class 1: Intro Flashcards
Property Types
residential:
–> single family + multi family
commercial:
–> office
–> retail
–> industrial
–> hotel
–> Mixed-use
What is Real Estate Development?
the continual reconfiguration of the built environment to meet society’s needs
It is the creation and re-creation of housing, office buildings, shopping centers, warehouses, roads, sewer systems, landscapes, etc.
Acquisitions, renovations, construction, leasing, purchase of raw land, etc.
It is complex and, as much intuitive as logical and as much creative as mathematical
–> No two developments are exactly alike
It involves many players with congruent or divergent goals and objectives
is Real Estate Development considered risky?
considered a highest risk and highest return area of real estate investing
Sources of risk to a developer
Market risk (Ability to lease up/sell units)
Government approval and permitting (entitlement) risk
Legislative risk
Site risk (Physical condition, environmental risk, infrastructure)
Financial risk (Access to credit risk, cost of financing , interest rate risk)
Construction risk (On time and on budget)
Real estate market are affected by the economy and interest rates
what is the demand for space related to?
related to broad economy as well as specific industries and employment trends
Real estate market are affected by the economy and interest rates
what does the Feasibility of a project depend on?
on ability to access capital at low cost
Real estate market are affected by the economy and interest rates
Demand from households for single family homes and condos are related to what?
are related to market mortgage rates
what is the relationship between Real Estate Cycles and development lead time?
Projects approved in boom times, but when they are delivered several years later, economic conditions may have changed
why are Cycles are exacerbated by overbuilding?
Many developers choose the same, favorable moment to start projects
Real Estate Cycles
- Recovery
- Expansion
- Hypersupply
- Recession
Demand Drivers for residential single family and condos (owner occupied)
Population
Household formation (child rearing ages)
Interest rates (Bank of Canada)
Employment growth (business and professional occupations)
Demand Drivers for Multi-family residential (renters)
Population
Household formation (non-child rearing ages)
Local housing affordability
Employment growth (blue collar occupations)
Demand Drivers for Retail
Disposable income
Household wealth
Traffic wealth (specific sites)
Demand Drivers for Office
Economic growth
Employment in office occupations (Finance, Insurance, Real Estate, Business and Professional Services, Legal Services)
Demand Drivers for Industrial
Mfg. employment
Transportation employment
Airfreight, rail and truck volume
Online sales
The developer must compose a team having the skill set for what specifically?
for the unique requirements of each project
Fee developer
hired by a client and does not usually own equity in the project
Little downside risk
Speculative developers
own all or part of the equity in the project
Downside risk for upside potential
risks involved with speculative developers
the cost of pre-development work for projects that may not go forward
Due diligence
Feasibility studies
Market analysis
Developers are usually compensated by one or more of the following:
Development fees: payment for services
Profits on sale of the project
Promote fee
Ownership of entities that sell services related to the development process
promote fee
when a developer earns a disproportionate share of the profits
Often given to the developer as a form of bonus for achieving a higher IRR
Generally applies to profits after the financial partner has achieved his targeted IRR
“Ownership of entities that sell services related to the development process” compensation to developer
Leasing
Property management
General contractors
roles of architects in development
Participate in the development of the concept
–> Site selection advice
–> Alternative concepts
–> Feasibility
Participate in communicating the vision
–> Illustrations
–> Models
-> Integration into the neighborhood
–> Videos
Creation of the detailed plans
–> Used for construction, public authority review and approval, costing and contractor bids
Use other professional firms in developing the plans
–> Structural engineers
–> Mechanical engineers
Monitor the construction work
–> Construction work phases completed satisfactorily
–> Approval for construction loan draws
–> Attestation of compliance with plans
Building contractors
turn designs into physical form
The general contractor
responsible for the overall construction project
hires subcontractors to perform specialized work
–> Excavation
–> HVAC installation
–> Electrical wiring
–> Plumbing
how are general contractors often chosen?
what is considered for the selection process?
often chosen through a bidding process
Cost, experience, keys employees, financial strength are all considered in the selection process
can it be possible for the developer serves as his own general contractor?
yes
Contractor fees are dependent on what?
size
complexity
risks of the project
role Geotechnical and soil engineers in development
determine the ability of the ground to support the proposed development
This information becomes part of the design requirements, in the specifications of the required depth and type of foundations, compaction, and setbacks
Geotechnical reports are also part of the information that excavation and grading contractors need for determining their scope of work
how do Geotechnical and soil engineers determine the ability of the ground to support the proposed development?
Their surveys identify major structural features such as:
–> Earthquake faults
–> Landslides
–> Bearing capacity of the soil
The key component of development project feasibility
market potential
what will the market study measure?
supply and demand conditions for the project
determine potential pricing
estimate the sales or leasing period
appraisers’ role
Appraisers produce an estimate of a property’s value
when are appraisers involved in the development project?
before, during, and after project completion and often take part in the financing process
other services provided by appraisers
investment analysis to litigation support
one must you control when starting your first deal?
one of the following (or more):
Land
Capital
Knowledge
Tenants
the importance of owning land when starting a development project
Supply: a site looking for a use
If you have or control land, a development strategy can be created once the developer has acquired information about the market, engineering, public approvals required, environmental issues, etc.
The market analysis will be a key tool
the importance of having tenants when starting a development project
Demand: a use looking for a site
Having a tenant ready and committed to leasing a property can make it easier for the beginning developer to access capital
It also eliminates or reduces the lease-up risk
the importance of having tenants when starting a development project
Demand: a use looking for a site
Having a tenant ready and committed to leasing a property can make it easier for the beginning developer to access capital
It also eliminates or reduces the lease-up risk
the importance of having knowledge when starting a development project
Demand: a use looking for a site.
In depth knowledge of the local market can give a starting developer a competitive edge by knowing where space is in short supply and which tenants are looking for space.
The ability to convince potential lenders and investors of these opportunities through the use of market studies or letters of intent from prospective tenants can start to make up for the lack of track record in development.
the importance of having capital when starting a development project
Supply or demand
Obtaining capital is the biggest hurdle for a new developer
With capital in hand a developer can attempt to match a site with the best possible tenant
A starting developer can use capital to gain knowledge, secure a site and attract tenants.
When starting out, what should you do if you wanna start a development project?
why?
develop what you know best in the market you know best
Keep it to a size and complexity level that you can easily manage.
The first deal will:
–> Establish your track record
–> Establish your image in the marketplace
–> Create contacts within the municipalities
–> Create a network of consultants and other players
–> Build a relationship with investors and lenders
Key Success Factors for a Developer
Ability to access capital from equity partners and lenders
Ability to identify high-potential sites for development
Knowledge of needs/preferences in local market
Ability to close a deal with a tenant/buyer
Ability to thrive in high risk environment
Ability to persevere through frustration
Great analysis, negotiation and management skills
Drive to succeed/strong work ethic
8 stage development model
- idea inception
- idea refinement
- feasibility
- contract negotiation
- formal commitment
- construction
- completion and formal operating
- property, asset, and portfolio management
