This is the fifth in a series of commercial real estate case studies shared by A.CRE. These case studies are meant to help you practice to master real estate financial modeling. The Jefferson Branded Condo Development puts you in the position of boutique condo developer considering investing in a to-be-built branded condo project. You are asked to assess the viability of a condo development project, including a challenging task of managing both a land loan and a construction loan that takes out the land loan at the commencement of construction.

This case is also the first that looks at for-sale real estate, rather than for-rent real estate. It thus becomes necessary to forecast sales over some period of time, as well as manage the payoff of the construction loan over time.

Practice makes perfect!

Each case study shared in this series mirrors real world situations, either in terms of the types of deals you will look at in various roles or the types of modeling tests you’ll be required to perform as part of the interview process. You can browse this and other case studies in the A.CRE Library of Real Estate Case Studies.

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The Jefferson – Branded Condo Development

You are the owner A.CRE Development Company, a boutique developer of single-family and condo development projects. Your company has developed nearly 2500 units over the past decade in South Florida. Your target market largely consists of high net worth, international, second-home buyers who place great value on brand, location, and quality.

Given that your company is relatively unknown, you’ve found great success in the branded residences concept. You believe that by partnering with luxury brands, you’re able to communicate a certain level of quality and exclusivity that allows you to sell your units at a greater velocity and price.

You recently completed a $90 million Two Seasons branded condo project and have closed on 40% of the units. You expect to fully close out of that project within the next 12 months, and so you’re looking for your next project. Among several opportunities you’re considering, your favorite brokerage firm recently presented you with the chance to purchase a fully entitled project code-named “The Jefferson“.

The Jefferson – 55 Luxury Branded Condos

The Jefferson is a 1.9 acre parcel of land fully entitled for 55 condo units in a five-story building. The parcel lies at the center of a 330-acre master-planned resort community on the ocean consisting of a Tiger Nicklaus 18-hole championship golf course, a 300-key Harriott Hotel, 60,000 SF of high-end retail, two restaurants, and 220 luxury single-family homes.

The site sits 200 yards from the ocean, with units in the upper two floors of The Jefferson expected to enjoy pristine golf and ocean views. A walking trail leads from the building to the beach, passing between the 16th and 17th holes of the Tiger Nicklaus course. To maintain an air of exclusivity and luxury, the master plan requires that The Jefferson be branded ‘Harriott Residences at The Jefferson’. This branding carries a fee of 4%, which you believe can be recaptured in the form of higher unit prices.

Given your track record with this type of development, the master developer is giving you a first look at this opportunity. She is asking $28.75 million for the entitled land. You expect 12 months will be needed to finalize the building plans, fully bid out the project, and secure the building permits (i.e. pre-construction).

You expect to presell ~25% of the units, with the balance of the units selling at a rate of four units per month after construction completion. While Florida law, in certain instances, allows for condo buyer deposits to be used by the developer for actual construction and development of the condo building, you do not generally rely on those deposits to fund your projects.

Instead, you require a 10% of purchase price deposit and then simply put that deposit in a special escrow account with an independent agent. You don’t touch the deposit until the purchaser closes on the condo at completion.

The master developer has asked you to provide an answer this week as to whether you’re interested in moving forward. You have the schematic design complete, and your GC has provided estimated costs. Based on that, you have the assumptions you need to perform the financial analysis and make a decision.

The Jefferson – Assumptions

  • Physical Description
    • Land Area: 1.9 acres (82,764 SF)
    • Building Area: 90,000 SF (18,000 SF per floor)
    • Number of units: 55 (Floor 1: 5, Floor 2: 15, Floor 3: 15, Floor 4: 15, Floor 5: 5)
  • Development Costs (Uses of Capital)
    • Land acquisition cost, including closing costs: $28,750,000
    • Pre-construction cost: $30,000/month for 12 months
    • Hard costs: $350/SF
    • Soft costs: $100/SF
  • Sources of Capital
    • Land loan: 50% LTC, 7% interest paid current, 1 point in 1 point out, 30/360 actual, funds at land acquisition (month 0), payoff in month 13
    • Construction loan: – $50 million, 350 bps over Libor, assume Libor is 150 bps average, interest accrues 30/360 actual, pays off land loan in month 13 and funds 100% of construction until $50 million deployed, 100% of sale proceeds used to payoff loan until fully repaid
    • Equity: Funds all uses not covered by land loan or construction loan
  • Project Timing
    • Land purchase: At analysis start (i.e. month 0)
    • Pre-construction period: 12 months
    • Construction period: 24 months
  • Absorption
    • Pre-sale units: 15
    • Unit sales per month thereafter: 4 units/month
  • Selling Assumptions
    • Average unit sales price: $1,250/SF
    • 4% branding fee from sales proceeds
    • 3 % broker commission from sales proceeds

The Jefferson – Task

  • Calculate unlevered and levered IRR, EMx, and Net Profit.
  • Run sensitivity on $/SF sales price

The Jefferson – Questions

  • You generally target a 20% profit margin (net profit ÷ total project cost) and a 1.50x equity multiple on your investments. Based on those target metrics, is this project worth pursuing?
  • How much equity will be required to fund this project?

The Jefferson – Answer Key

Coming Soon. We’re working on creating an answer key for this key. We’ll update this post once the answer key is available for download.

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