Revenue analysis key for builders
High-rise developers told to do homework
By HUBBLE SMITH
Las Vegas Review-Journal
One thing that the developers of the 25 or so high-rise developments that are now being built in Las Vegas had in common was a thorough and detailed financial analysis that they could present to bankers when they went looking a construction loan, an economic consultant said Tuesday.
"You need to do your homework. The heart and soul of a business plan will always be your pro forma," Thomas Climo said during a seminar by Lorman Education Services on high-rise development concerns. "You want your pro forma to be the same picture before you build as after you build."
The pro forma -- a revenue analysis of a project based on factors such as equity investment, debt financing, construction costs and sales and marketing -- will be sliced and diced by lenders looking for any discrepancies, any reason not to make the loan, he said.
Too many developers of luxury condo high-rises in Las Vegas have started with a Web site, fancy architectural renderings and a slick sales force before putting together the pro forma that calculates their expected revenues and an internal rate of return, Climo said.
Or, he added, they haven't been honest with the numbers and lied about their pro forma.
Banks treat high-rise developments as any other capital base that spins off cash flow, he said.
"Lenders have grown to have this huge disbelief of what's going on in Las Vegas. Bankers start getting a cold feeling, like these guys don't know what they're doing," Climo said. "There is a dilemma you're going to have with a pro forma -- skepticism in marketing."
When Donald Trump came to Las Vegas and announced prices starting at $1,000 a square foot for units at Trump International, people thought it was simply because of his name. Climo said it's likelier that Trump knew the market would bear those prices.
The nuts and bolts of preparing a pro forma is making assumptions, which can be affected by market conditions and other factors, Climo said.
The pro forma includes soft costs such as land acquisition, commissions paid on the land, permits and fees, marketing and other preconstruction costs. Hard costs include construction, furnishings, parking and tenant improvement allowances for office and retail.
A sample pro forma that Climo put together for an actual high-rise project in Las Vegas showed $121.8 million for hard costs, $49.2 million in soft costs, total revenue of $224.8 million and net project operating income of $53.8 million. The return on investment was calculated at 31.5 percent and the internal rate of return was 23.4 percent. He said pro formas are tweaked along the way.
John Riordan, vice president of sales for Turnberry Place, said Turnberry Associates spent about $4 million a year on marketing and advertising both locally and nationally when the luxury condo project was announced in 1998.
"People didn't know us and they didn't know our product," he said. "First of all, you determine what marketplace you want to reach. We're basically at the top end of the market. We're looking for an affluent market outside of the region, second home buyers. In Miami, we're looking in the Northeast. In Las Vegas, we're looking at California and Texas."
Demand is strong for high-rise living in Las Vegas, both from local residents who are tired of living in large custom homes and are looking to "lock and leave" and from other mature high-rise markets, Kathleen Ray, owner and broker at Subdivision Sales, said at the Lorman seminar.
"We're going to become a high-rise city. Think about Detroit and Chicago. Why will people come to Vegas? This is a 24-hour city, real estate, the weather. We're not used to high-rise living, but it's very exciting," Ray said. "It's all about the lifestyle, the amenities. What are you going to do for me? I want to go to the pool. I want to work out in the fitness center at night. A business center is really important and I think it's something that's missing in high-rises. People want to work from home."
When Turnberry Place was built, people wondered who the buyers would be and where are they, Ray said. "They're not here yet. They're comin' around the mountain."
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