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Experts discuss concerns in condo development finance.

The concerns in today's market regarding over saturation and its consequences in the condominium development industry were recently addressed by Paul Fried, Principal of AFC Realty Capital, at a condominium summit held in Ft. Lauderdale, FL.

Participating in a panel, which focused on the current state of financing for condominium projects, Fried noted that the investment community still utilizes traditional methods to analyze upcoming condominium developments, despite the large supply that was introduced last year and is expected to come to market in 2006.

"The investment and lending communities are beginning to look at these projects the way we have always done asking again what makes a project a good real estate deal," he said.

"For us, it always begins with land cost--is the developer buying the land right. If so, he starts out with a lower cost than his competition, which is an important hedge against unforeseen costs, such as rising construction and insurance costs."

Speaking before more than 500 attendees, Fried continued, "After land cost, nothing is more important than the projected profit margin. While projected profits are no predictor of actual profits, deals that provide too thin a profit margin will not have the room to absorb a rise in project expenses or a drop off in sales revenue.

"This is cause for concern when considering a new proposed project. And of course, a sizeable projected profit margin is important to creating the initial interest in the project that is essential to putting the capital together to do the project."

AFC Realty Capital has develop a strong reputation in the financing industry for structuring transactions beneficial both lender and borrower.

The Manhattan-based company is known for its ability to make the "impossible possible" by designing the most cost-effective and advantageous capitals structures for today's property landscape, including condominium and multi-family development. Mr. Fried explained AFC's methods for identifying desirable property characteristics which can be utilized to obtain financing.

"We look for a compelling explanation of the developer's land cost," he said. "For instance, we have a project where the developer began buying existing single family homes and eventually had sufficient land to put the lots together and build a large condominium project.

"That land assemblage created major land value. Another builder coming into that market would have to pay significantly more to get enough land to build a similar project and would be starting their project with significantly higher land cost. We also look for projected profit margins of at least 35 to 40%, before we begin analyzing the developer's projected construction costs."

"Everyone--from developers of large projects to home owners doing home renovations--is aware of how steeply construction costs have risen. Labor costs began increasing sharply a few years ago, and material costs--cement, wood product, steel, and wallboard--have all gone up this year beyond anyone's estimation.

Rising costs hit profit margins in a huge way, and if your project didn't start out with a big enough profit margin before the "surprise factor" of unforeseen cost increases, then you don't have enough profit in the deal to make any money."

Fried concluded by noting that the slight decline in condominium development expected in 2006 should have little effect on the investment industry.

"New condominium starts next year should be down from this past year," he said, "but in our experience, good real estate projects will get done whether or not we're in a condo craze".
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Publication:Real Estate Weekly
Date:Feb 1, 2006
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