Terranado Insider

Last time, we discussed some of the key members of your real estate development team.  As you continue to build your team, you will find that you need other consultants that include soils engineers, parking consultants, appraisers, attorneys, title companies, surety companies, and property managers.  Throughout my years in retail development, assembling a team of professionals to address the economic, physical, and political issues inherent in retail development is critical.  As the project increases in size, the size of real estate development team members will increase.  I would recommend that beginning real estate developers hire top-notch professionals with the practical experience and technical knowledge to guide you.  Although some professionals may be a little more expense, these professionals can be worth their weight in gold by making cost saving suggestions to having the necessary political connections to procure approvals for your project.

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Last week, I wrote about how to set up a real estate development shop.  Although we discussed the tools needed to set up shop, the most important ingredient is staffing your team.  In today’s article, we will discuss the different team members that assist the real estate developer from start to finish.  If you don’t know what a Phase I consultant is, you will know after reading this article.  Afterwards, you will probably know more than some other real estate folks out there.

 

Crucial key members of your team include:

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In the last couple of articles, we discusses the importance of project feasibility and the various components involved. This week, we will talk about how a real estate developer can set up a small shop. Real estate development firms are generally not that large, and the majority often are comprised of a couple of partners who shared a common interest and decided to band together. Exceptions to the rule include large real estate development firms such as Hines, Tishman Speyer, Westfield, and others. By nature, real estate developers are entrepreneurial and must control costs tightly.  Cash is king.  Some of the most successful real estate developers started their companies out of their home offices.  Since real estate developers are often on a tight budget, let’s discuss some of the basic tools that are needed to establish your presence.  For those of you who like reading a book, check this book out.

Real estate developers are often on the “Go”, and for those of us who are on a tight budget, real estate developers must be reachable by the outside world by telephone and email.    An excellent solution I recommend for real estate developers for a cost effective mobile telephone system can be found at Ringcentral.  By doing so, the real estate developer will have a working office phone number where he is always reachable and be able to receive faxes anywhere.  If one prefers to have an office, IP phones are your most cost effective solution for your staff.  To obtain a working email, hosting for your website, and for all of your interest needs, Hostgator offers an excellent choice.  Now that you are connected to the professional world with internet, email, and phone, you are ready to get down to businesses and look for additional staff to join you.

Real estate developers start up a small shop with other individuals that they know.  However, the real estate developer is always in need of additional staff.  Staff compensation is always an interesting question.  Some key staff that a small real estate company may look for include someone to handle acquisitions and dispositions, a leasing broker, a project/construction manager, and a property manager.  Compensating project managers is always a tricky proposition for a real estate developer for he seeks someone who will be there from the start of the project to its completion.  A real estate developer will often structure a monetary base salary along with a vested equity component to entice a project manager to stay though out the entire project.  A lengthy discussion can be ensued about the various methods to Read More…

In the prior articles, we discussed the feasibility of a project from a market, site selection, and regulatory perspective.  One of the most important parts of feasibility assessment is determining whether the project is financially feasible.  If a real estate developer is not going to make enough profit to substantiate the amount of risk he is assuming, the developer should not proceed forward with the project.  The feasibility of a retail project can only be determined after specific retail and leasing programs have been defined for the site.  Financial feasibility involves estimating development costs and operating revenues.  What makes estimating the revenue of retail projects unique is the fact that rental rates vary substantially based upon the tenant occupying the space and secondly, revenues may be tied to the overall sales performance of the tenants if percentage rents are included in the leases.

Backing up for a moment, a financial feasibility analysis enables the real estate developer to determine whether the proposed project will live up to performance expectations. Financial analysis initially begins with a simple “back of the envelope” calculation then followed by an iterative process that results in a multi-year discounted cash flow analysis.  At the early stage of the game, the financial analysis does not need to be detailed. The goal is to determine a go/no-go decision on the proposed project.

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L we discussed the importance of site selection during project feasibility.  Regulatory considerations are another important topic of discussion – zoning approvals and public approvals required to develop a site must be studied carefully before a retail site is purchased.  In areas where slower growth is a priority, procuring permits are difficult and rezoning is a protracted process. A project’s feasibility is greatly affected by current zoning regulations as well as by time and expenses that will be required for approval or rezoning.  Examples of regulatory issues that a real estate developer may encounter include the following:

When a developer purchases a retail site and has to go through the process to obtain the necessary approvals prior to being allowed to build on the site, the process is also known as procuring

entitlements.  If you want to learn more, read this book.  Theoretically, when a developer obtains entitlements, the value of the site increases accordingly (but not necessarily).  Much time, effort, and money is often spent procuring the necessary approvals. For a beginning developer interested in his first retail site, I would suggest that you identify and purchase a site that is already zoned accordingly to permit retail use and would only require minimal approval. I have encountered cases where a developer purchases a terrific retail site, but after five years of fighting a city to procure approvals for a proposed shopping center, he is unsuccessful.  To understand the difficulty of the approval process, read this article about the Mid-Market project in San Francisco.  After spending Read More…

The second part of our four-part series continues the discussion on project feasibility.  After  conducting a market analysis, the real estate developer has a general understanding of the local real estate market .  Site Selection is the next crucial step in the process.  A real estate developer must understand the dynamics that affect the site.  Questions that entail site selection include:

Why are answering these questions amongst others important? As most people know, real estate is driven by three key factors: location, location, and location. As a real estate developer, site selection is neither an art nor a science. Instead, it is a process that involves doing homework to justify making a substantial financial investment in the near future.  Site selection is fun.  Once a real estate developer is comfortable with the real estate market, he seeks to better understand the particular real estate site.  Seeing photographs, aerials, and flyers can only do so much.  A developer must physically see the site to get the “lay of the land” and familiarize himself with the surroundings. What may be obvious from a quick drive-by of the site is often overlooked from photos.  For example, an excellent retail site located on the corner seems to be a slam dunk location for a Dunkin’ Donuts drive-thru.  However, down the block, there is another competitor that has been selling donuts and coffee.  Observations that may not be blatantly obvious at first glance, become obvious upon a site visit.  I cannot stress the importance of physically visiting, driving, and walking the site.

To further understand the importance of site selection, we will site evaluation from the perspective of i) the Tenant, and ii) the Developer.  From the Developer’s perspective, we will understand the importance of site selection from the following perspectives: location, site data, legal, financial, and utilities/infrastructure.

The Tenant

Delving further, a real estate developer adopts a top-down approach to understand the local conditions that directly impact the site. Likewise, the tenant also has direct site selection requirements.  For example, McDonald’s site selection requirements can be found here ,  Whole Foods requirements Read More…

Project feasibility! What is it? As the name implies, conducting a feasibility study enables the developer to assess whether the project makes sense from a market, site selection, regulatory, and financial perspective.  Rather than spending a ton of money to find out that the project does not make sense to build, conduct

a project feasibility study enables the developer to minimize time, effort, and money to focus on projects that make sense.  Today, we will discuss the importance of the market analysis in conducting a feasibility study (the first of a four part series).  First and foremost, before proceeding with any project, a developer must be well-informed about the real estate market.  In essence, the real estate developer is proceeding in an organized fashion to analyze market opportunities much like an entrepreneur starting a business as outlined in this article.  Evaluating trends and understanding key factors allows the developer to understand the needs of the market and whether a project (if develop) will fulfill the needs of the community. If you need a primer on real estate market analysis, look into reading this book.

To fully understand the importance of a market analysis, let’s explore a proposed retail development project: a shopping center.  In order to decide whether or not to proceed further and what type of project to build, a more in-depth analysis of the market is required.  Retail markets are often defined by a specific geographic trade area.  Factors considered in assessing the market include understanding demographic characteristics, overall economic trends, existing retail supply, and suitable development sites.  Claritas is one of the largest providers of demographic and market information for real estate projects.  A detail demographics report is shown below (courtesy of Claritas and shown for mere educational purposes):

Understanding the boundaries of the primary, secondary, and tertiary trade areas surrounding a site are extremely important in retail development.  For example, automobile and transit access, physical barriers, location of competing projects, and population influences the size and the boundaries of trade areas. By Read More…

Welcome! Since you stopped by, I presume you must be curious to learn more about real estate development. Whether you are newbie wondering what real estate development is to a seasoned developer seeking to learn more about the experience of another fellow developer, you have stumbled upon an exciting community.  As a developer who has been involved in retail development, I will share with you lessons learned and walk you through a development from beginning to end through a series of articles.  I will discuss real estate development throughout a series of topics: Project Feasibility, Design, Leasing, Financing, Construction, and Operations.  For newbies out there, I highly recommend that you consider reading and purchasing this book. If you are serious about being a real estate developer, I highly recommend that you join the Urban Land Institute.

So what is real estate development? Real estate development is a multifaceted business that requires the careful orchestration of the talents of many players (architects, lenders, brokers, engineers, surveyors, designers, attorneys, and others) to create an urban landscape that tackles the challenge of converting undeveloped or under-utilized resources into homes, retail centers, office buildings, and places of recreation or commerce.  The real estate developer is an impresario who balances the interests of various constituents to create a sense of place.  While the individual assumes great risk, the rewards are endless and unparalleled.  Real estate development spans a variety of disciplines: marketing, finance, construction, design, policy, leasing, acquisitions/dispositions, and much more.  For example, development encompasses taking land and over a course of years, transforming it into a bustling retail center that meets the needs of a community. Read More…