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🤝 Introduction
A Letter From Your Guide 🗒️
Hello Everybody,
Welcome to Real Estate Development Financials: An Adventure . Let us first start off by saying thanks for coming, you're awesome and you are about to learn some really fun stuff. We know that for some of you this topic might seem boring or scary, and you already want to stop, but we are going to do our best to make this fun. And to prove it we have inserted this GIF (Warning: this is far from the last GIF):
Untitled_ Oct 15, 2020 3_49 PM.gif
Followed by this video:
Video 1: Hello and Introduction.
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See... we will have some fun. Promise.
We will cover a lot, but we will take it step-by-step and try to make sure that we connect all the dots so everyone understands why it is we're doing the things we’re doing. Stick with us through this Adventure and you will come out the other end with some new tools, a greater understanding of the variables going to Real Estate development, a solid sense of accomplishment and smile..
Sincerely,
Your Guides:
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Housekeeping 🏠
Below you will find some general overview information. We’re hoping this is the most boring part.
Source of Knowledge 🧠
Our Learning Adventure will include this website (from now on referred to as the Source of Knowledge), which is jam-packed with tools, videos, stories , exercises and definitions all here for you to enjoy at your asynchronous leisure.
1-on-1 🏓
But the fun doesn't stop there, for those of you who are interested and have completed your Adventure with at least 1 remaining Gold Star of Ultimate Awesomeness we will set up some time for one-on-one synchronous meeting to help you translate your new genius powers to your own project pro-forma and/or life.
Orientation 🧭
This video will orient you to using the Source of Knowledge

Generally what that video said was:
There is a navigation bar on the top of the screen.
Watch the videos they will be helpful and silly.
At the bottom of each of there will be a button to take you to the next challenge.
Look to the left of the section header for a little arrow. Click on it to open or close a section if it is open and closable.
Cells throughout the document that are yellow are for inputs. Everything else is just to look at. No touchy.
There is a place for questions or comments at the bottom of every page. Everything written there will go right to Co-Everything and if we respond you will see the responses at the bottom of that Challenges screen.
Feel free to email us or, of course, as always, send a carrier pigeon.
Gold Stars of Ultimate Awesomeness
The Gold Stars of Ultimate awesomeness (”STAR!⭐” For short) are nearly arbitrary yet absolutely necessary. You will award them to yourself based on how you feel you are comprehending the material we are covering. We hope it is a moment of self-reflection where you acknowledge you are learning something as you go. It also serves as a bit of live feedback for your Guides. You will find the stars at the end of every Challenge.
Explainer GIF:

Repeat 🔁
Sometimes we will repeat ourselves. Maybe there will be a video that said something, and then you'll see the same thing covered in text, in a graphic or in a table and this is on purpose. Sometimes redundancy is a good thing, and we know that not everyone learns the same way so we are covering our bases. With that mind remember that this is your own Learning Adventure. If we're covering something again and you already get it and you're on the verge of being annoyed... skip it and move to the next thing.
Repeat 🔁
Sometimes we will repeat ourselves. Maybe there will be a … (Get it? we just repeated the repeat section, this was on purpose, but a really lame joke...sorry.)
Getting Started 🏃‍♀️
We will introduce you to @thechallenges (AKA. the exercises or assignments) over on the challenges page. So Click below to get this party started.
To get started click 👉
Concepts
Below is a list of concepts, terms, ratios, etc. defined. Just scroll through the list or start typing in the search bar.
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Appraised Value
An appraised value or mortgage valuation pertains to the assessed value of real property in the opinion of a qualified appraiser or valuer. It is usually used as a pre-qualification & risk-based pricing factor related to the issuance of mortgage loans by a financial institution
Appreciation
An increase in the value or price of an asset.
Assets
property (Ie. land and/ or design of the future project) owned by a person or company, regarded as having value and available to meet debts or commitments. Real estate is an asset form with limited liquidity relative to other investments.
Balloon risk
The risk that a borrower will not be able to make a balloon (lump sum) payment at maturity due to a lack of funding.
Capitalization Rate
The capitalization rate, often referred to as the cap rate, refers to the net operating income (NOI) divided by an income property’s sale price (or asking price – whichever figure is lower). A cap rate can be used to help figure out your potential return on investment before factoring in potential mortgage financing. Typically, a low cap rate comes with a higher price point and less risk than a higher one.
Cash flow
The revenue remaining after all cash expenses are paid.
Cash-on-cash yield
The relationship, expressed as a percentage, between the net cash flow of a property and the average amount of invested capital during an operating year
Collateral
Asset(s) pledged to a lender to secure repayment of a loan in case of default.
Common Equity
Common Equity is the riskiest and most profitable portion of the real estate capital stack. Typically the General Partner investor (the developer or sponsor) will be required – by the lender and/or by other equity investors – to invest their own money as some portion of the equity to have skin in the game. As an investor in equity your risk is the greatest because every other tranche of capital is entitled to get paid before you. However, if the property does well equity investors usually have no cap on their potential returns. In real estate, equity is typically structured so that all investors earn a preferred return until they hit a certain annual return hurdle (i.e., 8%). After that, the developer will earn a disproportionate share of the profits (i.e., 40% of all the remaining profit), while investors receive the rest of what’s left pro rata.
Construction Loan
A construction loan is a short-term loan used to finance the building of a real estate project. The developer takes out a construction loan to cover the costs of the project before obtaining long-term funding. Because they are considered fairly risky, construction loans usually have higher interest rates than traditional mortgage loans.
Debt
When investing in real estate debt instruments, the investor is acting as a lender to the property owner or the deal sponsor. The loan is secured by the property itself and investors receive a fixed rate of return that's determined by the interest rate on the loan and how much they have invested. In a debt deal, the investor is at the bottom of the capital stack which means they have priority when it comes to claiming a payout from the property.
Debt service coverage ratio (DSCR)
The annual net operating income from a property divided by annual cost of debt service. A DSCR below 1 means the property is generating insufficient cash flow to cover debt payments.
Developer's Fee
This fee is built into the calculation of the development costs because a developer uses it to pay all the costs of doing business: hiring staff, running an office, finding new opportunities, and more. Affordable housing developers can choose to defer a portion of the fee, leaving more money to cover development costs. The developers then recoup the deferred portion of the fee as rents are paid over time.
Equity
An Equity investor is a shareholder in a specific property, and typically their stake is a precentage related to the amount they have invested. Returns are realized in the form of a precentage of the rental income the property generates. Investors may also be paid out a % of the sale value if the property is sold.
First mortgage
The senior mortgage that, by reason of its position, has priority over all junior encumbrances. The holder has a priority right to payment in the event of default.
First-loss position
The position in a security that will suffer the first economic loss if the underlying assets lose value or are foreclosed on. The first-loss position carries a higher risk and a higher yield.
Fixed Interest Rate
A fixed interest rate is an interest rate on a liability, such as a loan or mortgage, that remains the same either for the entire term of the loan or for part of the term. A fixed interest rate is attractive to borrowers who do not want their interest rates to rise over the term of their loans, increasing their interest expenses.
Fixed rate
An interest rate that remains constant over the term of the loan
Flat fee
A fee paid to an adviser or manager for managing a portfolio of real estate assets, typically stated as a flat percentage of gross asset value, net asset value or invested capital.
General Partner (GP)
who contributes capital and share in profits and have unlimited liability. A general partner is also usually a managing partner and active in the day-to-day operations of the business. The GP typically will need to offer a personal guarantee, meaning his or her personal assets may be subject to liquidation in the case of a default.
Gross Expenses
Gross expenses is the sum of the cost to keep a property operating and in good standing. Operating expenses are the costs associated with operating and maintaining a commercial property.
Gross Income
In short, potential gross income is the total rent a property could generate if 100% of the units are leased at market rent, while effective gross income is a net figure that considers expense reimbursements, vacancy and collection loss, and other income.
Hard
A hard preffered position where the investors is out of the deal when a specific interest hurdle is achieved. There is a hard cap on how much the investor can make.
Hard Costs
Any development costs associated with the physical construction of a building. These costs are easy to quantify and typically include items such as raw materials, labor, and interior finish, etc. Hard costs are also referred to as Direct Costs.
Hurdle
Preferred Return Hurdle or “hurdle rate” is a minimum contract threshold (typically a % of investment or a % of the net income) that must be received before the other investors higher in the capital stack can receive their interest.
Indirect costs
Development costs other than direct material and labor costs that are directly related to the construction of improvements, including administrative and office expenses, commissions, architectural, engineering and financing costs.
Interest
Interest is the charge for the privilege of borrowing money, typically expressed as annual percentage rate (APR). Interest can also refer to the amount of ownership a stockholder has in a company, usually expressed as a percentage
Leverage
The use of credit to finance a portion of the costs of purchasing or developing a real estate investment. Positive leverage occurs when the interest rate is lower than the capitalization rate or projected internal rate of return. Negative leverage occurs when the current return on equity is diminished by the employment of debt.
Limited Partner (LP)
An owner of an equity partnershio who contributes capital and share in profits, but who take no part in running the business and incur no liability above the amount contributed.
Liquidity
Liquidity determines whether assets will be sold quickly or slowly and if the price will be above or below market value. Property that is easy to sell and purchased at market value is liquid. Conversely, assets that are harder to sell and transact for a discounted price are considered illiquid.
Loan to Value (LTV)
The ratio of the value of the loan principal divided by the property's appraised value. So, if a property is appraised at $1M and the bank is willing to lend $700K that is a 70% LTV. This would mean that other sources would need to provide the other 30% (this is typically the equity of the project
Maturity
Maturity is the date on which the life of a loan ends, after which it must either be renewed, or it will cease to exist. Typically Debt investments require repayment of principal and interest at maturity.
Mezzanine Debt
Mezzanine Debtsits below the senior debt in order of payment priority. Once the developer pays operating expenses and the senior debt payment all income must go to pay the fixed return of the mezzanine debt. If the developer is unable to pay (assuming they aren’t also in default under the senior debt), the Mezzanine Debt lender typically has the ability to quickly take control of the property. The senior debt and mezzanine lenders will usually enter into an agreement, called an intercreditor agreement, where they spell out how their rights interact (i.e., what happens if a developer stops paying both of them). Mezzanine debt typically has a higher rate of return than senior debt but lower than equity.
Mortgage
A mortgage is a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire purchase price up front. Over many years, the borrower repays the loan, plus interest, until he or she owns the property free and clear. Mortgages are also known as "liens against property" or "claims on property." If the borrower stops paying the mortgage, the lender can foreclose.
Personal Guarantee
A personal guarantee is an individual’s legal promise to repay credit issued to a business for which they serve as an executive or partner. Providing a personal guarantee means that if the business becomes unable to repay a debt then the individual is personally responsible. The personal guarantee provides an extra level of protection to credit issuers, who want to make sure they will be repaid.
Preferred Equity
Preferred Equity differs from Common Equity in that certain investors (i.e. a “class of shares”) are given preference relative to the Common Equity in the distribution of cash flows. Typically in a Preferred Equity investment, all cash flow or profits are paid back to the preferred investors (after all debt has been repaid) until they receive the agreed upon “preferred return,” for example, 12%.
Principal
The original sum of money borrowed in a loan, or put into an investment.
Promissory Note
A promissory note, sometimes referred to as a note payable, is a legal agrremet in which one party (the maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time (maturity).
Senior Debt
Senior Debt is secured by a mortgage or deed of trust on the property itself, so if the borrower fails to pay the the lender can take title to the property or the guarantor of the deal might need to pay the lender personaly with his or her personal assets. This greatly reduces risk on the principal invested because, at worst, the lender owns the property and will look to maximize value by selling the property or selling the non-performing loan. The “cost” of this lower level of risk is a lower yield on the money invested.
Soft
A soft preffered position is where there are terms for an exit either out of the deal or into a common equity position. its a soft exit.
Soft Costs
Any indirect development costs (i.e. not labor or materials). These costs range from architecture and engineering fees to project management and developer fees and can affect hard costs significantly (e.g. an architect’s efficient building design may reduce the need for structured parking hard costs). Soft Costs are also referred to as Indirect Costs.
Tax credit syndicator
Is an intermediary between the developer and equity investors managing the investments in exchange for tax credits
Waterfall
The waterfall is a type of payment structure in which certain investors/ creditor positions recieve principle and/ or interest payments before other investors/ creditors. The creditors position in the waterfall will be determined in their agreement.
Appraised Value
Definition
An appraised value or mortgage valuation pertains to the assessed value of real property in the opinion of a qualified appraiser or valuer. It is usually used as a pre-qualification & risk-based pricing factor related to the issuance of mortgage loans by a financial institution

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