Real Estate Development - 4th Edition

Principles and Process

Mike E. Miles, Gayle L. Berens, Mark J. Eppli, Marc A. Weiss

• Publisher: Urban Land Institute
• Year: 2013
• ISBN:
  9780874202892
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Immobilien

Ideal for anyone new to real estate development, the fourth edition of this bestselling book covers each stage of the process step by step, explaining the basics of idea conception, feasibility, planning, financing, market analysis, contract negotiation, construction, marketing, and asset management. Thoroughly updated, the book includes material on financing and marketing.

PART I

INTRODUCTION

The principles and process of real estate development should not be studied without looking at both the people who are involved in the process and the people who are the ultimate users of the product. Although this book focuses on the role of the developer or the development company, many people affect and are affected by real estate development. We all consume the end product. Individuals ultimately provide financing for a project. Individuals make up the public sector that allows a development to be built. People in many allied professions produce the buildings that are used by people of many different backgrounds and income levels.

Anyone who is thinking about going into real estate development should try to understand who helps a development come to fruition and how they do it. Most important, developers must understand the users and their needs. Without users, buildings—no matter how aesthetically pleasing or how theoretically functional—have no value.

Part I looks at the people who make a development possible—the developer as prime mover, those of our society who will be the users, and the many players who work with the developer to provide what the end user wants/needs.

CHAPTER 1

The Real Estate Development Process

Real estate development is the continual reconfiguration of the built environment to meet society’s needs. Roads, sewer systems, housing, office buildings, and lifestyle centers do not just happen. Someone must initiate and manage the creation, maintenance, and eventual re-creation of the spaces in which we live, work, and play.

The need for development is constant, because population, technology, and taste never stop changing. New generations, new lifestyle choices, and revolving immigrant groups, coupled with the evolution of technology, drive economic changes in consumer tastes and individual preferences.

Whether current consumer, new citizen, or real estate professional, all of us inhabit the built environment. Further, through the legislative/political process, we collectively continue to alter the rules of the development process. Therefore, we should all understand the development process. The development process creates the houses we live in, the mixed-use development down the street, the 25-story office tower downtown, the warehouse that stored the paper this book was printed on, and the convenient (but to some tastes terribly unattractive) fast-food restaurant on the commercial strip.

Both public and private participants in real estate development share compelling reasons for understanding the development process. The goals of private sector participants are to minimize risk while maximizing personal and/or institutional objectives—usually profit (wealth maximization) but often nonmonetary objectives as well. Few business ventures are as heavily leveraged as traditional real estate development projects, magnifying the risk of ruin but also increasing the potential for high returns to equity. Large fortunes have been and continue to be made and lost in real estate development.

The public sector’s goal is to promote sound and smart development, ensuring that construction is attractive and safe and that new developments are located and designed to enhance the community, provide needed space, and boost the economy. Sound development means balancing the public’s need for both constructed space and economic growth against the public responsibility to provide services and improve the quality of life without harming the environment.

The public and private sectors are involved as partners in every real estate development project. A key tenet of this book is that all participants enjoy a higher probability of achieving their goals and objectives if they understand how the development process works, who the other players are, how their objectives are interwoven, and the need to achieve consensus.

This book was written for people who need to understand real estate development from the perspectives of both the public and private sectors. Its aim is to be useful to present and future developers, city planners, legislators, regulators, corporate real estate officers, land planners, lawyers specializing in real estate or municipal law, architects, engineers, building contractors, lenders, market analysts, and leasing agents/brokers. Readers are assumed to have already acquired the fundamentals of real estate and/or city planning. This book summarizes but does not repeat in great detail basic information about real estate law and finance, urban economics, and land planning and design. Although the focus of our book is the individual entrepreneurial developer, it is important to note that developers can also be financial institutions, corporations, universities, medical centers, private investors, cities, municipalities, and others. The process laid out in this book remains essentially the same—no matter who the developer is. Market decisions still have to be made, pro formas still need integrity, designers have to be consulted, and so on. The process might be layered by various institutional procedures and committees and boards of trustees, but the product is achieved by going through the same steps. In fact, many institutions and cities are hiring entrepreneurial developers on a fee basis to manage a project’s development within the larger organizational framework.

Throughout, the book includes profiles of developers and the diverse set of professionals who work with developers. Their career paths are always interesting and often surprising. Their perspectives on development are especially valuable because these individuals have lived the process we are describing. Development decision making has become more difficult as the world has grown more complex, and developers’ and professionals’ insights help frame the development process in human terms.

In addition to the various profiles, the book focuses on three developers and three projects. One profile is of Russell Katz, a young developer who was originally trained as an architect. An ardent supporter of green buildings, one of his goals in developing Elevation 314, a four-story, 52-unit apartment complex, is to demonstrate the potential of environmentally friendly architecture.

The other project involves two residential towers developed in Cambridge, Massachusetts, by Dean Stratouly of Congress Group Ventures. Museum Towers is the story of a development in a pioneering location.

In addition to Katz’s and Stratouly’s experiences, Appendix A of this edition includes an account of Whit Morrow’s Europa Center. Originally interspersed throughout the pages of previous editions of this book, the case study of Europa Center has changed as this book has changed. In the first edition, Morrow recounted in his own words all phases of the development process for this Class A office building: from conception through planning, permitting, financing, and construction to completion, leasing, and ongoing management. In subsequent editions, we learned how the building functioned over time and about the need for related development.

These projects tell stories of unexpected complications and their resolution through the words of the developers.

To begin the discussion of the development process, this chapter lays out the functions of the process and its many players:

• The definition of real estate development;
• The eight-stage model of real estate development;
• The characterization of developers and their reputations;
• The development team;
• The public/private partnership;
• Market and feasibility studies; and
• Design.

The next two chapters complete the introduction by defining the playing field—the spatial economics of the contemporary city—and then defining the roles of the various participants in the process. Chapter 2 describes the raw materials of the development process—demographics—while Chapter 3 adds detail and contemporary color to the process and the players.

Part II presents a long-term historical perspective on real estate development in the United States. Part III then covers the financial mechanics that support development decision making. Finance is not the goal, however; rather, finance constitutes the logic that allows the developer to bring together several participants (each with its own set of objectives) in a coordinated effort that will ultimately make a profit. The book then proceeds through the eight-stage model to look in detail at decision making in the real estate development process.

DEFINING REAL ESTATE DEVELOPMENT

A real estate development starts as an idea that comes to fruition when consumers—tenants or owner-occupants—occupy the bricks and mortar (space) put in place by the development team. Land, labor, capital, management, entrepreneurship, and broadly defined partnerships are needed to transform an idea into reality. Value is created by providing usable space over time with associated services. It is these three things—space, time, and services—in association that are needed so consumers can enjoy the intended benefits of the built space. Although the definition of real estate development remains simple, the activity continues to grow more and more complex. The product of the development process—a new or a redeveloped project—is a result of the coordinated efforts of many allied professionals.

Developments do not happen without financial backing and often require multiple agreements to be negotiated by multiple financial players. Only then can physical construction or reconstruction be started, involving the myriad of design professionals, construction workers, engineers, and so on. Before, after, and during the process, the developer works with public sector officials on approvals, zoning changes, exactions, building codes, infrastructure, and so on. Increasingly, community groups in many cities demand to be key players in the development process, and the time needed to work with them has to be factored into the development equation. Finally, selling or renting the space to users at the intended (or higher) price is the act that proves the entire project was justified. This consummation requires the expertise of marketing professionals, graphic artists, salespeople, Web site developers, lawyers, and others. The developer must ensure that all these elements—and many more to be identified later in this book—are completed on schedule, are properly executed, and are reasonably within budget.

Today, development requires more knowledge than ever before about the specifics of prospective markets and marketing, patterns of urban growth, neighborhood associations, traffic, legal requirements, local regulations, public policy, conveyances and contracts, elements of building design, site development, construction techniques, environmental issues, infrastructure, financing, risk control, and time management. Ever-increasing capacities and complexities along each of these dimensions have resulted in increased specialization. As more affiliated professionals work with developers, the size of the development team has expanded and the roles of some professionals have changed. Although greater complexity has generated the need for better-educated developers (educated both in book knowledge and hard knocks), it has not changed the steps they usually follow in the development process.

THE EIGHT-STAGE MODEL OF REAL ESTATE DEVELOPMENT

Developers follow a sequence of steps from the moment they first conceive a project to the time they complete the physical construction of that project and begin ongoing asset management or sell the finished product. Although various participants of the development process may delineate the sequence of steps slightly differently, the essence of the steps does not vary significantly. At a minimum, development requires the following elements: coming up with the idea, refining the idea, testing its feasibility, negotiating necessary contracts, making formal commitments, constructing the project, completing and opening it, and, finally, managing the built project. This text seeks to capture that essence in the eight-stage model depicted in Figure 1–1. Succeeding chapters detail the activities that collectively make up the eight-stage model of the development process.

Before proceeding further with the model, a few points about development must be emphasized. First, the development process is hardly straightforward or linear. A flow chart similar to that shown in Figure 1–1 can freeze 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 between the developer and the other participants in the process. And don’t forget that redevelopment of existing projects requires many of the same steps as development. Moreover, in very large projects, individual development components can be “nested” within a larger development plan. For example, during the development of a large-scale community like Stapleton in Denver, Colorado, individual components of the community may be in different stages while the overall development plan is in stage six—construction.

Second, development is an art. It is creative, often extremely complex, partly logical, and partly intuitive. Studying the components of real estate development can help all players make the most of their chances for success. What cannot be taught are two ingredients essential to the success of the real estate developer/entrepreneur: creativity and drive. At times, a smart dev...