond rates.

There is $1 billion invested for affordable housing by 2010 and I am expecting the current slow

trend on real estate to gain some more momentum in the years during this project. If the

interest rates keep declining as they have, and job growth continues to grow with the rise of

immigration to the state, then it should prove to be a lucrative venture. The soon to be

oversupplied market of Class A apartments will leave a big business for less expensive ones.

An interest‐only loan will be at about 21% with payment option of 13%. Whenever there is an

interest rate higher than the overall cap rate, the leverage will be negative. But that is not

always the concern. The less equity in the deal, the higher the IRR, if I have zero equity, then I

get infinity IRR. As Professor Richard Peiser always said, “You can’t eat IRRs,” this meaning we

need to maximize our wealth, not be concerned with high IRRs with little money down. At the

end of the day what matters is wealth. Whatever deal offers the highest IRR is only one of the

basis.

The land value was determined at the end. I first found out what I could afford for the land. This

will allow me to negotiate at a lower price, and the number I use will be the maximum I can

afford for the land.

The rents will be based on 140% of the FMR. Not all the units need to be affordable. The

amount of affordable units will be the bare minimum needed to get the maximum amount of

subsidies; in this case it is 20%. Those units cannot exceed 50% of the AMI. I chose not to do the

other option of 40% of the units being less than 60% of AMI because, essentially, I will need as

many possible for market rate to generate greater sources of income with no regulations on

long term affordability. The total number of units is assumed to be 23, thus 5 will be affordable.

I will try to save money by using the enterprise concept, which means the better management,

the better off. Management fees will be reduced by sharing an on‐call staff with surrounding

properties. Big property managers have a threshold of 200 units in order to have a team of 5

full time management personnel. If possible I could give one of the tenants’ better concessions

so that they are responsible for letting people into units when they get locked out. Just having

someone on site for any emergency is beneficial. However, I will have detailed expense stops

and triple net leasing to reduce additional operation costs.

With the National Reform Act of ’86 came PAL, which allows individual rental owners (not LLP)

to offset active income with up to $25k of passive activity losses. The act has adjustments to its

regulations based on the adjusted gross income between $100 and $150k.

Public and Private development opportunities for density bonuses, free building permits, zoning

flexibility, impact fee waivers, tax alleviation, infrastructure, or anything that the city can

provide me will be highly negotiated. Essentially, PPD and affordable housing will help finance

the project, and prefab construction may reduce the cost.

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JOINT VENTURE ANALYSIS‐

As mentioned before, I will form a team of no more than 5 individuals and will compensate

them a percentage of the developers fee which will be 8% of the hard costs. I will try to get one

free unit in the building for my profit, which will be worth around $200,000. All additional

profits will be divided to the equity investors. Whoever puts up the most cash will get the

preferred return before the other investors.

A silent limited liability partnership with the land owner would be ideal, but after further

review, I may not be capable of doing so. If the site is red flagged, this option may lead my

decision in acquiring a new site based on the risk willingness of the land owner. The State of

Florida Incentives provides a Property Tax Credit to equal 96% of all the land taxes for up to 5

years. If I agree to pay the taxes for site control then turn around and apply this incentive, I

could have the site control by easement with no equity down.

SOURCES & USES‐

The site is located within both the empowerment zone and enterprise zone making the project

eligible for additional public subsidies.

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LIHTC, New Market Tax Credits, Section 8, Affordable Housing Insurance Program, and public

bonds will be my sources of gap financing. I will guarantee 30 year long term affordability

instead of the state’s 15 year minimum. Preserving affordable rental housing is defined as

“when an owner acts to keep rents affordable for low and moderate‐income households while

ensuring that the property stays in good physical and financial condition for an extended

period” MacArthur Fund.

The State Apartment Incentive Loan Program will help me gap financing.

The riverfront site context is home to commercial fishermen whom are considered for special

needs housing by the city. If I target their tenancy it will qualify me for The Multifamily

Mortgage Revenue Bond program (MMRB).I am still waiting confirmation of eligibility for

buildings under 200 units.

The Housing Credit (HC) program provides dollar‐for‐dollar reduction in federal tax liability; it

can be used for 10 consecutive years. After the 14th year, I will have the option to convert to

market rates after the 14th year. These housing credits are also reserved for affordable housing

that address specific geographic and demographics, including commercial fishing workers.

The State Apartment Incentive Loan Program (SAIL) will provide 25% of TDC in loans with a 1%

interest rate! For developments that maintain 80% of occupancy for farm workers or

commercial fishermen.

The HOME Investment Partnerships Program provides 20 year loans at 1.5% for affordable

rental housing.

The Predevelopment Loan Program (PLP) provides up to $500,000 with interest deferred until

maturity. This particular program will assign an ‘assistance provider’ to work with the applicant

on developing strategies for securing construction and permanent financing.

The Florida Affordable Housing Guarantee Program can lower the overall cost of borrowing

capital by guaranteeing the payment of mortgages.

Many of the above subsidies comply with federal labor standards that may require the use of

union labor that tends to be more expensive. In Massachusetts, a building needs to be less than

12 units to utilize non‐union contractors, but Florida does not have a limit.

Other sources of subsidies not related to low income housing will come from the City of Miami

Community Development Housing Division, and Florida Housing Finance Corporation. The

Commercial Revitalization Program through The Community Development Block Grant

(CDBG) grants money for exterior aesthetics.

Equivalent Annual Yield is the comparing of the compound terms of different interest. What I

ultimately want to know with all the mortgage options is the effective borrowing cost to lender

and yield to borrower. With this I have selected BMC Capital for the allocation of the

construction loan, and a permanent loan from the City of Miami Public Bonds.


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*The following is my documentation of various information including types of mortgages.

.

REQUEST FOR PROPOSALS‐

To qualify for several subsidies, it needs to be on an RFP basis. The problems with that is that

they put them out about once every six months, there is an earnest money deposit of $1000 to

just apply, and finally the city does not have much vacant land in which I could push them to

RFP it on my account.

The benefits are that properties are donated, yet on an “as‐is” basis. Also, the city will assist in

pursuing grant funding, low interest rate loans, or other additional funds.

There are many tight regulations from, three bedroom units need to have 2 bathrooms and one

with a tub, all the way to mandatory tiles at entrance, kitchen and bathrooms, and carpet

everywhere else. They also hold the right to cancel for any reason before the ground break.

This could be bad if I have already invested time and money into the implementation.

The RFP process will require the development team to have five years of accumulated

experience, a previous successful development, and the financing of a project larger than

$2,000,000. Within the team they also favor minority/women participation, and within their

scoring values, they give it ten points.

CONCERNS‐

It’s hard to get a loan for land acquisition because the land can’t service the debt and generates

no income. If I cannot get the land in some sort of creative financing, the following graph shows

that smaller developers have limited access to mortgage capital.

TIMELINE –

Construction loans will be given out in stages so that the bank can tell if I will be using the

financing correctly. The first will be 20% for the foundation. The efficiency of time is crucial to

decrease possible risks from occurring and reduce the cost of financing. I know contractors are

not as involved in the project and less motivated then I may be, so I will have the general

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contractor, sub contract from different companies, such that when one is not showing up to

work, we can call the next contractor.

The following timeline was developed in conjunction with the City of Miami RFP process. My

conversation with Southern Structures Inc informed me construction can take place within 9

months time. Aggressive marketing will commence halfway through the construction period,

with the initial emphasis on leasing the retail. It is my informed belief that the low income

lottery will rent out all the affordable units in short order, and with little marketing effort.

Provisions for property management will commence soon thereafter. Below shows the

assumed timeline schedule.

MARKETING‐ I have chosen the name Miami Life Apartments with the motto, “bridging people and

potential.” I feel it holds an exceptional attitude that metaphorically describes my good

intentions for the community.

MLifeApartments

Marketing and leasing is pretty expensive, commercial is 18% of soft cost and residential is less

based on the typical turn‐over rate. But during the development I could use the construction

crane to allow people to see the site from a bird’s eye view. This might give a sense of place for

prospective homebuyer by seeing the entire site in its context.

I like the idea of funny advertisements like, ‘If you lived here you’d be home now’, or ‘this

project is so good it will create a Naturally Occurring Retirement Community NORC’. I will only

play with the idea, but this can be held off until the very last step of my project,. It just goes to

show that I have attempted to look at every possible aspect of the broad spectrum of real

estate development.

Exit Strategies

If there are problems, it is possible that the lender can take the title of the property without

filing a default‐“deed in lieu of foreclosure”. By using this, both parties may save time and

money with the foreclosure costs. This would be ideal, but the types of default procedures will

vary by institution.

If all goes as planned, I will live in the units and possibly manage it to save money, then divide

the developer’s fee to those who helped me. If the fee is not sufficient, it doesn’t always help to

say, “Developers have to eat too” (R. Peiser) I will have to strategically predict the outcomes.

Many condo conversions are being done with short‐term leverage and carry‐over debt because

they anticipate selling in 24months. (CB Richard Ellis) I will manage and hold on to the property as

long as I can maintain the mortgage payments, or about 36 months. (ULI and PCW)

The asset will keep appreciating as

taxes depreciate. Tax Shelter is

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created when the property has completely depreciated its value in 27.5 years but I don’t think I

can wait that long. The depreciation is considered a non‐cash expense by reducing the taxable

income. When I can no longer support my payments, or am in dire need of the equity to

reinvest into other opportunities, then I will sell based on existing cap rates for similar projects.

(ULI and PCW)

Future Market Assumptions

Florida’s fast growing population and

demographics will boost multifamily

housing. Absorption rates will increase.

The “Echo Boom” generation born

between 1977 and 2008 will soon begin

to venture away from home looking for

cheap accommodations. Statistics show

that the prime renting age is 20‐29 and

those over 65.The peak of the echo boom

was started in 1990 when 4.3million

children were born. Those kids will be 20 in 2010 and they will be looking for places to live.

However baby boomers are moving into the peak vacation home years with record amount of

wealth, demand for second or temporary homes will continue to grow with this bracket of

patrons who is one of Florida’s top consumers.

On a side note, I have found countless government incentives for the creation of assisted

housing in the Florida Keys. From my experience being there, I see that as a very probable

future venture. It is a beautiful environment and would be lovely and entertaining to live there

a few years while conducting business.

Conclusion

It is safe to say at this point that I have achieved my goal of understanding the complexity

involved in the development process.

Florida has had a negative reputation about its residential market. My research has shown that

that reputation is only regarding the condominium market. Therefore indicating that there are

pocket markets in the apartment sector that could still be exploited.

Acquiring the market numbers was somewhat challenging due to the fact that officials and

CEOs that I wanted to contact were evidently not easily available. Continuous determination

proved to be rewarding because many significant individuals did communicate back with me.

While in Florida I met with city officials as well as potential retail tenants and investors.

Miami sets the stage for an international audience, mainly Latin America. The multi‐cultural

contacts that I have made in the process and the acquired knowledge out of this research

project has initiated me toward my ultimate career aspirations of delivering environmentally

friendly affordable housing at a global scale.

I am now looking forward to take my project through the next stages toward final

development.

Bibliography

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(RealQuest). 17 10 2007 <http://www.facorelogic.com/>.

"Affordable Housing Finance." San Francisco: Affordable Housing Finance, 1 Dec 2007.

Brown, David J. Tte Home House Project; the furure of affordable housing. Cambridge: The MIT Press, 2004.

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Brueggeman, W., J. Fisher and Richard D. Irwin. Real Estate Finance and Investments, 13th Edition. New York, NY, 2007.

Builder Magazine. "Builder Magazine." Cambridge, 1 November 2007.

CB Richard Ellis. "2006 year‐end report: Florida Market Perspective." 2007.

Financial Analysis of Real Property Investments. No. 379‐193. Harvard Business School.

Google. Googleearth.com. 31 March 2007. 31 March 2007 <googleearth.com>.

"Housing for All Americans." The Best Affordable Housing developments of 2006‐2007. San Francisco: warren Nesbitt, 1 Dec 2007.

Joint Center for Housing Studies. America’s Rental Housing—Homes for a Diverse Nation. Cambridge: President and Fellows of Harvard College, 2006.

Joint Center for Housing Studies of Harvard University. The State of the Nation's Housing. Cambridge: President and Fellows of Harvard College, 2007.

Lecture. By Kelvin Xuna. Perf. Edward Marchant.

Marchant, Ed. Real Estate Development and Fundamentals Lecture Kelvin Xuna. 2007.

Marksjarvis, Gail. "Miami Herald." Economy Aug 2007.

Miami Dade. Miami‐Dade.gov. 12 11 2007. 12 11 2007 <www.miamidade.gov>.

Miles, Mike E., Gayle Berens, and Marc A Weiss. Real Estate Development, Principles and Process, Third Edition. Washington, DC: ULI‐The Urban Land Institute, 2000.

Peiser, Richard B and Anne B Frej. Professional Real Estaet Development: The ULI guide to the business. Second Edition. Washington, DC: ULI‐ the Urban Land Institute, 2003.

Peiser, Richard. Lecture Kevin Xna. 18 09 2007.

Real Estate Research Corporation. RERC Real Estate Report. Miami: The National Real Estate Authority, Summer 2007.

Retsinas, Nicholas. Housing for Humanities and Joint Center for Housing Kelvin Xuna. 2 11 2007.

Stan Geberer& Associates, Fishkind & Associates, Inc. Economic Outlook 2007‐09; Southeast Florida. Orland, FL: ULI Southeast Florida/Caribbean, January 25, 2007.

Stockard, James. Housing Delivery Systems Lecturer Kelvin Xuna. 17 10 2007.

ULI and PCW. Emerging Trends in Real Estate. Washington DC: Urban Land Institute, 2007.

ULI. Multfamily Trends. Magazine. Washington DC: Rachelle L. Levitt, 2007.

Urban Land Institute. Urban Land. Magazine. Washington DC: Rachelle L. Levitt, 2007.

US Department of Housing and Urban Development . 10 September 2007 <www.hud.gov>.

Acknowledgements & Sources

A special thanks to:

Affordable Housing Developers

American Community Survey

Data Resources, Inc (DRI)

Harvard University Joint Center for Housing

Studies

The Department of Agriculture and Rural

Development

The Department of the Environment

The Department for Regional Development

The Department for Social Development

The Housing and Commercial Loan

Committee

Miami City Commission

Miami Economic Associates, Inc.

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Moody's Economy.com

Miami Property Assessors

National Association of Homebuilders'

National Council of Real Estate Investment

Fiduciaries

National Association of Realtors

National Association of Affordable Housing

Lenders

National Association of Housing and

Redevelopment Officials

National Council of State Housing Agencies

National Housing Conference

National Low Income Housing Coalition

National Multi Housing Council

Research Institute for Housing America

Regional Financial Associates, Inc (RFA)

State Housing Finance Agency (SHFA)

University of Miami‐ School of Law

US Department Of Housing And Urban

Development

Wharton Econometrics (WEFA)

My Master Thesis

Documents

Transcript of My Master Thesis