class 5: stages 1, 2, 3 Flashcards
the role of the developer in stages 1, 2 and 3
the developer takes on the role of creator and promoter
Stage One – Idea Conception
the most creative and least mechanical process for the developer
Success is predicated on finding the right idea
It is not uncommon for a developer to go through many ideas in the course of day or week
Some developers are continuously brainstorming with their teams
The developer is continuously scanning her environment for ideas and opportunities
tools Helping to guide the developer in idea conception
His experience
Her knowledge of the market
His familiarity with changes in the industry
Her network of consultants, lenders and investors
Motivation Behind the Ideas
Land
Tenants
Knowledge
The “Back-of-the-Envelope Pro-forma”
attempts to do a quick financial feasibility test without investing money on a full analysis
A rough estimate of the rent and operating expenses per square foot are used to estimate a stabilized NOI
A value estimate can be derived by using the NOI and market cap rates
when does the “Back-of-the-Envelope Pro-forma” lead to the next stage
If the value generated is greater than the estimated cost of the project, the idea may survive to the next stage
If the value is less than costs, the project may be re-imagined or abandoned
Is there money to be made in a rough estimate type of way
Risk Control Measures in Stage One
Know your capabilities
Know your team’s abilities, strengths and weaknesses
Keep current
–> Zoning
–> Rent levels
Be willing to say “PASS”
Stage Two – Idea Refinement
The primary objectives and tasks in the stage
Control the site
Identify the critical assumptions, modify them as appropriate, and prepare them for validation through the due diligence process
Make an initial determination of the project’s feasibility
initial determination of the project’s feasibility
This requires the involvement of the development team
Use of relationships and connections
Try to get as much information without spending any money
true or false
The developer should feel reasonably confident at the end of stage two about the project’s feasibility.
For ideas that are not associated with a specific site, what is the first task of stage two
creating a plan for land acquisition
how to create a plan for land acquisition
Analyzing areas/neighborhoods in the market
Analyzing competition
Discussing with elected and appointed official & city planners
Determining initial design requirements for the site
Negotiating site and structuring a contract to secure the site
Refine financial feasibility.
Selecting the Site –Sources of Information
Urban growth models
GISs (Geographic Information Systems)
Urban growth models
Provide a theoretical framework for understanding a market’s current pattern of land use and potential directions of change.
the two types of GISs (Geographic Information Systems)
Spatial interaction models
Spatial diffusion models
Spatial interaction models
traffic flows
store patronage
store revenue
Spatial diffusion models
predict population movements
growth/decay of neighborhoods
development of new neighborhoods)
Selecting the Site – Characteristics
Usable Area
Floor/area ratio: square feet of a parcel that can be constructed on
Situs: interaction of the project with surrounding sites & the impacts of those surrounding uses on the subject property
Geology
Soil condition (can lead to excavation & foundation work if not looked into)
Hazardous Material
Cultural considerations
Infrastructure
Situs
interaction of the project with surrounding sites & the impacts of those surrounding uses on the subject property
a cheat code for a developper after finding out about the site’s characteristics
Ideally the developer sets up contracts that allow her to back out of land purchase if significant environment contamination or geological problems are discovered
Controlling the Site
To reduce the amount of money at risk during this period, the developer would rather not purchase the land but wants to control it
A letter of intent (LOI) is often signed and is converted to purchase agreement following satisfactory due diligence
An option is often used to control the site without an outright initial purchase
A letter of intent (LOI)
The price to be paid at closing
Deposits paid to the seller as an inducement to take the property off the market
Conditions of closing
Responsibility for brokerage commissions
Responsibilities of the buyer and seller
Due diligence rights, including entry, testing, interviews, and other acts
Right of assignment.
The Initial Feasibility
the developer tests the concepts in the context of specific sites.
Ideas and initial design concepts are refined as more information becomes available
assumptions made during The Initial Feasibility
physical character of the site
entitlement environment
competitive environment
lending environment
participants in the second stage
contractors
end users
property managers
designer and architects
Lenders
Investors
The Public
contractors
Contractors are consulted to ensure that the concept can be built on the proposed site or if adjustments need to be made
contractors and business cycles
Business cycle affects the quality of available trades’ people
As business cycles peaks, construction costs may escalate and quality may suffer, as less experienced people only are the ones available.
End Users
developers begin discussions with a range of possible tenants to determine users’ specific requirements and to refine the general idea of market demand established during stage one
Property Managers and their use
Valuable in helping developers avoid costly design mistakes and in planning design features that will make the building easier to manage and/or reduce operating costs
Input from property managers is particularly important when a proposed project will involve extensive, ongoing services
Designers and architects
Initial discussions on the feasibility of the concepts and designs may begin at this stage
More important if this is a new concept
These discussions may lead to changes in the initial design
Good at tweaking designs to see If it would fit the space if needed
Lenders
Determining if the project can be financed is imperative
Possible terms and conditions required by the lender are assessed
Informal discussions and negotiations are started
Investors
At this point, you probably won’t be talking to investors
Early equity investors typically want a greater portion of the project’s cash flow because they assume more of the development risk.
Early involvement of equity investors reduces the risk to permanent & construction lenders, thereby lowering the cost of debt financing
Many projects endure a period in which none of the money will be returned to investors if the project doesn’t proceed
The Public
Government
neighborhood associations
advocacy groups
Can bring the later in case the project kinda bugs
Don’t want the public to think you lied
A favorable impression of the project by the public can lead to an easier entitlement process and a greater market acceptance
Analysis of financial feasibility gets refined at which stage
stage two
