Real Estate Development - 5th Edition: Principles and Process
500
Real Estate Development - 5th Edition: Principles and Process
500eBookFifth edition (Fifth edition)
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Product Details
| ISBN-13: | 9780874203455 |
|---|---|
| Publisher: | Urban Land Institute |
| Publication date: | 06/01/2015 |
| Sold by: | INDEPENDENT PUB GROUP - EPUB - EBKS |
| Format: | eBook |
| Pages: | 500 |
| File size: | 9 MB |
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Real Estate Development
Principles and Process
By Mike E. Miles, Laurence M. Netherton, Adrienne Schmitz
Urban Land Institute
Copyright © 2015 Urban Land InstituteAll rights reserved.
ISBN: 978-0-87420-345-5
CHAPTER 1
Introduction to the Real Estate Development Process
Real estate development is the continual reconfiguration of the built environment to meet society's needs. The creation of roads, sewer systems, housing, office buildings, and shopping centers requires much work. Someone must initiate and then manage the creation, maintenance, and eventual re-creation of the spaces in which we live, work, and play. The need for development is constant as population increases, technologies evolve, and tastes continue to change.
Both public and private participants have compelling reasons to understand the development process. The goal of private sector participants is to minimize risk while maximizing personal or institutional objectives — typically profit, but often nonmonetary objectives as well. Fortunes have been made and lost in real estate development. Few business ventures are as heavily leveraged as traditional real estate development projects, magnifying the risk of ruin but also the potential for high returns to investors. The public sector's goals are to ensure public safety, to manage the impacts of real estate development on the community and the environment, and to promote smart development that is consistent with community's interests. These goals require balancing the market's need for constructed space against the public sector's responsibility to provide services, improve the quality of life, and limit environmental harm. A key tenet of this book is that all participants enjoy a higher probability of achieving their goals if they understand the nuances of how the development process works, who the key players are, how their objectives are interwoven, and why it is important to achieve consensus.
DEFINING REAL ESTATE DEVELOPMENT
Real estate development is the process of bringing built space to fruition. It starts with an idea and ends when consumers — tenants or owner-occupants — occupy the physical space put in place by the development team. Each real estate project is in essence a separate business entity employing the three factors of production — land, labor, and capital — to create a product. To transform an idea into reality, these factors are coordinated by entrepreneurial management and delivered by teams. Value is created by providing space to meet the needs of society. Although the definition of real estate development remains simple, the process grows more and more complex as municipalities, financial markets, and consumer tastes evolve.
Developments do not happen without financial backing, which often requires multiple agreements negotiated by multiple players. The developer works with public sector officials on approvals, zoning changes, exactions, building codes, and the provision of infrastructure. Community and special-interest groups play increasingly important roles. The time needed to conduct public outreach, negotiate with the public sector, and obtain financing must thus be factored into the equation when evaluating a potential project. Only after these functions are organized can the team of designers, engineers, and construction workers begin the physical development. The project is completed with the leasing or selling of the space to users. This final phase requires the expertise of marketing professionals, graphic artists, salespeople, website developers, and other specialists. The developer tries to ensure that every element in the process is properly executed on schedule and within budget.
Today, development requires more knowledge than ever about the specifics of prospective markets, patterns of urban growth, neighborhood associations, traffic patterns, legal requirements, local regulations, contracts, building design, site development, construction techniques, environmental issues, infrastructure, financing, risk control, and time management. Ever-increasing complexities in each arena have led to increased specialization within the development team. As more affiliated professionals work with developers, the size of the team has expanded and the roles of some members have changed. As development has become more complex, it has generated the need for better-educated developers.
THE EIGHT-STAGE MODEL OF REAL ESTATE DEVELOPMENT
Despite the growing complexity, developers still follow a standard sequence of steps from the moment they conceive a project through the time they begin ongoing asset management and/or sell the finished product. Although some may delineate the sequence of steps slightly differently, the essence does not vary significantly from the eight-stage model shown in figure 1–1.
The eight-stage model also applies to the redevelopment of projects, which requires most of the same steps as new development. In very large development projects, individual components can be nested within a larger development plan and may each be at different stages at a given time.
Before proceeding further with the model, a few points should be emphasized. First, the development process is neither straightforward nor linear. The flow chart shown in figure 1–1 can identify the discrete steps and guide an understanding of development, but no chart can capture the constant repositioning that occurs in the developer's mind or the nearly constant renegotiation that occurs between the developer and the other participants.
Second, real estate development is an art. It is creative and complex, partly logical and partly intuitive. Studying the components of development can help all players make the most of their chances for success. What cannot be taught are two personal qualities essential to success: creativity and drive.
Third, at each stage of the process, developers should consider all the remaining stages. Developers should make current decisions fully aware of their implications not only for the immediate next step, but also for the life of the project. The development process requires managing the interaction among the functions (design, construction, finance, management, marketing, and government relations) in each of the eight stages as well as over time.
The developer should recognize the importance of asset management and property management after the project is built by providing for those functions during design and construction. For example, operating a sophisticated building with advanced technological systems may require skills beyond those of most property managers in a particular market. Or, maintaining a particular material may require greater expense than would a different product.
Furthermore, to keep a space competitive in an ever-evolving market, asset managers need to remarket it continually and to upgrade or remodel it periodically. Institutional investors and corporate owners are keenly aware of the periodic need for and cost of major remodeling to prolong a building's economic life. Careful planning during stages one through seven should enable developers to find ways to minimize the frequency and cost of retrofitting, while respecting the original concepts. Whether or not developers manage a property for the long term, they are responsible for considerations that affect asset management during the first seven stages. Given that developers' decisions help determine future operating costs and that such costs represent a significant part of the project's value (i.e., what it will sell for), developers typically focus sharply on making building operations cost-efficient.
Fourth, although the model for development is grounded in reality, it represents an ideal version of the process. The model assumes a well-informed developer, a thorough analysis of the market, accurate assessments of the construction costs, and so on. Real estate development is full of stories of people whose intuition has led them to success. The stages described here do not account for the lucky, intuitive person who had a gut feeling and used unconventional means to get a project built. Still, it is better to be skilled and lucky than just lucky.
Fifth, the development process is inherently interdisciplinary and dynamic. It is a complex process that demands attention to all aspects of creating the built environment. The developer must be conversant in many disciplines, in order to make informed decisions and balance competing goals. Furthermore, many of the components of this interdisciplinary world are changing rapidly, and the interfaces between disciplines are constantly in flux.
Finally, real estate development is a global industry. Financing sources are sometimes global, major tenants have international connections, and real estate service companies operate and compete globally. Most important, global factors are spurring changes in lifestyle preferences that are changing what people want in the built environment.
CHARACTERIZING DEVELOPERS
Developers are like movie producers; they promote and finance a project, assemble a team of specialists, and then manage that team to make sure that the project is realized. Developers are proactive; they make things happen. As discussed in later chapters, a great deal of uncertainty is associated with the development process, just as with the introduction of any new product. However, unlike many other industries that make new products which have limited lives, real estate development involves long-term commitments because buildings last for decades. Thus, the cost of making a mistake is extraordinarily high. The amount of related risk the developer assumes personally is an important issue that commands significant attention throughout this book. Regardless of which risk control devices the developer finds appropriate for a particular project, the developer ultimately is responsible for managing all aspects of that project. Clearly, successful developers must be able to handle (and thrive under) intense pressure and considerable uncertainty.
Developers are not all alike. Some develop only one type of property such as single-family homes; others develop a wide range of product types. Some carve out a niche in one city; others work regionally, nationally, or internationally. Some run extremely lean organizations, hiring outside expertise for every function from design to leasing; others maintain needed expertise in house. Some operate as publicly traded companies, such as real estate investment trusts (REITs), while others stay private, forgoing certain capital market advantages to avoid the short term pressure of quarterly earnings. In between are many gradations. As in most professions, developers range from those who put reputation above profit to those who fail to respect even the letter of the law. Likewise, in ego and visibility, they vary enormously. Some name buildings for themselves, while others cherish anonymity.
Private developers must balance an extraordinary number of requirements for completing a project against the needs of diverse consumers of the product. First, as figure 1–2 shows, developers need the blessing of local government and often of neighbors around the site. In many cases, to obtain public approval, developers must redesign a project. Thus, appropriate flexibility is one of a developer's most crucial traits. Second, developers need to be able to find tenants or buyers (users) who will pay for space and associated services over time. Third, developers must lead an internal team of specialists who depend on the developer for their livelihoods and recruit external players whose businesses contract with developers. Fourth, developers need to demonstrate the project's feasibility to the capital markets and pay interest or offer equity positions in return for funding. In each of these areas, developers use various forms of risk management, initiating and managing a complex web of relationships from day one through the completion of the development process.
This book refers many times to the "development team" that assists the developer in the design and construction of an idea. It is worth noting that only a small proportion of the people in real estate development are developers — the entrepreneurs who initiate and execute a project. The bulk of the players come from a wide range of professionals, support staff, and building tradespeople who are indispensable to the process. Clearly, challenging work abounds in real estate development for many participants, not just for the developer. In fact, most developers start their real estate careers in one of the supporting professional trades.
The developer's job description includes shifting roles as visionary, promoter, negotiator, manager, leader, risk manager, and investor — a much more complex job than merely buying low to sell high. Developers are more akin to entrepreneurial innovators (like Bill Gates or Elon Musk) — people who realize an idea in the marketplace — than to pure traders skilled primarily at arbitrage.
Balancing these roles is an art that is mastered through experience. Equally important as that mastery is a goal-oriented disposition to overcome problems and obstacles. Developers must be highly focused on success with the ability to negotiate, compromise, and shape a project to meet the demands of stakeholders. Without the drive of a developer, few developments would occur because the potential roadblocks are numerous.
REPUTATION OF THE INDUSTRY
By definition, developers are agents of change. As in any profession, some are models of ethical behavior, making innovative and attractive contributions to the community, while others exhibit little sensitivity to community standards. But unlike other consumer goods that can remain in a showroom, the developer's product is clearly manifested in the built environment. It is there for everyone to see and judge. It is extremely difficult to communicate the qualities of a project before it is completed. Thus the developer's public persona can be as much a part of a project as the product itself, making developers easy scapegoats for everything from more traffic to higher taxes or crime rates.
As growth infringes on communities, the appearance of NIMBYism ("not in my backyard") is inevitable. Without even knowing the individual or the firm, many people are wary of a developer's involvement in a project in their neighborhood. Neighbors await bulldozers with trepidation. In the face of growing animosity, developers, city planners, elected officials, and others involved in community growth have learned the hard way about the necessity of involving the broader community in guiding development. Chapter 8 discusses how a developer can address these challenges. Communities will always change, with or without developers. A good developer can manage change with vision and sensitivity, and thus have a positive effect on a community.
THE DEVELOPMENT TEAM
The developer is the leader of a development team. He coordinates people and helps realize a vision. That vision may be his own, that of the community, one that is shaped by the team, or a blend of all of these. Developers seldom work in isolation. To design, finance, build, lease or sell their products, developers must engage the services of many other experts — public and private — some of them specialized professionals, others entrepreneurs like themselves. Chapter 3 describes the typical array of team members in detail.
With each project, developers must shape and sell an idea to secure commitments from others. Thus, they are first and foremost promoters. Like any team leader, they must also motivate players, often with incentives beyond money — with pride in the project, with the hope of future work, and with fear of the consequences of nonperformance. Knowing when and with whom to use different incentives is a key leadership skill for developers.
THE PUBLIC SECTOR: ALWAYS A PARTNER
The public sector is involved — as a stakeholder or a partner — in every real estate project. Real estate development is highly regulated, and the legal and regulatory environment surrounds the entire development process. Developers usually work hand in hand with local governments and the community, giving them the same respect and attention they would give any other partner. Chapters 7 and 8 discuss the public sector's involvement in depth.
(Continues...)
Excerpted from Real Estate Development by Mike E. Miles, Laurence M. Netherton, Adrienne Schmitz. Copyright © 2015 Urban Land Institute. Excerpted by permission of Urban Land Institute.
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