How Real Estate Developers Think. Peter Hendee Brown

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СКАЧАТЬ from materials selections to construction details to the review of monthly construction payment applications. Until the building is finished she will be constantly rebalancing the project’s design, materials, systems, and costs.

      Closing dates with tenants or buyers will drive the schedule. For large projects the developer may complete and sell or lease up a part of the project while the rest of the building is still under construction. High-rise residential and office towers are often completed and occupied from the top down, while horizontal developments like townhomes and office parks lend themselves more easily to phasing that matches market demand and absorption. Whether the first condo unit or an entire building, the completion of construction signals the beginning of sales.

      Sales Stage

      Once construction is complete and the building is ready for occupancy, the developer’s objective is to sell or lease it up for the highest prices possible as quickly as possible. The developer must repay the construction loan with proceeds from sales. The longer it takes to sell out or lease up, the higher the interest costs on that borrowed money—the carrying costs—and the lower the developer’s profit. During this stage the developer’s attention will be focused on ensuring that buyers or tenants who have signed purchase agreements or leases remain satisfied and show up to close on those contracts.

      The developer’s involvement will not end until the building is completely sold out or, in the case of a rental property, leased up and then refinanced or sold. Some developers build to “hold” over a longer time frame and they will have ongoing responsibility for property ownership from maintenance to periodic capital improvements. When the developer does finally sell or “dispose of the asset,” whether it is as soon as it has been leased up to a “stabilized” level of occupancy (for example 90 percent) or decades later, she will return all funds to lenders and make distributions of equity and profits to investors.

      An Iterative and Fluid Process

      The five stages outlined above offer an idea of the breadth of knowledge and experience required to be a successful developer. Each stage contains many tasks and many of those tasks span across some or all stages of a project. Many of those tasks are also different in character from one another, from negotiating a land purchase and directing an architect to drafting a pro forma and seeking the support of an elected official. So while they are sometimes portrayed as generalists who are “a mile wide but only an inch deep,” developers must possess deep knowledge in a broad range of subjects—they must be a mile wide and a mile deep. They must also know when to bring in specialized expertise in those instances when they are less knowledgeable. And they must know how and when to approach these many different tasks. Pat Prendergast, a developer from Portland, Oregon, offers a different view of the real estate development process through his own detailed checklist:

      REAL ESTATE DEVELOPMENT TASK LIST:

      • Project Initiation

      • Site Control: Option/Purchase/Venture

      • Initial Development Entity

      • Selection of Development Team

      • Project Conception

      • Alternative Development Concepts

      • Development Program

      • Market Evaluation

      • Site Evaluation

      • Economic Analysis (Pro Forma)

      ○ Gross Income

      ○ Operating Expenses

      ○ Net Operating Income (NOI)

      ■ Debt Coverage Ratio (DCR)

      ■ Debt Service Constant/Loan Constant

      ■ Mortgage Loan Amount

      ■ Total Development Cost (TDC)

      ■ Equity Investment

      ○ Debt Service

      ○ Net Cash Flow Before Taxes (CFBT)

      ○ Return Ratio

      ■ Economic: Return on Assets (ROA)/Return on Cost (ROC) (ROA/ROC = NOI/TDC)

      ■ Cash-on-Cash: Return on Equity (ROE)

      ■ Discounted: Net Present Value (NPV) or Internal Rate of Return (IRR)

      • Socioeconomic Analysis

      • Development Prospectus

      • Development Proposals

      • Development Planning

      • Development Agreements/Deals

      • Land Use Approval

      • Private-Sector Commitments

      • Public-Sector Commitments

      • Equity Participation

      • Permanent Loan Commitments

      • Construction Loan Commitments

      • Public Site Assembly

      • Design Development

      • Construction Drawings and Specifications

      • Construction Bids and Awards

      • Construction Management

      • Preleasing Program

      • Leasing Program

      • Property Management

      • Marketing Promotion

      • Critiques and Evaluation

      • Alternative Development

      Other Tasks:

      • Disposal/Sale of Asset

      (Include Presale OR Prelease)

      (Courtesy of Pat Prendergast.)

      Prendergast’s list reveals the scope and magnitude of the developer’s job, but it is also important to recognize that while some tasks are shown on this list as one-time events in fact many of them are ongoing. These tasks span over some or all development stages and are messy and not easily confined to lists and frameworks. Indeed, the development process is an iterative and fluid one, as various ideas, constraints, different types of feedback, and new information are integrated into the process and the product comes into increasingly clearer focus.

      For example, the original development budget will evolve from some numbers scribbled on the back of an envelope to a simple one-page spreadsheet to a spreadsheet with many tables. These tables will reflect increasingly finer assumptions and the accumulation of more information. Over a development timeline of five years or more, the pro forma will undergo many iterations and revisions that incorporate new and changing information and assumptions from land price and construction costs to unit size, mix, and price. Discussions СКАЧАТЬ