RE Development
17.4. Why are space absorption and rent changes two critical elements of data when analyzing a market?
- Absorption is vulnerable to misstatement based on changes in the survey sample - Rent data should be collected holding building sample as constant as possible
17.6. Why must an analyst devote attention to ensuring the accuracy of absorption rates and the growth and decline of rental rates?
- Absorption rate is easily misstated. Net absorption is total space leased - space vacated. Many times, gross leasing activity is mislabeled as net absorption
17.3. What are the seven basic factors the market analyst should consider when auditing real estate supply or demand data?
- Inventory and quality of existing space - New construction of space (under construction and proposed) - Overall vacancy rate and characteristics of vacant stock - Recent absorption of space (including types of tenants) - Market rents (and the reasons rents differ across locations ad by quality of space) - Lease terms and concessions (free rent, improvement allowances...)
17.2. What are the primary factors that influence market demand? How are they used to forecast demand for the primary property types (i.e., office, retail, multifamily, and industrial)?
- Job creation, household formation, income generation, local economic growth, wage rates, economic/non-economic forces affecting competitiveness and desirability - Office/industrial: White and blue collar employment - Residential: household formation - Retail: income generation
17.1. What is the difference between a market study and a marketability study?
- Market study: supply and demand - Marketability study may be a part of the market study, address narrow market so developer may product/price/appeal to the group 1. Profile space user 2. ID revenue unit and associated service 3. Define product features, functions, benefits 4. Pricing and sales strategy
17.7. What are some of the resource analysts can use for forecasting population, income, and employment growth or decline?
- Population: Census Bureau - Income and employment: Employment and earnings (bureau of labor statistics) (metropolitan areas), Economic Research Service (non-metropolitan areas)
14.7 What are two primary ways in which a developer hires a general contractor?
1. BID CONTRACT - (the developer puts out plans and specifications to general contractors who are considered technically and financially qualified and asks them to offer a set price or a base price plus a fixed rate for certain items whose exact specifications will be known only as the leasing is completed.) 2. NEGOTIATED CONTRACT - (the developer negotiates with one general contractor, agreeing that the general contractor will perform the work and bill the developer for a fixed price or cost plus a certain profit margin)
14.5 What are some types of equity investment vehicles?
1. PARTNERSHIPS 2. SYNDICATIONS 3. PRIVATE PLACEMENTS 4. OTHERS
14.2 What are some financing options for developers who do not have permanent financing committed before construction begins?
1. The Developer can provide the necessary equity from his own funds or his firm's funds 2. Can bring in an outside equity investor for the development period 3. Obtain a second loan, subordinate to the first, in which the lender may get part of the equity in return 4. A combination of these 3 alternatives
2.12 What portion of land in US is developed?
5.5%
13.1 Define feasibility
A real estate project is "feasible" when: 1. The real estate analyst determines that the project is reasonably likely to meet its goals 2. Satisfies explicit objectives 3. Whether it could be executed within a specific time frame. 4. Tested for fit to a context of specific constraints and limited resources. Simply put, for a project to be feasible, it must be with feasible with the amount of capital and the number of people to be dedicated to the project, according to the selected course of action at a particular time.
14.6 Describe the contract that a developer signs with an architect and some of the issues that should be negotiated.
AIA Document B-101, drafted by the American Institute of Architects mainly to protect the architects in various ways, therefore the developer may need to negotiate changes to it. Lenders may also require several changes to the contract: 1. Only some preliminary budgeting is included (negotiate for additionals) 2. Public hearing and interior layouts (excluded from the contract, and needs to be negotiated) 3. Insurance (is not included as well) 4. The architect has the right to make decisions binding
2.2 Why have US developers looked outside US for development opportunities?
According to census bureau no single generation is large enough to dominate public policy, and the cohorts have more comparable numbers of real estate consumers (although their relative purchasing power will be quite different). Politicians and retailers try to appeal to the various age groups in new ways. Overlaying the distribution of population by age with the distribution of variations in income and other household characteristics reveals the large number of discrete target markets. This variety creates opportunities for developers to look outside the country.
14.8 How do allowance items in a construction contract allocate risk?
Allowance items can lead to serious problems in stage six. Allowances make it possible to draw a set amount from the construction lender, however if costs exceed this amount, serious financial pressures can result, as the developer is responsible for costs in excess of the allowance. Therefore developers are generally advised to guard against allowances, as opposed to fixed prices.
11.1 Discuss the 3 ways that property owners escalate tenant rents in multi year leases.
Anniversary-based Rents , Indexed Rents, Overage Rents,
12.3 What services can architect provide to developers at this stage (II) of the development process?
Architects can provide initial building footprint on the site and determine whether the building and its associated parking can be placed on the site. the layout should also include: - Environmental features, - Site setbacks - Guidelines
2.7 Why is it important for RE players to stay well informed about trends?
Bc cyclical nature of RE, things are unforeseen so need to stay on top of shit
10.5 How is the required rate of return different from the cap rate?
Cap Rate - the rate, expressed as a percentage, at which a future cash flow of income is converted to a present value figure. Required Rate of Return - Determined by the market, by the rate of return of investments in other asset classes with similar risk profiles. -
what is stage 7?
Completion/ formal opening
what is stage 6?
Construction
14.3 What is the difference between the risks taken by a construction lender and those taken by a permanent lender?
Construction lenders take on execution risk; Long term/ Permanent lenders are exposed to market risk.
what is stage 4?
Contract negotiation
14.1 Broadly describe how contracts help control risk.
Contracts set forth the rules for the physical, financial, marketing, and operating activities that occur during construction, formal opening, and operation (stages 6, 7, 8).
1.8 Discuss the importance of good design in development
Crucial in establishing differences bt market segments, considers community's needs
2.11 How will significant growth in professional and business services and the health care and social assistance employment sectors affect demand for RE?
Decrease growth bc not multitenant, focus on job cut thus dec in office space
3.5 Describe the expanded role of a landscape architect
Emcompasses analysis, design, planning, management of natural and built environment. Responsible for site planning in context of existing environment and to create sense of place bt natural and built environment.
1.9 Discuss the many roles a developer must play.
Entrepreneur, risk manager, and team builder. Creator, promoter, analyst, provider (to users) Planner, promoter, negotiator, provider (to public) Employer, client, manager (to development team) Promoter, negotiator, borrower, investment partner (to capital markets)
3.6 Why do developers need environmental and transportation consultants more often now than 20 yrs ago?
Environmental regulations are getting more complex (need to analyze impact and hazardous material). Increasingly, need transportation consultants bc of parking, traffic impact studies...
what is stage 3?
Feasibility
what is stage 5?
Formal commitment
what is stage 1?
Idea Inception
what is stage 2?
Idea refinement
14.4 What is mezzanine financing, and why is it usually considered expensive money?
Mezzanine financing refers to the equity structure used by the developers to raise the money to cover any shortfall in the financing needed to complete the development. It requires the loan to be secured by a subordinate deed of trust.
17.5. Why is it crucial for market analysts to gather data for several time periods?
Needed to assess credibility of real estate market data/audit, ensures internal consistency
what is stage 8?
Property, asset, and portfolio management
14.9 What occurs in stage five? Why does stage five depend so heavily on decision made in stage four?
Several of the contracts negotiated during stage four are contingent on other contracts, ( for example: it is common for the permanent lender to be unwilling to commit until certain major tenants have signed lease agreements, construction lender's agreement is often contingent on a permanent loan takeout, etc.) In stage five, the contracts are executed. - Agreements with outside investors are signed and filed with governmental jurisdictions - Permanent loan is signed and the fee is paid → To complete the financial agreements - Construction loan agreement is signed and fee is paid - Developer signs contract with general contractor; general contractor signs with subcontractors - Permits obtained in Stages 3 or 4; negotiations are finalized and signed. - Listing agreement or Memorandum for leases - Construction loan is closed - Insurance for the construction period - Formal budget and cash control - Physical development control (architect's supervision/ on site construction manager) - Formal control process used by the general contractors: Program Evaluation Review Technique (PERT) and Critical Path Method (CPM)
4.3. What was the Holland land company needed for?
The Holland Land Company was one of the first companies to engage in long-term, value-added investment and development. It purchased 3.3 million acres of land and formed the city of Buffalo, New York and was founder Jacob Ellicott's establishment as a national role model of an early American "community builder"
3.9 How does the eight-stage model help the developer think about assembling the right team for a particular development?
The balance between the goals of the developer and the interests of other stakeholders is a primary theme of this text. Stakeholders include everyone affected by the impacts of the development. Their interests are formally represented by elected officials and appointed staff whose responsibility is to ensure that the development is consistent with the interests of the community.
11.8 Who decides the capital structure of a development?
The general partner of the project determines the capital structure and negotiates with the limited partners to determine the equity structure after securing the debt financing (if levered).
3.4 Why are contractors critical to the developer's work?
Turns paper to physical thing. Developer -(bids)- GC - subs
18.4. The authors offer advice to read as widely as possible and talk to as many kinds of people as possible. Why would it be beneficial to follow that advice? Are there any possible pitfalls?
a. Benefits: to become more aware of the ever-changing, diverse needs and wants of customers. b. Pitfalls: despite talking to people doesn't really have nay costs, there is still subjectivity needed to make use this new broadly-gathered information; this inconsistency in subjective understandings and evaluations could be a pitfall.
15.3. Why is appropriate scheduling particularly important for the project manager?
a. Construction lenders hold the availability of their funds contingent to proper supervision and oversight of the project's construction. Maintaining on schedule, with periodic sign offs by the PM, is important for these lenders' risks.
15.2 What is the role of the developer in the managing the construction process? How does it differ from the role of the project manager?
a. Developer: to ensure that all players perform their jobs on time, that they deliver the quality of work specified in the contracts, and that all soft costs are continuously monitored. b. Project manager differs from this: the PM works under the Developer and is responsible for on-site decision and maintaining the project's schedule. They must keep all parties updated on the current project status and also has operating responsibility of the project budget—maintaining communication with the developer's finance departments.
16.3. What are the three basic approaches to estimating a market budget?
a. Fixed allocation budgeting—(total budget amount ) the assignment of an amount for marketing on the basis of company experience or project financial modeling b. Percentage budgeting—(percentage splits of amount) the use of industry averages to determine what others are spending for similar marketing, helping project the potential costs of this project. c. Zero-based budgeting—(itemized amounts) assigns a cost to each line item or activity.
18.3. How do the lifestyles of baby boomers and Gen Y differ? How are they influencing trends in real estate?
a. Gen Y: more urban and less suburban. i. Prefer more walkable, mixed-use environments. ii. Marrying latter and at lower rates iii. Same single-family aspirations as parents (shown in their longer-term aspirations) b. Real estate effects: need for urban spaces with great living capacities c. Baby boomers: preferred more homogenous cul-de-sac, suburb communities. i. They are retiring differently 1. Moving to urban walkable communities 2. Downsizing in existing suburbs 3. Upsizing in existing suburbs in expectation of more family visits. ii. Caring for them as they age is a growing issue d. Real estate effects: need for homes and services to accommodate those with specialized health conditions.
15.4. Describe the process of drawing down the construction loan.
a. Periodically subcontractors submit invocies for work completed b. General contractor then complies these invoices—with input from PM or architect—and verifies that the specified work has indeed been completed. c. If there are discrepancies, the General Contractor works with the subcontractors to submit one grand total to the developer of all the draw requests + the general contractors fee d. The PM or architect verifies to the developer and lenders that this total matches the specifications of the contract The approved invoices are then sent to the developer's financial officer e. The financial officer combines this total invoice total with other "soft costs" to then produces a final number for the construction lender's loan.
18.2. How has the trend toward privatization of services affected developers?
a. Privatization of services has forced developers to anticipate higher costs for supporting and maintain their customers. Without a government al regulation agency, the developers themselves must find ways to offset these greater expenses for the sake of their grander project's success and profitability.
18.5. The authors lay out some potential scenarios that may affect developers in the future. What others might occur? How would they affect cities, development, and the real estate profession?
a. Rising rates and the economy i. Increasing rates exacerbate the affordability crisis and produces stakeholder concern for potential recessions, which would impact jobs. ii. Rising rates are bad when they increase costs. iii. Rising rates are good when they monitor business activity and keep inflation in check. b. Politics and political uncertainty i. Elections could change the balance of power and with it, policy. These changes in policy will have extended effects in the RE market and the development process. c. Housing affordability i. Wage stagnation, gentrification and a low supply of affordable homes and apartments, plus two decades of housing underproduction that has dramatically impacted the residential housing market. ii. It's a supply and demand problem: If we can increase the supply of housing, we can lower the pricing. d. Immigration i. Immigration affects the skilled and unskilled labor pool ii. Immigration impacts both residential and commercial real estate and affects both urban and suburban areas iii. Residentially, changes in immigration policy mean fewer new households, reduced rental/owner demand, and reduced broker transactions.
15.5. Describe some of the risks inherent in stage 6 and some ways to avoid them.
a. Risks: they are usually interlinked i. Delays do to weather, unexpected construction costs, market-research based adjustments, etc. b. Risk controlling techniques: i. Liability, fire, and insurance coverage ii. Software packages (PERT & CPM) help manage time and use the internet to link project participants iii. Good internal controls (particularly the accounting system) iv. Architectural supervision and construction project management v. Retainage (holding back cash to ensure the completion of the work) ensure work will be completed according to plans vi. Having inspectors agree things were installed to code vii. Performance bonds- 1. Guarantees performance and completion of a general contractor's contract 2. Doesn't work for timing issues viii. Good union relations
16.5. Describe the types of leases and what is included in each.
a. Single net lease: the lessee pays for property tax b. Double net lease: the lessee pays for property tax and building insurance c. Triple net lease: the lessee pays for all operating expenses and bears all the risk of increase in those expenses.
16.4. How do hard and soft considerations interact in the marketing in stage 6?
a. Soft side—promotional: identifying, defining, and persuading potential users to purchase the product b. Hard side—contractual: production and solidification of legally binding documents between the developer and the buyer
16.1. Describe the marketing team's role at each stage of the development process.
a. Stages 1, 2, & 3: to identify the project's potential users, their needs, and how much they are willing to pay for space b. Stages 4 & 5: decisions are made about the optimal paths to follow in the marketing effort and related contracts are negotiated and signed c. Stage 6: blocking and tackling—soft activities such as planning and strategy and hard activities such as leasing and sales.
16.2. What are the components of the SWOT analysis? What goals does it accomplish?
a. Strengths, weaknesses, opportunities, and threats b. This analysis leads to the formation of the marketing vision, which encompasses the positioning of the property and the formulating of marketing goals and objectives.
15.1. How does stage 6 differ from the first 5 stages?
a. The developer becomes less a promoter a more of a manager: they are now fully committed to the project—with cash, guarantees, and human resources. i. Stopping or making any major changes after this point would bring significant financial consequences.
18.1. How can looking at the past help us to think about the future?
a. This helps us learn from past mistakes and avoid making them again today
4.4. What effect did private deed restrictions and public controls have on real estate in the 19th century?
deed restrictions in the form of private contracts were the sole regulatory device for land controls, but were difficult to establish and enforce
3.3 Describe the architect's role in the development process
- Aesthetics, physical safety, community acceptance - Help develop concept and create detailed plans - Either design-award-build or fast-track - Now involved much earlier than before
3.1 What are the most common forms of compensation for developers?
- Development fee - Profit on sale to end users or LT investor - Promote- ownership interest in excess of the developer's % contribution to the project's equity capitalization - LT equity - Ownership of entities that sell services related to development process - (reputation and personal/professional satisfaction)
3.8 Describe the various types of financial players and when they are involved in the development process.
- Joint Venture partners - During development period - Equity for share - Bridges gap bt project cost and debt financing for construction - Construction lenders - During project construction - Usually commercial banks - Certifies degree of completion before each pymt withdrawal - Permanent lenders - Finance completed project thru LT mortgage by taking over financing from construction lender - Fixed interest rates, amortized 20-30yrs - Size determined by dscr and cf/noi - LT equity investors - Not necessary during construction, may buy completed or before construction begins, just a commitment tho, don't give money until completion - Passive investors, low risk, low return
13.4 What is the role of the architect at this stage of the development process?
- Maps - Drawings - Other visuals that show the location and site of the development - Renderings - Photographs of the subject property - Complementary and competitive projects
12.1 Describe some key concepts involved in site selection and how developers go about assessing potential sites.
1. Create Plan for land acquisition 2. Analyze areas or neighborhoods in the market 3. Analyze competition and refine idea to maximize competitiveness 4. Discuss project with elected and appointed officials and city planners 5. Determine initial design requirements for the site 6. Analyze potential sites that best fit criteria 7. Negotiate for selected site and Structure contract to secure site 8. Refine financial feasibility
9.1 What are the three most common motivations from which ideas for new development emerge?
1. Discovery of site looking for use 2. Encountering a use when looking for a site 3. Owners of capital looking for development opportunity
1.4 What are the eight stages of development as delineated in this textbook?
1. Idea Inception 2. Idea refinement (design, physical feasibility) 3. Feasibility (market study) 4. Contract negotiation (final design, loan, GC) 5. Formal commitment (contracts signed) 6. Construction 7. Completion/ formal opening 8. Property, asset, and portfolio management
12.5 How can developers control risk during stage two?
1. Land acquisition, to control the site through an option or a low-down payment, non-recourse, seller-financed purchase are ways to minimize risk exposure (A developer seeks to limit financial exposure before formally committing to a project). 2. Recording. (places the agreement in the chain of title and gives notice to all others of the developer's right ot the land). 3. Ensuring that a project is acceptable to the community. 4. Presenting project to city officials and building inspectors. 5. More and better market research.
11.6 What are the 6 steps in underwriting a commercial loan?
1. Market and Submarket Analysis 2. Location analysis of the subject site 3. Assessment of the appropriateness of the proposed improvements for the site 4. Determination of the creditworthiness of the borrower 5. Evaluation of the developer's construction team and property management plan 6. Evaluation of the financial viability of the proposed improvements.
13.7 Describe some of the techniques that can be used to control risk during stage three.
1. Using the best available information and doing rigorous data analysis in the feasibility study 2. Financing 3. Formal review of the architect's design plan 4. Ensure utilities and other infrastructure are available 5. Check details 6. Provide Structural Warranties
4.1. How was public land put into private ownership?
1600s- British settlers brought to USA to farm the land owned by Virginia Company, rebelled and insisted on ownership of land. In 1616, Virginia colonial governor granted title to land for farmers, transferring public land to private hands. In New England colonies, governors granted and sold land to groups for purpose of establishing towns. Similarly in 1862, Congress established the Homestead Act, which granted settlers land in exchange for them living on it and improving it.
4.5. Who was Llewellyn Haskell?
A successful merchant, Haskell and his partners purchased 400 acres of land in New Jersey to create a suburban development. This site was attractive based on its natural beauty and access to the nearby railroad into the city. The implemented new innovations such as the curvilinear street, which followed the natural contours of the land, a 50-acre park, which was owned and managed by a homeowners association, and deed restrictions, which prohibited industrial and commercial uses of land. This allowed the community to be the wealthy, quite area that Haskell had imagined.
1.5 What are the advantages of using such a model? What are the pitfalls?
Advantage: model is useful bc process is complex and interactive, model can help so future ramifications of current decisions can be easily evaluated. Disadvantage: RED is an art so very unpredictable and all projects are different so don't exactly follow model
11.2 What is an expense stop, and how is it used in gross, modified gross, and net leases?
Any amount above the expense stop is the tenant's responsibility. An expense stop is a tool used by landlords to limit their exposure to operating costs.] GROSS - landlord pays for almost everything, including operating expenses and expense increases. Tenants usually pay for utilities. MODIFIED GROSS - Landlord pays all expenses up to a lease-defined expense stop. Usually happens after first year of lease term and most commonly found in office leases. NET - Has an expense stop of ZERO, meaning the tenant is responsible for all property expenses and expense increases. SINGLE NET - tenant pays for property taxes; landlord pays for building insurance and property maintenance NET NET - tenant pays for property taxes as well as building insurance; landlord pays for property maintenance TRIPLE NET - tenants pays for all the mentioned above; landlord takes on minimal responsibility
2.4 Describe anticipated changes in composition of US population
Become more ethnically and racially diverse, more single (divorced/unmarried), less married with kids, more women bc women live longer
3.7 Why are appraisers involved before, during, and at project completion?
Before: valuation, needed for financing During: market studies After: transfer of ownership
2.9 How does aging baby boom generation affect population pyramid?
By 2030, each gen group will be equally important, need to please all age groups, increasingly less of a pyramid
11.7 What are capital expenditures, and why are they usually not included as an expense in the calculation of NOI?
Capital Expenditures are the funds used to acquire, upgrade or repair the property. It also includes the acquisition of equipment for said property. An expenditure is considered a Capital Expenditure if it is a new purchase or extends the life of the property, for example: fixing the roof, installing a furnace or painting the building.
11.3 What is cap rate, and how is it used to value commercial real estate?
Capitalization rate is a rate that helps in evaluating a real estate investment. It shows the potential rate of return on the real estate investment based on the income that the property is expected to generate. In order to do so, a single-year income estimate is capitalized to estimate value other than using a multi-period estimated stream of cash flows to value a property
12.4 What are market segmentation and product differentiation? Why are they important in the real estate development planning process?
Developers consider the Features, Functions and Benefits offered by the competition. Segment demand and differentiate the product from the competitor's product. Idea refinement in market research can also be viewed as the process of segmenting the market and differentiating the product. It is important in the real estate development process the winning strategy will capture sufficient market share.
13.5 How do developers know whether general contractors' estimates of construction costs are appropriate?
Developers typically use standard industry cost guides to compile in-house cost projections to compare with local general contractors' estimates. Estimating process requires a developer to meet with individual subcontractors.
7.4 Discuss how developer fees and exactions work.
Exactions ● Financial or other conditions imposed on the developer as a condition of project approval ● Scheduled fees (imposed as a condition of service) or mitigation exactions (applied toward offsetting project's direct impacts) ● Just compensation, equal protection, due process establish limit on size and scope of exactions ● Must be necessary to protecting health, safety, and public welfare
1.7 Why and how do developers use market research and feasibility studies?
Feasibility and mkt research to estimate legal, physical, financial feasibility for all participants, needed for lenders, also development planning. Research for both regulatory requirements and opinions of public
11.9 How does financial modeling facilitate loan negotiation?
Financial modeling allows for developers, lenders, and investors to model the on-the-ground situation and then perform sensitivity analysis of all assumptions. Lenders, developers and investors will all have the same rough outline of the models but will negotiate on the assumptions (inputs) that can drastically affect the negotiated items. They build out different scenarios on rent realizations and market conditions and then use these models to negotiate terms.
1.2 Why does every real estate development project involve both the public and private sector?
Highly regulated process, so need public sector's support (property law, public infrastructure, permits...). Sometimes, public sector will be private sector's equity partner (ie: downtown development)
4.8. Discuss the role of the railroads in land development
Historically, communities were built near navigable bodies of water, as this was the primary form of transportation. The invention of the railroad allowed communities to expand outwards and be built virtually anywhere with railroad access. This led to feverish land speculation, as no investors knew what sites would be in demand and at what price. In 1862, Congress commissioned the construction of the transcontinental railroad and incentivized railroad companies to do so by offering 10 square miles of land for every 1 mile of track. This land was often sold off within a few weeks or months, while other land would be used as mortgaging to bankers and bond buyers in exchange for cash. ● Railroads spun off their real estate to development holdings ● Today, the operate some of the largest developments such as Hudson Yards
2.5 How does immigration affect demand for RE?
Homeownership rates of naturalized citizens same as native born americans, as immigrants move into economic mainstreams, support RE market as buyers of new and existing housing.
12.2 What issues do developers face when they find a site that meets their initial criteria but that had not yet been subjected to a thorough feasibility analysis?
If the project proves infeasible, the developer may have to resell the land at a lower price and with significant transaction costs.
1.6 Why is real estate development inherently an interdisciplinary process?
Interdisciplinary bc the development process demands attention to different aspects of creating the "built environment"-political, economic, physical, legal, sociological...
13.3 What are the essential elements of a feasibility study?
It includes an executive summary, a market study, revenue projections, preliminary drawings, maps, cost estimates, information about the terms and sources of financing, government considerations, and an estimate value.
11.4 What is the most difficult part of DCF analysis?
It is difficult to forecast cash flows into the future. It is even harder to choose a discount rate that properly reflects all the risks identified in the cash flow forecasting exercise.
4.2. Describe the fee simple system of private ownership
It is the most common form of ownership in which the owner has complete property rights through private ownership. Ability to convey to another through sale, lease, trade
13.8 Discuss the enterprise concept and the impact it can have on the type of space that is developed.
It portrays real estate as an enterprise and sets the stage for business-like, aggressive management. The more a building entails significant management operations, the more complex the feasibility study.
1.3 What is the role of the developer in the development process?
Leader throughout the process who coordinates people and help realize a particular vision
11.5 What are the primary ratios that commercial property lenders use? What risk does each ratio assess?
Lenders use two majors metrics to analyze the financial viability of the development being financed: Debt Service Coverage Ratio (DSCR) and the Loan-To-Value Ratio (LTVR). 1. DSCR: measures the property's ability to cover debt service payments 2. LTVR: assesses the property's collateral value RISKS: DSCR: Lower DSCR → Smaller the cushion of available NOI per dollar borrowed → Higher Lender's financial risk LTVR: Higher LTVR → Larger the loan relative to the value of the property → lower the equity invested in the property → greater risk to the lender
3.2 What are some of the ways in which a public sector developer operates?
Motivated by economic development goals/neighborhood revitalization, need to create housing for certain income levels. "Public entrepreneurs" have access to both public and private, good bc govt mostly takes risk and provides equity, but area usually salaried employees. (valuable to city, personality for public sector, technical/analytical/good communication skills). Public could be entrepreneurial or a good partner
2.8 How significant is the construction industry to the nation's overall economy?
Provided ~3x amt of jobs to us than RE
2.3 Why is RE so important to US economy?
RE is largest component of gross private domestic investment in GDP, to individuals, seen as source of security and ⅕ of personal net worth
13.2 What is a feasibility study, and why is it necessary for a development?
The goal of a feasibility study is to place emphasis on potential problems that could occur if the project is pursued. The study will determine if, after all significant factors are considered, the project should be pursued; and if so, how the project should be pursued. The feasibility study allows a business or institution to address where and how it will operate, potential risks and the necessary funding to complete the project.
1.10 What role does time play in the real estate development process?
Time = money, explains need to partner with public sector bc nimbys may delay developer's time
13.6 How and why do construction contingencies change?
Turnover in public offices can pose other problems for developers when projects conflict with the platforms of newly elected officials. When administrations change, earlier approval of a project does not necessarily guarantee that the newly elected officials will be good partners.
10.1 Discuss the market for commercial real estate in terms of space and capital market components.
Value = NOI / Cap rate ● Relationship between space and capital markets: Value = space market / capital market ● The ability of a property to generate an income stream depends on the demand for space, competing properties, and locational factors
2.6 How does employment growth influence demand for commercial space?
office construction boom was caused by shift in economy from production of goods to delivery of services. Future: may not see as much growth bc of employment bc growth of service sector is in health care, don't really need multi-tenant office space. Many other financial/govt companies are focused on consolidation and cost containment
1.1 What is real estate development?
the continual reconfiguration of the "built environment" to meet society's needs. The process of transforming an idea into reality. Three key elements include space, time, and services, in addition, these projects require the expertise of marketing professionals, graphic artists, sales people, Web site developers, etc.
5.4 What was the City Beautiful Movement
● 1893 Chicago Columbian Exposition ● Unity of plan, unity of architecture, unity of magnitude ● Construct attractive and often monumental public buildings: city halls, parks ● Plans based on classical architecture and land planning concepts ● Ex: Central Park
5.6 How did real estate trade associations come about
● 20th century began reform and modernization of the industry ● To upgrade standards of practice, to isolate/ostracized/and eliminate unsavory activities ● NAR(National Association of Realtors), public regulation of all participants in the industry ● BOMA and MBA, represented owners and management
6.2 Describe the urban renewal efforts of the 1950s and 1960s
● 3 steps: district replanning, urban development, urban renewal ● Rebuild centrally located blighted areas- clear away underused commercial and industrial structures, move our poor residents, and replace their housing with new office towers, convention centers, hotels, shopping malls, and housing ● Use power of eminent domain to condemn and acquire land, demolish structures, redevelop infrastructure and public amenities, and sell land to private developers ● High public cost ● Largest investors were life insurance companies
10.8 What are the largest sources of equity capital for commercial real estate? Which has grown fastest over the past decade?
● A considerable portion of private equity investment has come from foreign sources, particularly sovereign wealth funds ● Public equity comes from 3 major sources: Master Limited Partnerships, C Corporations, REITS ● REITS have growth the fastest
7.5 Explain the bundle of rights of property ownership.
● A developer's right to proceed with development of the project without the risk of changes in the rules is known as a vested right ● Development contract defines entitlement obligations of local govt and landowner ○ Projects entitlements, fees, exactions, dedications ○ The right of develop to develop project in accordance with jurisdictions rules ● Transferable development rights (TDRs)- device to move densities or other entitlements from one planning area to another
5.5 What was a garden city and how did the movement evolve
● A suburban community that contained a mix of residential, business, industrial, and agricultural surround by a buffer of open space called a "greenbelt" ● Concept was to incorporate the best elements of town and country ● First garden city was Letchworth in England
5.1 What happened to downtowns as transportation networks allowed people to move farther out of the city
● Also called CBD (Central Business District) ● As people moved outwards towards suburbs, the value of downtown real estate began to drop and many areas became extremely poor and blighted
6.6 What is a new community
● Alternative to to both big crowded cities and suburban sprawl. ● Large scale, mixed use, master planned communities ● Product of long-term multiphase development programs that combine a complementary mix of land uses
7.1 What is police power and how it it enforced? Who has a stronger obligation in the exercise of police power-- federal govt or states?
● Amendment 10A "Police Power" reserved for the states, delegates to local government by statue ● Gives states rights and powers "not delegated the the United States" ● State govt protect public health and safety, and general welfare of citizens
10.2 Explain how the quality and stability of a property's income stream are determined by its space market.
● As space market strengthens, landlords secure leases with higher tenants and property income streams increase ● As space markets weaken and rents and viability of tenants become less secure, risk premium increases, property values decline
7.2 What are the mainstays of local govts regulatory programs and how do they affect development?
● At local and regional levels, entitlements address land use, environmental concerns, design issues through general plans, specific plans, zoning, conditions of approval, and other regulations
7.3 What are the roles of state and regional agencies in regulating development?
● At state level, entitlements address environmental issues through Endangered Species Act, Clean Air Act, Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) Welch v. Swasey (1909)- right of city to regulate building height Hadacheck v. Sebastian (1915)- right of city to prohibit manufacturing use Euclid v. Ambler Realty (1926)- upheld zoning as valid form of regulation Nollan v. California Coastal Commission- closely scrutinize govt action to ensure regulation are related to public purpose Dolan v. City of Tigard- proportionate degree of burden on landowner Kelo v. City of London- eminent domain can be used to transfer private property for economic development
9.3 What are some of the formal techniques that developers can use to generate ideas?
● Brainstorming ● Nominal group process- establishes priority among ideas identified by group, participant writes ideas in silence, members vote on preference ● Delphi method- developer prepared questions for experts to research ● Environmental scanning- monitor local, regional, national, global environments, predict possible implications of environmental events (ex. recession) ● Focus groups- used for modifying proposed project to meet desires of potential consumer group, allow free flow of thoughts and can generate interesting ideas ● Surveys
4.7. Describe the evolution of slums
● Close to factories and warehouses ● Worst housing, greatest overcrowding, highest rates of disease ● Landlords packed low rent paying customers into a building in order to be profitable ● New laws in late 19th, early 201ty c regulated the minimum quality and standard features of new and existing construction, but tenants could not afford the higher rents needed to finance these improvements ● Philanthropic capitalists built higher quality housing for less profit incentive ● Another approach, led by social workers, was forming settlement homes that provided public health and education services ● Many social groups advocated for economic, political, and social reform
10.6 What are CMBSs?
● Commercial mortgage backed securities ● most volatile in terms of % of total lending
6.5 What is a CDC, and what is its role in community building
● Community Development Corporation ● It is a public-private partnership that attempts to combine the best features of business investment and management with government services and citizen participation ● A combination of private and public funding has helped CDC's grow ● Build affordable housing, health clinics, preschool, child care
2.10 How might housing market be affected by population where less than 30% of all households have children under age of 18?
● Demand for houses will increase ● More than one-fourth of all households consist of a single person, and that proportion is rising rapidly. ● The number of traditional married-couple-with-children families has declined sharply—from 40 percent of all households in 1970 to 20.2 percent in 2010. Only 29.8 percent of all households include any children under 18. ● To gauge demand, homebuilders focus on aggregate growth in the number of households in their market areas, within the context of national and regional trends. Average household size has been falling in the United States, from 3.14 persons in 1970 to 2.63 persons in 1990 to 2.59 persons in 2010
8.5 What advantages does a developer gain? What are some of the practical problems or points of tension in such a relationship?
● Developers anticipate more cooperative regulatory environment ● Programmatic assistance (tax abatements) through which local govt provides subsidies to attract private investment ● Public sector can bear more risk in brownfield sites ● Problems: greater public review, specific contracting requirements, attention to political concerns, greater disclosure than in private project
10.9 In the early stages of the commercial real estate development process, what are the primary sources of capital and why?
● Developers can cover predevelopment costs with their own equity of with the capital from a joint venture partner
5.8 What strategies were used in the New Deal to revive the Great Depression
● Established the PWA Housing Division and the US Housing Authority to remove the worst slum dwellings and build publicly owned rental housing
9.4 Describe the techniques of risk control that developers use at this stage. How to they help developers hedge their bets?
● Know yourself ● Know your image ● Know your team ● Coordinate ● Keep current ● Behave ethically ● Pay attention to global financial cycles
6.1 How and why did homebuilding production methods change after WW2
● Large demand for homes from returning veterans ● To accomodate, agricultural land was subdivided into suburban tracts ● Government was subsidizing home builders to mass-produce private housing for war workers ● Levittown, everything was a mobile assembly line
8.2 What are some ways the development team can build public support for a project?
● Outreach program- identify supporters, neutralize potential opposition
8.4 What advantages does a city gain by working within a public/private partnership?
● Partnerships afford more control over projects throughout the development process ● Cities achieve social objectives (affirmative action, minority contractors, creation of jobs for low income residents)
10.7 What is the normal sequence of financing for real estate development?
● Pre Development financing ● Short-term construction financing ● Interim financing ● Permanent financing Lenders concerned with 2 risks: nonpayment of debt service, loss of loan principal
10.3 Describe the 4 quadrants of the capital markets.
● Private debt- banks (short term and construction), insurance companies (long term permanent financing), hard money lender (individuals) ● Public debt- Fannie Mae/ Freddie Mac, CMBSs (pooled, collateralized, sold on bond market), SOME (originate → underwrite → service → sell CMBS on Wall Street) ○ Fannie Mae- a quasi private corporation chartered by the federal govt to function as a secondary market for residential mortgages ○ Freddie Mac- subsidiary of Federal Home Loan Bank System (FHLBS) established in 1970 to act as a secondary mortgage market for savings and loan associations that are members of the FHLBS ● Private equity- equity investor ● Public equity- Master Limited Partnerships, C Corporations, REITS
8.3 Describe the key decisions the public sector faces in implementing a public/private partnership.
● Selecting a developer ○ Issuing RFI and RFP ● Determining appropriate terms for the deal ○ Determine total development costs by project component ○ Determine level of private financing available ● Negotiating a deal
8.1 Describe how the approvals process has changed over time.
● Since the mid 20th century, planning theory has led or influenced the entitlement process in 3 areas: participation, process, physical design ● In the 1960s, a planning theory called advocacy planning emerged as a reaction to the sometimes autocratic planning process ○ This has expanded the public's role in land use decisions
6.3 How and why did retailing change in the 1950s and 1960s
● Suburban sprawl caused large shopping centers to be built that drew patrons from a wide geographic area
5.2 Discuss the history of the skyscraper-its construction, its symbolism, and how it shaped cities
● Symbol of prosperity ● Steel frame building allowed more vertical height ● Competition started to build the tallest and most prominent building ● Negative perception of: urban density, sunlight, and safety ● Municipal height restrictions imposed on buildings ● Buildings were used as advertising and built without anchor tenants ● Skyscrapers became a symbol of economic power for cities and some buildings served as architectural feats
5.7 How did the advent of creative financing change real estate markets in the United States
● The FHA revolutionized real estate markets by standardizing terms, underwriting, and the secondary market ● Encouraged lenders to increase the first mortgage LTV ratio to 80-90%. Extend the length of the loan repayment period to 20-25 years, eliminate second mortgages, lower interest rates and total loan origination fees ● Rationalized, standardized, and improve methods and practices of appraisal, universalized title insurance, required lender's monthly collection of property taxes and property insurance ● This stabilized real estate transactions and financing procedures ● Promoted cost efficient construction of small houses and affordable home ownership for middle-income families by enabling developers and merchant home builders to obtain debt financing for large scale construction with homes ready for immediate occupancy by people who were ready to buy that had modest savings and FHA backed mortgages ● Standards for property and neighborhood raised the minimum level of quality in the design, engineering, materials, equipment, and methods of land development and housing construction ● FHA's Land Planning Division encouraged private planning by state and local governments to ensure the coordination of accessible transportation, recreational facilities, utilities, services, and land uses through comprehensive plans, official maps, zoning laws, requirements for setbacks , and regulations for subdivisions. Also, it reshaped the design of suburban housing tracts, upgraded the use of deed restrictions for private planning and development, reorganized and exterended the role of local and metropolitan public planning ● FHA introduced new techniques for analyzing market demand and using stricter underwriting criteria to limit overbuilding and excessive subdiving. ● Caused Fannie Mae to be created, capitalized by the federal government's reconstruction finance corporation, and initiated a strong secondary market for FHA insured mortgages. This allowed primary lenders liquidity to make new loans and additional income through retention and servicing fees ● This national secondary mortgage market helped smooth out fluctuations in real estate business cycles as well as compensate for geographic differences in the availability of mortgage funds ● Fannie Mae was vital to the growth of modern mortgage banking companies ● FHA's underwriting guidelines favored new houses over existing ones, causing a shift away from apartments and towards single family homes ● It also caused discrimination against blacks but helped grow the white middle class
2.1 Why is ownership of RE more attractive in US than in many other countries?
● The relative ease of acquiring property that US citizens take for granted attracts foreign investors ● In other developed nations, RE markets are smaller and laws restrict foreign investment. ● Perceived political and economic stability in US ● The sheer size of US market ● Appreciation potential in US
6.4 What spurred the urban crisis of the 1960s and what housing related programs were initiated because of it
● The urban crisis was spurred by people moving out of cities and into suburbs, abandoning downtown areas ● Creation of US Department of Housing and Urban Development ● Federal involvement in subsidizing housing ● Private developers began to build subsidized housing ● National Housing Act of 1968 created goal to build 600,000 subsidized housing in each of the next 10 years
7.6 What are special taxing districts?
● These districts have power to establish their own regulations and fees ● The mission of some may be to address infrastructure needs, environmental needs, etc.
5.3 Discuss the role of the downtown department store at the turn of the century
● These shopping areas were decorated lavishly and were targeted towards women ● Employees were guest oriented and offered special promotions ● More department stores were getting built, larger and more unique ● Wanamaker business philosophy, "selling high quality goods as one everyday low price" ● Department stores were central in creating the modern commercial downtown
4.6. What is the balloon-frame method of construction, and what effect did it have on residential development?
● Used light wooden two-by-fours hammered together with machine-made nails rather than heavy timbers held in place by elaborate joints ● Saved time, labor, and materials ● Combined with cheap land, this made homeownership and residential development much cheaper than in Europe
10.4 How can one determine the market expectation of inflation?
● With the advent of a 10-year inflation protected Treasury security, investors have a way to determine the inflation expectation being priced in the market ● The difference between the regular 10-year Treasury yield and the inflation protected yield is the market's expectation of inflation over the next 10 years
6.7 Real estate is always said to be a cyclical business. What are some of the financial cycle that have occured since 1970
● Worst global recession since 2007 since the Great Depression ● 1990, falling prices, rents, unsold inventories, foreclosures, and bankruptcies
9.2 Describe a back-of-the-envelope pro forma and what it is used for.
● simple comparison of value and cost ● Estimate rent, estimate of income per SF, operating expenses per SF without detailed attention to configuration, length of lease, # of elevators ● Multiply leasable SF by estimated revenue per SF, subtract operating expenses to obtain operating income, which is then translated into estimate of value
