2B — July 27 - August 9, 2018 — Owners, Developers & Managers — M id A tlantic
Real Estate Journal
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O wners , D evelopers & M anagers By Mike Harris and Max Garbus, CRE Models Single-usedevelopers facenew challenges in today's world
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wo veteran real estate executives from con- sultancy CREModels
caution Harris and Garbus. This tends to escalate when different stakeholders want to see reporting at different levels, they explain. “For instance, in- vestors may want rollup f i n a n c i a l s , but lenders may want to see progress reported on each property type individually.” As projects scale up, the reporting can get even more complicated: “One group of investors may cover the retail and office portion, but the mezzanine lenders may be involved only on the condos, while traditional construction loans are placed on the entire project,” write Harris and Garbus. “As these complex developments evolve, making changes to the models can be especially cumbersome—one nuanced alteration can have cascading effects, requiring time-consuming adjustments.” In the piece, Harris and Garbus describe a number of additional complexities often associated with mixed- use projects in areas such as leasing, marketing and timing. They note that some of the largest development companies are now battling for a shrinking pool of highly paid executive talent with track records in mixed-use. But an alternative to build- ing in-house expertise hinges on forming joint ventures and bringing in consultants who are experts in financial analysis, leasing, property management, marketing and operations on such projects. “Every additional property Max Garbus
type introduces more com- plexity, which takes a trained eye to recognize,” the execu- tives write. In particular, the pro forma analysis and underwriting need to be conducted quickly and accurately, with a view toward creating a compel- ling, professional package for presentation to prospective lenders and investors, advise Harris and Garbus. “By their nature, mixed- use deals may be larger than what single-use developers are accustomed to handling,” they explain. “Because of this, as developers make the transition to creating mixed- use projects, they may need to talk to whole new sets of lenders or investors … Be- ing armed with the right tools—everything from the pitch deck, to the financial projections, to a clear explica- tion of the deal structure— demonstrates the team’s capabilities and competence with respect to the financial underwriting.” In the conclusion, Harris and Garbus encourage de- velopers to prepare for the possibility of one day becom- ing a part of the mixed-use trend. Toward that end, they could act now to build vendor relationships, visit outstand- ing success stories, line up modeling methodologies and, in general, make a thorough study of the world of mixed- use. “Cross-training in this way has another potential upside—relationships forged today just might blossom into the mixed-use JVs of tomorrow.” CREModels is a bou- tique real estate consult- ing firm.
ask a provoc- ative ques- tion in a new column for Commercial Property Ex- ecutive : How can single- use develop- ers of offices,
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Mike Harris
shopping centers or multi- family properties prepare themselves for a mixed-use world? The national trend toward mixed-use development is undeniable, write Mike Har- ris, managing director, and Max Garbus, practice direc- tor, due diligence services. “Marketed as experiential, live-work-play communities beloved by Millennials and empty nesters alike, mixed- use projects are popping up from the waterfronts of the Mid-Atlantic to the suburbs of Seattle,” they note. But if they choose to embrace the trend, caution the executives, single-use developers need to carefully prepare for the dif- ferent dynamics that prevail. “Simply put, mixed-use is a different animal,” they write. It starts from the very begin- ning as the team puts together financing. “While the capital stack for single-use properties tends to be relatively simple, a large mixed-use project could involve one set of investors and four different construction loans, or vice versa,” they note. Likewise, the financial under- writing and modeling platforms that work perfectly well for single-use projects can break down when retrofitted to in- clude additional property types,
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