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Wednesday, March 18, 2015

What counts towards the developer's equity?

It is the sum of the following:
  1. The developer's cash down payment on the purchase of the land.
  2. It does NOT include the principal and interest payments on the land loan used to buy the land.  Payments on a land loan don't add value to the project.  In theory, a developer is supposed to pay cash for the land.
  3. But definitely include any appreciation in the value of the land since the buyer purchased it, either because of time (maybe the developer wisely bought the property in 2009 at the bottom of the market) or because of the happening of some external event, such as the completion of a freeway off-ramp on the subject strip or the opening of a nearby Wal-Mart.
  4. Any increase in land value due to a zoning change or use change.
  5. Any increase in value of the land due to assemblage.  Sometimes an assembled parcel is worth far more than the sum of the purchase prices of the various parcels.  Imagine a developer who is able to buy six ugly, old rental houses along a busy strip and combine them into a site large enough for a modern new strip center (called a mini-mall in Southern California).
  6. Any monies already expended for architect's fees.
  7. Any monies already expended for engineering fees.
  8. Any monies already expended for legal fees, especially when used to get the zoning or use changed.
So how much equity is enough?  Generally a developer has to cover 20% of the total cost of a project.

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