Real Estate Development - 5th Edition

Principles and Process

Mike E. Miles, Laurence M. Netherton, Adrienne Schmitz, Adrienne Schmitz

• Publisher: Urban Land Institute
• Year: 2015
• ISBN:
  9780874203455
• Edition: 1
• Topic: Business
• Subtopic: Real Estate
• Index: Business

This comprehensive book covers each stage of the real estate development process, explaining the basics of idea conception, feasibility, planning, financing, market analysis, contract negotiation, construction, marketing, and asset management. Widely used by professionals and in universities, this book should be on the shelf of anyone involved in architecture, planning, development, investment, or related fields.

PART 1

Introduction

The principles and process of real estate development should be studied by looking at both the people who are involved in the process and the people who are the end users of the product. Although this book focuses on the role of the developer and the development firm, a great many people affect and are affected by real estate development. Everyone consumes the end product. Individuals form the lending institutions and investment firms that provide financing for a project. Individuals make up the public sector that both allows development and provides infrastructure to a development. Individuals in many allied professions produce the built environment that is used by people of different backgrounds and income levels.

Although the private entrepreneurial developer is often considered the most typical type of developer, it is important to note that developers can also be financial institutions, corporations, universities, medical centers, cities, municipalities, and other entities. Regardless of the kind of developer or real estate sector, the process laid out in this book remains essentially the same. Market decisions must be made, pro formas should be sound, the development team must be retained, and all of the stakeholders should be consulted. The process may be layered with various institutional procedures, committees, and boards of trustees, but the product is achieved by going through the same steps.

Profiles of developers and the diverse set of professionals who work with developers are interspersed throughout the text. Their career paths are interesting and often surprising. Their perspectives on development are especially valuable because these individuals have lived the process this book describes.

In addition to the profiles, the book features two case studies depicting two developers and their respective projects. The first is Larry Short, who is developing high-end student housing in Chapel Hill, North Carolina. His development, Shortbread Lofts, consists of a 271-bedroom community in six stories of apartments above ground-level amenities. The second is Wil Smith, a developer working in southern California. His project, Irvine Tech Center, is a large, multi-building, mixed-use development in Newport Beach, California. These case studies tell stories of unexpected complications and their resolution in the developers’ own words.

Part I looks at the people who make a development possible: the developer as prime mover, the future users, and the many participants who work with the developer to produce what society will want. Part II presents a historical overview of real estate development in the United States and the roles of regulatory and political actors. Part III builds on that history with a contemporary view of the public sector’s role. Part IV introduces the eight-stage development process with the first stage, inception of an idea. It also covers the financial decision-making mechanics that support development and are used at each stage of the process. In parts V, VI, and VII, the book proceeds through the eight-stage model, looking in detail at decision making in the real estate development process.

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.

Figure 1–1 The Eight-Stage Model of Real Estate Development

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 ...