Understanding how to manage a complex development project does not mean that you understand the complexities of the finances involved, says #b#Gerson Martinez#/b#, program coordinator at the New Jersey Redevelopment Authority in Trenton.
Investment in a large project, whether new construction or redevelopment, has high up-front costs. But it also might offer investment benefits that will only be realized in the long term, once the project is completed. The developers of a project must understand how to obtain finances as well as how to budget for the long-term, he says.
NJRA is presenting is offering a course specifically designed to help project managers learn the basics of project finance: “Project Finance,” which will take place from Monday to Thursday, February 1 to 4, at 9 a.m. daily at Thomas Edison State College in Trenton. Cost: $395. For registration go to www.njra.us/rti or contact Martinez at 609-292-0031.
The NJRA Training Institute offers intensive intermediate-level training courses that focus on the redevelopment of New Jersey’s communities. The organization itself is designed to provide nonprofit and for-profit developers, professional consultants, entrepreneurs, and city/county staff with a body of knowledge of the redevelopment and real estate development process.
The finance course in particular is designed to introduce students to key concepts, such as terms and conditions of loan applications, as well as a review of applications and closing documents. A new component of the course is training in how to use Excel to better understand how to analyze cash flow, Martinez says. Participants will analyze and develop project financials, and calculate debt capacity, loan payments, ratios, and return on investments. Students will also explore various tools and incentives used to close financing and improve project feasibility.
Martinez is coordinator for the course, which will feature a variety of guest experts on the various topics.
Martinez has been with the NJRA for nine years. A 1999 graduate of Rider University, he majored in public relations and did a community planning internship program through AmeriCorps. “I became interested in learning about how to put all the tools together to make a project work,” he says.
#b#First steps#/b#. Most construction projects take between three and six years to complete, Martinez says. That means careful planning of all details of the project, particularly the financing, is extremely important for a successful outcome.
“You need to know what your resources are and where your financing can be obtained from; where the low interest rates can be found,” he says. That includes learning about private sector financing as well as bridge financing because “the raw steps of construction tie into both of these things. It’s like sewing — you need to thread the needle carefully through all of the holes to make sure that you have things tightened up.”
Arrangements for financing differ depending on the type of owner and the type of development. Tax receipts or bonds may be part of the funding for a public project, and grants may also be available from state or federal agencies, he says.
In addition, a wide variety of financing options exist for developers in the initial stages of a project, Martinez says. These may include grants, borrowing money, or agreements for payment delays. Once a project is complete, the owner of the project generally looks for a more traditional mortgage.
#b#Do the homework#/b#. Financing is often one of the last stages of a project before construction begins, explains Martinez, because to obtain financing the developer must show that he has met all of the requirements of the host municipality.
Martinez uses the example of a developer who wants to build a medical center. “He knows it is a great idea; it will help the community, but there are still a number of things he must do before he can make it happen,” he says. These include a feasibility study to decide if the project can make enough money to justify the costs, and satisfying all zoning and planning board requirements.
“You have to have gone before the city and the county and have held open hearings all over town,” he says. “You have to show that your building will fit with the current plan for that block and that community. No one is going to give you money if you can’t show you have done your due diligence.”
#b#Plan for problems#/b#. One important thing any developer should remember is that no project is completed without setbacks. Lenders expect to see a reserve amount included in the financing plan to cover any unforeseen expenses. The reserve can be represented by a special reserve or a contingency amount in the project budget.
“No matter how well you plan, you can’t control everything,” he says. “You will have delays or emergencies — and don’t forget that you can never control the weather.” Plenty of projects in and around New Jersey slowed to a crawl this past summer because of rain, while snow blanketed much of the ground in December and stopped many projects for several weeks, Martinez says.
Making arrangements for financing takes time, often several months; and also must be taken into account when planning the project, he says.
The right accountant. With so many details to consider, finding a good accountant can be one of the best things a developer can do, says Martinez. The worst, he adds, may be trying to handle all of the bookkeeping and finances yourself.
We all can’t be an expert in everything, and having an accountant who thoroughly understands all of the details of the project’s short-term and long-term financing issues is paramount. In fact, it may be the difference between success and failure.