Description

Richard Peiser and David Hamilton’s ULI guide (third edition, 2012) teaches development as “the art—and, increasingly, the science—of building real estate value by managing development risk.” It is written for beginning developers and the professionals who work around them, and its central method is iterative: commit a little money, buy better information, and only then commit more. Two opening chapters define the developer’s role, entry paths, the go/no-go logic and the team and capital sources a project needs. Five product chapters (land, multifamily, office, industrial, retail) then walk each type through feasibility, design, financing, construction, marketing and management; the land and multifamily chapters double as the book’s reference for acquisition contracts, present-value land allocation and the five stages of income-property analysis. A closing chapter surveys industry restructuring after two crashes, demographic and regulatory trends, and the developer’s social responsibility to the communities whose fabric development creates.

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Open the complete book (file not included in this release)

Page links: all citations use the PDF viewer’s page count (720 pages in this calibre-built PDF), not the printed page numbers shown in the book’s running footers or in the Readwise highlights.

Earlier highlights: Readwise highlights note (copied once into the Highlights section below).

Evidence boundary: these notes reconstruct the authors’ argument from the supplied book. Market figures, rules of thumb and case results are the authors’ and contributors’ claims as of about 2010–2012; they have not been independently fact-checked and many are dated.

Chapter-by-Chapter Overview

Linked reading map

Use the entries below to jump to the full argument, analytical divisions, essential evidence, concepts, conclusion, and reflection questions for each part of the book.

• Preface: Developers shape the fabric of cities and so carry public as well as private responsibility; the book teaches development as building value by managing risk in a harder, more crowded, more capital-hungry field. p. 20 (file not included in this release)
• 1. Introduction: The developer is a coordinator of risk; beginners should control one of four assets (land, knowledge, tenants, capital), start small, time the cycle, and let exposure rise only as each iteration yields better information. p. 26 (file not included in this release)
• 2. Organizing for Development: After the site, success depends on team and capital: complementary partners, a lean firm, carefully contracted consultants, and lenders who judge the developer as much as the project. p. 73 (file not included in this release)
• 3. Land Development: Subdivision is a separate, riskier business dominated by entitlement risk; it is controlled through acquisition terms, conservative capture rates, present-value land allocation, DCF analysis and builder-backed financing. p. 143 (file not included in this release)
• 4. Multifamily Residential: Apartments begin and end with market analysis (need, pro rata capture, months of inventory), and the chapter sets out the five stages of income-property analysis and the equity priorities reused throughout the book. p. 264 (file not included in this release)
• 5. Office Development: Office success turns on employment-driven demand, effective rents, efficient floor plates and heavy preleasing; after the Great Recession, development is need-based and workouts and repositioning loom large. p. 412 (file not included in this release)
• 6. Industrial Development: Standardized, fast-to-build industrial space concentrates risk in the site; small developers win through niches, difficult sites and careful structuring of institutional joint ventures. p. 487 (file not included in this release)
• 7. Retail Development: Retail value depends on tenant sales, and every decision follows from whether a center serves commodity (price/convenience) or specialty (product/place) shopping. p. 564 (file not included in this release)
• 8. Trends and Issues: After two crashes, development is more institutional, regulated and capital-hungry, yet niches remain for small firms that keep cash, partner well, and treat community trust and integrity as their lasting assets. p. 648 (file not included in this release)

Review

Handwrite First

Use this section with the book and notes closed. Retrieval matters more than polished prose.

1. Before Reading

• Prediction:
• Question I want answered:
• What I already think about how developers make (and lose) money:
• What I expect to disagree with:

2. Closed-Book Recall Dump

• Main claims I remember:

• Key evidence, cases, or rules of thumb:

• Product types, players, and concepts:

• What feels fuzzy or incomplete:

3. Core Argument From Memory

• The book or chapter in one sentence:
• The problem the authors are correcting:

• The causal chain:
• Best evidence I remember:
• Most important qualification:

4. Feynman Check

Explain the development process in plain language to an intelligent reader who thinks developers simply buy land, build, and sell at a profit. Circle any term—highest and best use, present value and the discount rate, at-risk capital, going hard, the iterative go/no-go decision, capture rate, months of inventory, debt coverage ratio versus loan-to-value, the five stages of analysis, preferred return, lookback and promote, effective rent, entitlement and vesting, or commodity versus specialty retail—that you cannot define without looking.

5. Pushback From Memory

• Strongest alternative explanation:
• Claim the authors may overstate:
• Evidence that would change my mind:
• What the cases show, and what remains rule of thumb or opinion:

Type Into Obsidian

After checking the chapter notes, correct the handwritten reconstruction.

1. Correction After Checking

• What I remembered accurately:
• What I distorted or omitted:
• Chapter or passage that corrected me:

2. Clean Core Argument

• Thesis:
• Reasoning:
• Essential evidence:
• Qualification:
• Connection to the book:

3. Connections

• Mastering Real Estate Investment - Frank Gallinelli — how do Gallinelli’s investor measures (cap rate, cash-on-cash, IRR) compare with Peiser’s five stages of analysis, and what does a developer have to add that an investor can ignore?
• The Multifamily Millionaire Vol. 1 — does the buy-and-reposition approach to apartments share chapter 4’s discipline about pro rata capture and months of inventory, or does it lean on optimism the authors warn against?
• The Complete Guide to Real Estate Finance for Investment Properties — where do its loan-sizing and financing rules agree with, or diverge from, the DCR/LTV logic and post-crisis lending standards described here?
• Getting Past No — which of the book’s recurring negotiations (land sellers, neighbors, lenders in a workout, equity partners) would most benefit from Ury’s methods, and where does the developer’s lack of leverage change the advice?
• New connection:

4. Flashcards / Atomic Recall

• Q: What four assets must a beginning developer control at least one of, according to James Graaskamp? A: Land, knowledge, tenants, or capital; land makes a supply-driven “site looking for a use,” while knowledge or tenants make a demand-driven “use looking for a site.”
• Q: What are the two principles governing developer exposure over time? A: Development is iterative, with each round bringing more accurate information and more money at risk; spend enough to get the information needed, but do not risk more than necessary for each level of commitment.
• Q: Why should a market study assume pro rata capture? A: Because in the long run competitors who lose share cut prices until they recapture it, so no project, however superior, reliably captures more than its share of supply.
• Q: What are the five stages of income-property analysis? A: Simple capitalization of stabilized NOI, DCF of the operating period, combined development-and-operating analysis, monthly development-period cash flows for the construction lender, and DCF analysis for investors.
• Q: What is the difference between commodity and specialty retail? A: Commodity retail sells daily needs on a price/convenience equation; specialty retail sells discretionary goods on a product/place equation, and the two motivate shoppers in nearly opposite ways.

Retention Check

24 Hours Later

• Reconstruct the six stages of development and the point at which each major commitment of risk money occurs.
• Name one claim, one case, and one qualification from the book.

1 Week Later

• Run a quick Stage 1 check on a real listing: estimate NOI, size a loan by DCR and LTV, and compute overall and cash-on-cash returns.
• Explain why acquisition terms can matter as much as price, using one example from chapter 3 or chapter 8.

1 Month Later

• Rebuild the book’s argument from “development is managing risk” to “development is a civic responsibility” without opening the note.
• Identify the strongest claim you accept, the strongest you resist, and the evidence needed to decide between them.

Notes

Book Argument and Reading Map

Peiser and Hamilton’s governing claim is that development is the business of building real estate value by managing development risk. A developer is defined less by any technical skill than by taking the risks and receiving the rewards of a project while coordinating many other people’s work. The book’s core method follows from that definition: development is iterative, each round of analysis buys more precise information, and the developer should let money at risk rise only as confidence rises. Options, extended closings, entitlement contingencies and staged financing are all tools for keeping exposure below knowledge.

The book is built in three movements. Chapters 1 and 2 supply the general framework: what a developer is, how beginners enter the field, the four assets of entry, present value and real estate cycles, the six stages of development, and the team, partnerships and capital sources a project requires. Chapters 3 through 7 then run the same six stages (feasibility and acquisition, design, financing, construction, marketing, operations) through five product types. Chapters 3 and 4 do double duty as the analytical reference: chapter 3 for acquisition contracts, regulation, present-value land allocation and for-sale DCF analysis, chapter 4 for market analysis and the five stages of income-property analysis and equity structuring. Chapter 8 widens the lens to industry restructuring, demographic and regulatory trends and social responsibility.

Several through-lines connect the chapters. Market analysis comes first and must resist optimism: pro rata capture, months of inventory, effective rather than quoted rents. Regulation and community approval are treated as central risks rather than formalities, and the authors repeatedly urge early, personal engagement with officials and neighbors. Capital structure is a hierarchy of priority and risk: lenders look to the developer and the property, investors to preferred returns and payback priorities, and developers’ profits are deferred. Two crashes, the S&L collapse and the Great Recession, frame the advice on leverage, liquidity and inventory, distilled in the refrain “Don’t Run Out of Cash.”

The book ends where its preface begins. Developers shape the street layouts, parks and districts that outlast any building, and their long-term values depend on the health of the cities they build in. Reputation, integrity and community trust are presented as the beginner’s most durable assets, and social responsibility as both an ethical duty and enlightened self-interest.

Interpretive guardrails

• Rules of thumb (capture rates, preleasing thresholds, loan ratios, fees, returns, costs per space) are snapshots from roughly 2000–2012 and vary by market and cycle; the authors themselves warn that the book is “no substitute for expert local advice.”
• Chapters 5, 6 and 7 are written by contributing authors (Sofia Dermisi, Alex Duval, Nick A. Egelanian), and many sections rely on interviews and sidebars; tone and emphasis vary, and some quoted advice is the interviewee’s opinion rather than the authors’ finding.
• Case studies (West River Commons, Rock Row, 17th and Larimer, Ameriplex, Bayshore Town Center and others) illustrate the method with selected successes and lessons; they are not representative samples or proof that the method works.
• The book is U.S.-focused: legal tools (zoning, vesting, development agreements, Supreme Court cases), tax credits and financing institutions are American, and the authors’ judgments about e-commerce, malls and CMBS reflect conditions around 2011.
• Spreadsheets and figures referenced in the text (for example the Veranda and West River Commons analyses) are mostly images in the PDF; the notes report only numbers stated in the prose.

Preface

Chapter Objective and Through Line

The preface states why the book exists and what kind of competence it is trying to build. Its opening claim is moral as much as practical: developers “face an awesome responsibility” because the communities and buildings they create “become the fabric of our civilization” (p. 20 (file not included in this release)). Where people live, work and shop, how long they travel, and the quality of what they find there depend largely on developers’ decisions. That framing sets up the book’s recurring double standard for success: a project must make money, but it also has to be good for the place where it stands.

The preface then explains why the job has become harder. Developers can no longer decide alone what to build; “Everyone has a stake in their activities.” Two crashes frame the third edition: the overbuilding and savings-and-loan collapse of the 1990s, and the 2008–2009 crisis in which securitized lending collapsed, about 8 million homes were foreclosed and public budgets were cut. Three structural changes are named as the forces of the past ten to twenty years: globalization and institutionalization of ownership, securitization of finance, and the technological revolution. The upshot is that entrepreneurial development “requires more capital to get started and more time to get projects off the ground.”

Against that background the authors give three reasons for a how-to book: sound principles would have kept many failed projects from ever being financed, the recovery phase of a cycle is the best time for newcomers to enter, and qualified developers will always be needed, especially in fast-growing markets such as Brazil, China and India.

Chapter Structure at a Glance

1. Developers shape cities and therefore carry public responsibility, not only private risk.
2. The context has become more crowded with stakeholders, more cyclical and more capital-hungry.
3. A disciplined guide is justified because bad development harms whole communities, not just investors.
4. The book is organized by five product types, but development is defined more broadly as building value by managing risk.
5. The final challenge is a fairer and more efficient development process.

Section-by-Section Argument

Responsibility and a changed context (analytical division)

The first half of the preface argues that development has moved from a unilateral private act to a negotiated public one. The authors use the two recent crashes to show that the industry’s environment shifts faster than any single developer can control.

• The 1990s adjustment was “the most wrenching adjustment since the Great Depression”; the 2008–2009 cycle differed by having stronger regional variation depending on how much each area had overbuilt.
• The three structural changes (institutional ownership, securitization, technology) both open and close doors for beginners.

Why a book on development, and what it covers (analytical division)

The second half defines the field. “Development is not for amateurs,” because when projects fail or are poorly designed “the whole community loses.” Long-term real estate values are tied to the quality of the urban areas around them, so developers have a direct interest in the long-term economic health of their cities.

• The book covers land, residential, office, industrial and retail, but asks for more than product knowledge: urban dynamics, architectural criticism, construction, law, approvals, public finance, market analysis, leasing and management.
• The core definition: “Real estate development is the art—and, increasingly, the science—of building real estate value by managing development risk” (p. 21 (file not included in this release)).
• Development skill applies beyond new construction: leasing empty buildings, renovating warehouses, repositioning shopping centers, entitling raw land and working out distressed debt.

Key Concepts and Distinctions

• Development as risk management: Value is created by managing development risk, not merely by building.
  • Significance: This definition organizes every later chapter, where each stage is treated as a way of reducing or transferring risk before more money is committed.
• Shared stakes: Communities, neighbors and officials now have real power over what is built.
  • Significance: It explains the weight the book gives to approvals, politics and social responsibility.
• Same steps, different products: The process steps are common to all property types, while risks and concerns differ by product.
  • Significance: It justifies the book’s structure: general chapters first, then product chapters.

Chapter Conclusion and Significance

The preface closes by naming what it sees as “perhaps the greatest challenge”: evolving “a fairer and more efficient development process” that reflects the needs of all groups while removing hurdles that raise costs “without providing commensurate benefits.” It also concedes the limit of its own advice: the expertise developers need “will be different tomorrow from what it is today.” The book is therefore offered as a distillation of the experience of developers in both successful and failed projects, not as a fixed rulebook.

Questions for Reflection

1. If development is defined as building value by managing risk, what separates a developer from an investor or a contractor who also bears risk?
2. The authors claim long-term values depend on the quality of the surrounding city. Does that make a developer’s civic responsibility a matter of self-interest, of ethics, or both?
3. Which of the three structural changes (institutional ownership, securitization, technology) most raises the barrier to entry for a small developer, and why?

Chapter 1: Introduction

Chapter Objective and Through Line

Chapter 1 defines the developer and gives a beginner the basic logic of the business. Its central thesis is that development is the coordinated management of risk over time: the developer initiates and orchestrates a project “from beginning to end,” often takes “the greatest risks,” and succeeds by limiting how much money is exposed before enough is known to justify the next commitment. The developer is an orchestrator, not an expert in everything, whose skill lies in “knowing the questions to ask and whom to ask” (p. 27 (file not included in this release)).

The problem the chapter addresses is the beginner’s handicap. A beginner lacks a track record, established sources of equity and the bargaining power to push risk onto others, so he usually starts with deals that experienced developers have passed over. The chapter answers with a strategy: control at least one key asset, start small and simple, stay in a familiar market and product, time entry to the real estate cycle, and treat predevelopment as an iterative process in which each round of analysis buys better information before more capital is at risk.

The argument moves from definition (what a developer does and what temperament it takes), to entry (career paths and the first deal), to the mechanics of the process (present value, cycles, stages, the go decision and exposure over time). It sets up the rest of the book: chapter 2 builds the team, and chapters 3 through 7 apply the same six stages to each product type.

Chapter Structure at a Glance

1. Development is defined as detail-heavy coordination under risk, demanding vision, flexibility and judgment.
2. Risk is the price of entry; beginners must limit it through cash reserves, site control and careful acquisition terms.
3. Entry comes through prior careers and through controlling land, knowledge, tenants or capital.
4. The first deal should be small, simple and within the partners’ net worth, because its main purpose is a track record.
5. Present value and real estate cycles explain when to build and when to wait.
6. The six stages of development overlap, and predevelopment is an iterative path to a go/no-go decision.
7. Exposure should rise only as information improves; the chapter ends with collected rules of thumb.

Section-by-Section Argument

What Is a Developer?

The opening section argues that the developer’s role is defined by coordination and responsibility rather than by any single technical skill. Developers “must think big, but development is a detail business”: an overlooked title clause or a poor soils test can sink a project, and the developer bears the consequences even when someone else was negligent (p. 26 (file not included in this release)).

• The developer must hold a clear vision while listening and collaborating, and must answer every stakeholder “without compromising the project’s economic viability.”
• Managing a creative team is a balancing act: too much guidance stifles creativity, too little produces chaos. The answer is a rigorous overall process with room for exploratory work inside it.
• Phil Hughes’s line sets the tone: “In this business you’d better be lucky and good,” because the developer “makes his own preparations and his own opportunities” (p. 28 (file not included in this release)).

The Book’s Approach and Objectives

This section explains how the book is built and warns against using it as a substitute for local knowledge. The process is similar for each product but differs in detail and emphasis; for example, preleasing is critical for office and retail, unnecessary for apartments and meaningless for land.

• Real estate is divided into five product types, and markets also differ by building design and density. High-rise apartments with structured parking need higher rents and proof of unmet high-income demand, so “choices made in development must continually balance market demands with project economics” (p. 29 (file not included in this release)).
• Chapters 3 and 4 serve as the detailed reference for analysis that applies to all product types; chapter 4 explains project and joint-venture return calculations.
• The authors caution that regulations, construction methods and even court decisions can overturn standard practice; the book “is no substitute for expert local advice.”

Requirements for Success

The core claim here is that developers both take and manage risk, and that beginners often take on more than they need to. Risk ranges from fee development, where little is at stake, to full personal liability where failure can mean bankruptcy. Developers “minimize, share, hedge, or eliminate risk at each phase” before moving forward (p. 30 (file not included in this release)).

• Temperament matters: three or more years often pass before the initial risk money returns, and the developer may risk losing everything more than once during a project.
• Local politics “cannot be overstated”: a project that works financially can still die if officials or neighbors object (p. 31 (file not included in this release)).
• Cash rules: even small projects need $50,000 to $100,000 of “pursuit capital,” and a developer should hold “at least twice as much cash on hand as seems necessary”; lenders usually require cash equity of 25 to 40 percent of total cost.
• Acquisition terms are the main risk tool: close on land as late as possible, seek longer closings, make approvals a condition of purchase, and use purchase options, which are “one of the greatest tools for developers” (p. 32 (file not included in this release)).
• Equity should be lined up before signing a contract, ideally through investors pre-committed to a defined type of deal, but “Investor intent, even written intent, is never a guarantee.” A beginner may need to attempt five or more projects before one proceeds.

Paths for Entering the Development Field

The chapter argues that there is no single path in, but some positions make the move easier. Most people learn by working for another developer; the ideal entry job is project manager with full responsibility for small projects, or a role in a small firm where one can “see and do everything.”

• Homebuilders move into land or apartments; contractors build for other developers; commercial brokers use a major tenant client as an anchor; mortgage brokers can join a joint venture by controlling a funding source.
• A 2010 survey of 239 ULI developers (sidebar) found residential the most common first project, project management the most common step before development, and front-end work (acquisition, approvals, market analysis, design) the main focus. Respondents’ lessons centered on team selection, approvals, due diligence and knowing when to walk away.

Finding the First Deal

This section supplies the chapter’s most practical framework. Following James Graaskamp, a beginner must control at least one of four assets: land, knowledge, tenants or capital. Control of land produces a supply-driven deal (“a site looking for a use”); control of knowledge or tenants produces a demand-driven deal (“a use looking for a site”); capital gives a choice (p. 34 (file not included in this release)).

• A use looking for a site. “All development is ultimately driven by demand.” For commercial developers, finding the tenant is the most important task, because “it is the tenant that makes the property valuable, not the building itself” (p. 35 (file not included in this release)).
• A site looking for a use. The first question is the land’s highest and best use, which must be checked against real demand. Whether to build now or wait depends on timing, future value and opportunity cost, which makes the “apparently simple” analysis “dizzyingly complex” (p. 36 (file not included in this release)).
• Improving the chances. The first deal establishes the track record, the quality standard, a market image, a network of consultants and relationships with lenders. It should be put together in about six months, and the partners’ combined net worth should be at least as large as total project cost (p. 41 (file not included in this release)).
• The maxim that small deals take as much effort as large ones does not hold for beginners. They should seek small, simple deals without long approval processes, though “problem” sites and public land that larger developers avoid can be openings.
• When money is plentiful, it pays to learn in advance what local investors want, then tie up a matching property and bring it to them quickly, since sellers in hot markets demand shorter free-look periods before the deposit “goes hard.”

The Concept of Present Value (sidebar)

The sidebar gives the tool that resolves the build-now-or-wait problem. A future sum must be discounted to its present value before it can be compared with money today, and the choice of discount rate depends on risk.

• Worked example: land worth $100,000 an acre for houses today versus $200,000 an acre for a shopping center in five years. At 10 percent the future value is worth $124,184 today, so the owner should wait; at 20 percent it is worth only $80,375, so the owner should build houses now (p. 44 (file not included in this release)).
• Most developers use personal discount rates of at least 20 percent. A discount rate combines a real return, inflation and a risk premium that may run from about 4 percent for a completed office building to 15 to 20 percent for recreational land.

Managing the Development Process

This section separates development from investment and explains timing and staging. Development carries risks that buying operating property does not. A useful analytical device is the 100 percent owner/developer, who supplies all equity and bears all risk: if a deal fails that test, “it will make even less sense as a joint venture” (p. 45 (file not included in this release)).

• A developer is defined as the party “actively involved in the development process” who “takes the risks and receives the rewards.” Fee developers and contractors carry performance risk on tasks rather than development risk on the whole project. Development managers for institutions bear little risk and earn a fee plus 10 to 20 percent of profits.
• Real estate cycles. Real estate is highly sensitive to interest rates and the economy; lenders show “a herd mentality,” and the lag between demand and new supply makes markets cyclical even in stable times (p. 46 (file not included in this release)).
• Financing is easiest late in an up-cycle, but that is when risk is highest; the last to enter are usually the first in trouble. Glenn Mueller’s four phases are recovery, expansion, hypersupply and recession. The favorable window (phases I and II) may last two to three years; financing may be nearly impossible in phase IV (p. 49 (file not included in this release)).
• Getting started. Choose a geographic market and a product first. Local players hold large advantages; newcomers should bring in a well-connected local partner. Beginners should build a product they know and look for a niche others have not seen, because “if a market opportunity is obvious, another developer is probably already building” (p. 50 (file not included in this release)).
• Stages of development. The six stages are feasibility and acquisition, design, financing, construction, marketing and leasing, and operations and management. Four of them happen during predevelopment, and a developer should be “almost absolutely certain” of profitability before closing (p. 59 (file not included in this release)).

The iterative go decision and exposure over time (analytical division)

The chapter’s concluding mechanism is that development is iterative: each round gathers more precise information until the developer can make a go/no-go decision. The financial analysis grows in detail with each round, from a simple capitalization check at the earnest-money stage, to an annual operating pro forma, to a monthly construction cash flow for lenders, to a combined construction-and-operating cash flow for joint ventures (p. 60 (file not included in this release)).

• The level of detail should match the quality of available information; a 60-month spreadsheet built before reliable costs exist is “a waste of time and money” (p. 61 (file not included in this release)).
• Each step depends on the one before; litigation, especially against government, usually produces “a pyrrhic and value-destroying win.” Critical path charts and written confirmations serve as the monitoring system.
• The Great Recession differed from normal cycles: demand collapsed with the financial freeze rather than supply overtaking demand, and the downturn was national rather than regional (p. 63 (file not included in this release)).
• At-risk capital rises sharply when the developer goes hard on earnest money, closes on land, pays financing fees or authorizes working drawings. These steps should be delayed as long as possible; paying a little more for an extended closing is worth it (p. 64 (file not included in this release)).
• Two principles: each iteration “brings more accurate information and puts a greater amount of money at risk,” and the developer should “not risk more than is necessary for each level of commitment” (p. 69 (file not included in this release)).

Key Concepts and Distinctions

• Four assets of entry (land, knowledge, tenants, capital): A beginner must control at least one to start.
  • Significance: It turns the vague question of how to begin into an inventory of what one actually brings to a deal.
• Site looking for a use vs. use looking for a site: Supply-driven deals start from land; demand-driven deals start from a tenant or market gap.
  • Significance: It determines which analysis comes first: highest-and-best-use study or site search.
• Highest and best use: The use that maximizes a site’s value at a given time, tested against demand and timing.
  • Significance: It sets land prices and frames the decision to build now or wait.
• Development risk vs. performance risk: The first attaches to delivering the whole project; the second to individual tasks under fixed contracts.
  • Significance: It defines who counts as a developer and why rewards follow risk.
• At-risk capital: The total that could be lost at a given moment, rising at each commitment point.
  • Significance: It is the variable the iterative process is designed to control.
• Real estate cycle phases: Recovery, expansion, hypersupply, recession, driven by the lag between demand and new supply.
  • Significance: Timing within the cycle often decides whether a sound project can be financed and leased.

Essential Evidence and Examples

• Four developers’ starts (sidebar). Chickie Grayson, Tara Hernandez, Don Killoren and Jair Lynch began through affordable housing, historic adaptive use, master-planned communities and urban regeneration. Together they support the claim that there is no single path in, and their recurring difficulty, funding two to four years of predevelopment before revenue, illustrates the capital problem (p. 52 (file not included in this release)).
• Equity versus value. A $10 million project appraised at $12 million can support a 70 percent loan of $8.4 million, leaving $1.6 million of cash equity; signed leases create value that reduces the equity a beginner must raise (p. 42 (file not included in this release)).
• Developer exposure on a 160-unit bond-financed apartment project. Exposure peaks just before the bond closing at $270,000, when the project could still fail, which illustrates why commitments should be delayed until uncertainty falls (p. 68 (file not included in this release)).
• Advice from ULI’s Small-Scale Development Council. The checklist reduces to three themes: be well prepared, work with experienced people even when they cost more, and anticipate delays, including the rule to “Increase the time you think you need to develop a project—perhaps by twice as much” (p. 67 (file not included in this release)).

Chapter Conclusion and Significance

The chapter concludes that development calls for managing people and managing risk, and that beginners face a harder road because they are learning the steps and building every relationship for the first time. Their first project “should not set a new precedent or require difficult public approvals or new forms of financing” (p. 69 (file not included in this release)). The success principle is market-specific: serve “the needs of a particular segment of the market in a particular location,” often meaning the needs of a particular individual, and understand “what the local market is missing” (p. 70 (file not included in this release)).

The chapter’s contribution is the framework that every product chapter reuses: six stages, iterative analysis and staged exposure of risk capital. A tension it leaves open is between its advice to stay small and simple and its admission that beginners often get only the difficult deals others pass over, and that financing is easiest at exactly the point in the cycle when risk is highest.

Questions for Reflection

1. The 100 percent owner/developer test assumes that a deal which fails for a single owner will only look worse when risk is shared. When might a joint venture make an otherwise unattractive project viable?
2. How does the choice of discount rate in the present value sidebar carry the developer’s whole judgment about risk, and how could a beginner check whether a 10 or 20 percent rate is the honest one?
3. If financing is easiest late in the cycle and safest early, what concrete practices from the chapter (options, extended closings, pre-committed investors) help a beginner act early without capital that lenders will not yet provide?

Chapter 2: Organizing for Development

Chapter Objective and Through Line

Chapter 2 argues that, after the site itself, the keys to success for small developers are “the quality of their development team and their access to capital” (p. 73 (file not included in this release)). A beginner can buy expertise and credibility by hiring the same consultants that large firms use, and can survive downturns by keeping the central organization lean and contracting out non-core work. The chapter’s thesis is that the developer’s real product, before any building exists, is a well-structured team: partners chosen for complementary strengths, a firm sized to its stage of life, consultants hired on clear terms, and lenders persuaded of both the project and the person.

The problem it addresses is that a beginner has no established network. The chapter supplies one, role by role. It moves outward from the developer: first to partners (who shares risk and reward), then to the firm (how it grows, is organized and pays its people), then to the consultants and contractors who design and build, then to service firms who study, value, insure, sell and manage, and finally to the lenders and capital sources who decide whether the project happens at all.

Throughout, the same principles repeat in different settings: hire for direct experience with the product type, check references personally, make sure the job is a manageable share of the firm’s workload, spell out scope and the triggers for extra cost in writing, and align compensation with the behavior you want. The chapter closes on the developer’s paradox: he must trust the team and still oversee the critical path, because “If mistakes are made, the developer is ultimately responsible” (p. 140 (file not included in this release)).

Chapter Structure at a Glance

1. A lean firm plus first-rate consultants is how small developers compete and survive cycles.
2. Partnerships come before the team: they should join complementary skills and be fixed in written agreements.
3. Development firms move through startup, growth and maturity, each with its own risks, structures and pay systems.
4. Consultants are located through other developers and officials, selected on experience and capacity, and bound by clear contracts.
5. The design and construction team is described discipline by discipline, with the developer as coordinator.
6. Service firms (market, appraisal, legal, title, surety, brokerage, PR, management) support specific phases.
7. Lenders judge the developer as much as the project; the chapter maps sources of capital and what each requires.

Section-by-Section Argument

Opening: the lean firm and the selection rules

The chapter opens by tying team quality to survival. “The cyclical history of real estate development has proved repeatedly that a lean central organization is a key to surviving downturns” (p. 73 (file not included in this release)). Consultants allow that leanness.

• Selection rules: hire the best available even at higher cost (and when price must decide, spend first on the areas furthest from your own expertise), insist on direct experience with the product type, value strategic connections such as an engineer with good relations with planning staff, beware of firms dependent on a few clients, and ask other developers.
• Development’s “hurry up and wait” rhythm makes slow periods the time to extend the network; building a permanent team “takes more than one project.”

Forming Partnerships

The claim is that partnership structure matters even more than team assembly, and that hasty partnerships produce “heartache and financial risk.” The safest partners are those with a long history together; beginners must compensate with careful selection and legal structuring.

• Landowners and key tenants are common early partners: landowners can contribute land as equity or provide seller financing, but both see real estate as non-core and “will tolerate little risk” (p. 75 (file not included in this release)).
• “A common mistake in forming partnerships is to choose partners with similar rather than complementary skills.” Typical pairings: capital with development experience, construction with management.
• Unequal wealth creates unequal exposure; remedies include liability-limiting entities, forfeiture for partners who fail capital calls, and extra return for the richer partner.
• Compensation should be designed as incentive rather than fairness, with capital accounts to track each partner’s equity.
• A written agreement is essential; casual general partnerships can make partners liable for one another’s unrelated debts.
• The financial partner’s net worth should be at least equal to total project cost, “and preferably twice that amount.” Bringing in the financial partner before equity needs are known risks giving away too much ownership (p. 77 (file not included in this release)).

The Firm’s Organization and Management

This section argues that firm design should follow stage of growth and should guard against overhead. Large integrated firms gain quality control and new profit centers, but risk “mission creep”; small firms with a few principals and contracted services can shed costs fast in a downturn. Development can be “a low-cost business that is relatively easy to enter,” provided one has credibility with capital.

• Organizational life cycles. Startup firms are usually merchant builders and depend on the founder’s entrepreneurial contacts; the common pitfall is overexpansion and hiring too fast. Some highly productive developers have worked with “a professional staff of only three or four” (p. 78 (file not included in this release)).
• Growth firms must add controls without “bureaucratic sclerosis,” keep principals directly involved, retain key people and manage founder-to-staff and family generational transitions. Mature firms have deep pockets, larger projects, less competition and more aversion to risk.
• Organizational structure. Principals usually keep site acquisition, financing, major leases and timing of sales. Small firms organize by project, large firms by function, and hybrids are increasingly common.
• Compensation. Equity or phantom equity aligns managers with owners. Phantom equity is computed like a bonus from project profits, carries paper losses forward against future gains, and vests over years, but carries no legal ownership or capital liability (p. 82 (file not included in this release)). Beginners may have to give experienced project managers 25 percent of profits, while established firms may pay 1 to 5 percent, because employees’ risk is lower.
• Strategic planning. Most beginners have no formal plan; their competence “can become its business strategy.” Larger firms benefit from a plan with budgets and approval systems, which can paradoxically allow more decentralization. Personnel costs are typically 60 to 80 percent of operating budgets.

Choosing Consultants and Contractors

The core claim is that the developer’s success depends on coordinating interrelated professionals at the right time, and that selection and contracting are skills in their own right.

• Find consultants through local developers who built similar projects, professional associations, and the informal opinions of public officials, since some approvals may depend on the reputation of team members (p. 87 (file not included in this release)).
• In interviews, beginners should admit inexperience and ask consultants to explain the process. Check references personally, inspect past work, and make sure the project is no more than “a third of the consultant’s overall business” (p. 88 (file not included in this release)). Confirm who the project manager will be and which subconsultants will be used.
• Hiring is “a two-way street”: consultants will ask whether the developer can pay, decide and survive delays, and they deserve candor about when they are working at their own risk.
• Rates. Do not simply choose the lowest bid; changes in scope often exceed differences in initial quotes, so agreements should spell out what triggers extra cost and unit prices for added work. Fixed price is preferred; time-and-materials needs trust and billing limits; monthly retainers should be avoided except for truly ongoing work, because they can leave 90 percent paid for 50 percent done (p. 92 (file not included in this release)).
• Working with consultants. The developer passes information among consultants, announces concept changes immediately, starts due diligence before spending heavily on design, and listens rather than letting ego block good advice.

The Design/Construction Team

This long section describes each discipline and the developer’s relationship to it. Its unifying point is that the design team produces most soft costs, and that early coordination is the main defense against overruns.

• Architects. Most developers lead the team themselves. AIA Document B101 is standard but written from the architect’s perspective. Design moves from programming through schematic drawings, design development (where most major decisions are made and changes become costlier) and working drawings; marketing, leasing and management people should critique drawings early because “Beautiful, but unmarketable projects can lead to finger-pointing later” (p. 96 (file not included in this release)).
• Developers often study drawings and neglect specifications, which is “a mistake,” because quality, durability and warranties depend on the spec (p. 97 (file not included in this release)).
• Design-award-build separates design from bidding; fast-track brings the contractor in early to save holding costs but starts construction before costs and approvals are final. Percentage-of-cost architect fees (3 to 6 percent of hard costs) give no incentive to economize; hybrid “not-to-exceed” arrangements are common.
• Landscape architects increasingly lead entitlement because their drawings are most persuasive to communities; land planners are the principal consultant on land projects.
• Engineers (structural, mechanical, electrical, civil) must be licensed and coordinated by the architect. Ronald Stenlund identifies poor early communication among developer, architect and engineers as “the single most common cause for project delays, redesigns, and cost overruns” (p. 103 (file not included in this release)).
• Soils engineers should test before purchase. Environmental consultants handle impact review (with mitigation and exactions) and hazardous materials (Phase I, II and III reports). Liability for cleanup can attach to anyone in the chain of title, even for contamination that predates the developer (p. 108 (file not included in this release)).
• Surveyors are hired early, before money goes hard; parking and traffic consultants matter because parking and road capacity often limit what can be built; asbestos professionals are required for buildings of the 1920–1976 era.
• Contractors. Combine a request for qualifications with a short competitive bid; follow Jonathan Rose’s three rules (product experience, project no more than one-third of the contractor’s workload, checked references). Cost-plus-fee with a guaranteed maximum price and shared savings suits experienced contractors; incentives must not erode quality (p. 112 (file not included in this release)).

Real Estate Service Firms

The service firms support specific phases, and each section explains what the developer is actually buying.

• Market consultants provide the market study that lenders, investors, designers and salespeople all use; a third-party view is advisable, and lenders’ recommendations matter because their decisions depend on it (p. 115 (file not included in this release)).
• Appraisers value by income, market or cost approaches; the income approach (net operating income divided by a capitalization rate) is standard for income property.
• Attorneys are needed in several specialties; a land use attorney’s early zoning opinion gives a defensible view of a site’s potential. Leonard Zax advises assigning one person to patch gaps in representation and distinguishing legal advice from business comment.
• Title companies insure against unexpected liens; standard policies exclude unrecorded claims, while ALTA policies cover them with a full survey.
• Surety companies issue performance, payment, completion and bid bonds; bonding validates the contractor, and performance and payment bonds cost roughly 1 percent of construction (p. 121 (file not included in this release)).
• Brokers can be in-house or outside; the exclusive right-to-sell listing is most common; developers should honor broker-negotiated leases within agreed guidelines to keep credibility. PR and advertising should start at least a year before sales, since hoping a project sells itself “is almost always a mistake” (p. 124 (file not included in this release)).
• Property management shifts the focus from vision to operations; beginners usually outsource it because many tasks become profitable only across multiple properties (p. 128 (file not included in this release)).

Lenders and Sources of Financing for Real Estate Projects

The chapter’s final argument is that lenders evaluate “the developer and the project,” and that “the developer’s potential gain is less important than the lender’s potential loss” (p. 129 (file not included in this release)). They test financial backing, managerial capability and character.

• Preleasing requirements vary: apartments need little, offices 50 to 75 percent or more. Tenant mix matters because the construction lender depends on the permanent lender’s takeout.
• Practice presentations on less important lenders first; show a catalog of past results, including the difficult parts.
• Sources: commercial banks (short construction and miniperm loans; local banks for beginners), much-diminished S&Ls, insurance companies and pension funds (large, experienced developers), foreign investors, syndications and REITs (private syndication is “the best source of capital for small developers”), private equity investors, CMBS (moribund after 2008–2009), credit companies, and mezzanine debt (p. 133 (file not included in this release)).
• Private investors are the most likely partner for a beginner: profit splits run from 80/20 to 50/50 with the investor’s return paid first, and the developer should always put in some cash, 5 to 33 percent of equity on small deals (p. 134 (file not included in this release)).
• Construction loans typically float 150 to 300 basis points over prime. Lenders care about design, permits, environmental indemnity, insurance, developer capacity, integrity and lien releases. Bad news should reach the lender from the developer, not from its inspector.
• Permanent lenders “look to the property more than to the borrower”: a fully leased property with a weak owner finances faster than an unleased one with a strong owner (p. 139 (file not included in this release)).

Key Concepts and Distinctions

• Lean organization: A small central staff that contracts out non-core and project-specific work.
  • Significance: It is the chapter’s survival strategy for downturns and the reason consultant selection matters so much.
• Complementary partnership: Partners who supply different assets (capital, development skill, construction, management).
  • Significance: It corrects the most common partnership error and sets up equitable sharing of risk and return.
• Phantom equity: Profit participation computed like equity but without legal ownership or capital liability.
  • Significance: It aligns project managers with owners while protecting the firm’s control and signatures.
• Fixed price vs. time-and-materials vs. retainer: Three ways to pay consultants, with different incentive effects.
  • Significance: Contract form determines who bears the risk of scope change and delay.
• Construction loan vs. permanent loan (takeout): Short-term floating money to build, long-term fixed money to hold.
  • Significance: The construction lender’s dependence on a takeout explains preleasing and tenant-mix demands.
• Mezzanine debt: Debt between first mortgage and equity, convertible to a partnership interest on default.
  • Significance: It is costlier than a mortgage but replaces the most expensive money, equity.

Essential Evidence and Examples

• Phantom equity at the O’Donnell Group. A manager with 5 percent of a property earning $100,000 is credited $5,000; losses accrue on paper and must be recovered before future profit is paid (p. 82 (file not included in this release)). It shows how upside and downside can be shared without cash calls.
• The lead arsenate orchard. A greenfield site may have been a 1930s orchard treated with powdered lead arsenate, detectable only if historic aerial photos are checked (p. 108 (file not included in this release)). It supports the claim that apparently clean sites still require environmental investigation.
• One-third workload rule. For a $20 million project, look for a contractor with at least $60 million in total business (p. 112 (file not included in this release)). It turns the capacity test into a usable number.
• Equity partner timing. A partner providing $800,000 for 50 percent may take an unnecessarily large share if another $100,000 is needed later (p. 77 (file not included in this release)). It shows why equity needs must be known before the partner is brought in.

Chapter Conclusion and Significance

The chapter concludes that “Development is always a team effort,” and that the roster keeps growing: environmental and political consultants were rare twenty years earlier and are now routine (p. 139 (file not included in this release)). As information grows more complex, the developer’s distinctive skill becomes recognizing quality work across many disciplines and knowing “when to ask questions, whom to ask, and what to ask.”

The chapter adds the organizational layer that chapter 1’s risk logic requires: each consultant, contract form and capital source is a way of buying information or shifting risk. The unresolved tension is between leanness and control. A lean firm survives cycles, but every function contracted out is one more party whose work the developer must check and for whose mistakes he will still answer.

Questions for Reflection

1. The chapter recommends both a lean organization and close oversight of every consultant. At what point does a lean firm’s dependence on outsiders become a risk rather than a protection?
2. Why might compensation designed for incentive produce better partnerships than compensation designed for fairness, and where could it go wrong?
3. Permanent lenders look mainly to the property, construction lenders to the developer. How should that difference shape the order in which a beginner builds credibility?

Chapter 3: Land Development

Chapter Objective and Through Line

Chapter 3 treats subdivision as “the principal mechanism by which communities are developed” and walks a beginner through the legal and physical steps of converting raw land into finished lots, using small residential subdivisions as the model (p. 143 (file not included in this release)). Its central thesis is that land development is a distinct business, riskier but potentially more profitable than building, because it “is dependent on the public sector for approvals and infrastructure and involves a long investment period with no positive cash flow” (p. 147 (file not included in this release)). Every stage of the chapter is about controlling that exposure: through site choice, purchase terms, phasing, financial modeling, financing structures and long-term governance.

The chapter also carries a civic argument. Subdivision decides a community’s appearance, land-use mix, infrastructure and governance, and the old presumption that zoning confers a right to build “has largely dissolved.” Developers must justify projects to residents and officials, and increasingly become “de facto agents of cities” for roads, utilities and environmental cleanup (p. 258 (file not included in this release)).

The argument follows the six stages introduced in chapter 1. Feasibility is the longest part: market analysis before and after site selection, acquisition contracts, regulation and financial analysis (quick-and-dirty pro forma, then discounted cash flow). Design and site planning, financing, construction, marketing to builders, and post-completion maintenance follow. Because chapter 3 introduces the core analytical methods, it serves (with chapter 4) as a reference for the later product chapters.

Chapter Structure at a Glance

1. Land moves from raw to semideveloped to finished lots; beginners should seek small, serviced, appropriately zoned tracts.
2. Market analysis before and after site selection defines the lot product, conservative capture rates and builder demand.
3. Acquisition terms (free look, earnest money, contingencies, release provisions) are as important as price.
4. Regulation (platting, vesting, growth controls, environment, traffic, infrastructure finance) is the central risk and must be managed politically.
5. Financial feasibility moves from a quick-and-dirty pro forma to a multiperiod DCF, with land uses allocated by present value.
6. Design and site engineering should be market-led and increasingly sustainable; higher densities answer rising land costs.
7. Financing, construction, builder marketing and community governance complete the project and extend the developer’s liability beyond sellout.

Section-by-Section Argument

Overview

The overview places land development in the community and in the industry. Subdivision proceeds through three stages: raw land, semideveloped tracts of 20 to 100 acres with major infrastructure, and platted lots. Larger, well-capitalized firms usually do the first conversion; small projects and infill skip the middle stage (p. 144 (file not included in this release)).

• Leapfrog development leaves passed-over parcels that can be good infill opportunities for small developers, because their complexity deters regional and national firms that prefer repeatable processes.
• Developers are “the primary agents of physical change in a community,” and residents resist change unless it brings tangible benefit (p. 145 (file not included in this release)). A well-conceived project can still lose money by taking too long to get to market.
• Land vs. building development. Horizontal and vertical development should be analyzed separately, with the developer modeling himself as a purchaser of his own finished lots (p. 146 (file not included in this release)).

Project Feasibility: market analysis and site selection

The chapter’s first substantive claim is that beginners should look for “comparatively problem-free tracts”: land already served by utilities and zoned or needing only administrative approvals. Market analysis happens twice, before site selection (to find underserved segments) and after (to define the product for the chosen site).

• Builders are key sources and future customers, but also potential competitors. Demand can be estimated by area and price band: if 56 percent of 500 new homes sell in the west of town and 75 percent are under $300,000, demand there is 210 units (p. 149 (file not included in this release)).
• “Irrationally exuberant capture rate projections are among the most common pitfalls of even experienced developers” (p. 150 (file not included in this release)). In metro areas over a million people, capture rates above 5 percent for any project are suspect.
• Lots are an “intermediate good”: demand for lots depends on demand for houses in the price band that justifies the lot price. Builders typically pay about 25 percent of house price for the lot, so a $200,000 house supports a $50,000 lot.
• Early builder contacts can produce letters of intent which, though seldom binding, “can be the linchpin of the developer’s first deal” (p. 151 (file not included in this release)).
• Site selection advice: stay within a “no air travel” radius, do not rely only on brokers, approach owners whose land is not for sale, and “do not look for ‘home runs’; build a reputation on singles and doubles.” The checklist ends with “always walk the land” (p. 154 (file not included in this release)).

Site acquisition and the purchase contract

This section argues that “The terms of acquisition set the stage for everything else” (p. 155 (file not included in this release)). The customary three-stage contract (free look, forfeitable earnest money, closing) pits the buyer’s desire for time and low risk against the seller’s desire for speed and commitment. When sellers can demand cash, short diligence and high prices, the market is likely near its peak and a beginner may do better to wait.

• A nonbinding letter of intent settles business terms before legal drafting; the offer to purchase must list every contingency, since the later purchase and sale agreement cannot add restrictions without both parties’ consent (p. 156 (file not included in this release)).
• Pricing per approved unit gives the seller an incentive to help with entitlements: at $50,000 a unit, 100 approved units cost $5 million and 80 cost $4 million (p. 159 (file not included in this release)). Earnest money typically runs 3 to 5 percent of price.
• Release provisions on purchase money notes. Seller financing holds first lien, so land must be released from the note before a development lender or lot buyer can get clear title. Sellers want strict, contiguous releases; developers want flexibility. Careful drafting (“all prepayments are credited toward the next principal installments coming due”) prevents a release payment from shortening the note’s term (p. 161 (file not included in this release)).
• Key contract clauses include supplementary notes for builders, out-of-sequence releases, joinder and subordination for approvals, extension rights, letters of credit as earnest money, and protection from agricultural tax “rollback.”
• After tying up the site, the market study is redone: “Land uses change slowly, but markets can change quickly” (p. 164 (file not included in this release)). Projected sales pace must be checked against what competitors actually sell. Rolling options let builders take lots in increments with built-in price escalation.

Regulatory process

The regulatory section makes approvals the decisive risk of land development. Platting usually requires a zoning change, a process “politically fraught” and lasting months to years (p. 167 (file not included in this release)). The chapter advises against maximizing density unless the market supports it, while noting that developers often propose near the maximum knowing the process will cut it.

• Replatting can be blocked by unexpected requirements: Peiser Corporation abandoned a Dallas site because 50 abutting owners all had to consent to abandon an unbuilt alley (p. 168 (file not included in this release)).
• A Supreme Court sidebar summarizes key limits on regulation: Nollan (rational nexus), Lucas (compensation when all economically beneficial use is denied), Dolan (rough proportionality for dedications), SWANCC (isolated wetlands) and Kelo (economic development takings) (p. 169 (file not included in this release)).
• Phasing keeps each phase absorbable in 18 to 24 months; filing only the first phase preserves flexibility.
• Four regulatory issues dominate: vesting of development rights (often secured by development agreements), growth controls, environmental review, and traffic. Tim Edmond’s rule: estimate the cost and time of entitlements, “and then add 30 percent” (p. 172 (file not included in this release)).
• Infrastructure finance options range from general taxes to impact fees, special districts, tax increment financing and exactions. Many communities now make new residents subsidize existing ones, which fuels tension on both sides (p. 178 (file not included in this release)).
• Community relations should be handled by the developer in person and early. Peiser Corporation lost a zoning case after meeting the homeowners association president but not a local minister, who opposed the project partly because he had not been consulted (p. 180 (file not included in this release)).
• Much slow-growth sentiment comes from a real fiscal mismatch: when infrastructure is financed over shorter periods than its economic life and growth exceeds about 3 percent a year, existing residents pay for benefits faster than they receive them (p. 181 (file not included in this release)).

Financial feasibility analysis

This is the analytical core. Land is for-sale property analyzed over the absorption period, not income property valued at stabilization. Analysis proceeds in two stages, a “quick and dirty” pro forma and a multiperiod discounted cash flow (DCF), both done before earnest money goes hard (p. 182 (file not included in this release)).

• Gross, net developable and net usable acreage must be distinguished; a rough lot yield deducts 25 percent for streets (30 with alleys).
• Land use budget and optimal allocation. Allocate each acre to the use whose present value is highest, considering absorption. In the 35-acre example, retail land worth $200,000 an acre today is worth only $75,000 if sold in seven years at 15 percent, less than $80,000 for an acre of single-family lots sold now, so the result is 26 acres residential and 9 retail (p. 186 (file not included in this release)). “A market-based land use allocation … should determine the land use plan, not vice versa.”
• Veranda quick-and-dirty analysis (Charter Homes, 180 lots, Lancaster, Pennsylvania): revenue about $10.7 million, profit about $2.85 million, roughly 38 percent of cost (p. 187 (file not included in this release)). Its weakness is that it ignores time: 30 percent in one year is good, but over three years it is only about 9 percent a year compounded.
• DCF method. Use five to ten periods; avoid monthly detail too early; keep inputs in one place; run a case at half the expected sales pace; be wary of inflation assumptions that let prices outrun costs (p. 191 (file not included in this release)).
• Returns: the unleveraged IRR should be at least 15 to 20 percent and exceed the loan rate for positive leverage; Veranda shows 28 percent unleveraged and 60.7 percent on $2 million equity (p. 193 (file not included in this release)). NPV ranks projects better than IRR; a personal guarantee is a contingent liability, not equity.
• Required returns combine a real rate, inflation and a risk premium; unentitled land is “the riskiest of all forms of development.” Hurdle IRRs rise with inflation, while cap rates tend to fall with inflation and rise with risk (p. 200 (file not included in this release)).

Design and site planning

The design section argues that land planning starts from the end buyer and the eventual buildings. Subdivision design has been shaped by the automobile, rising housing costs and environmental awareness; the cul-de-sac hierarchy pioneered at Radburn is now questioned because it concentrates traffic and weakens pedestrian links (p. 201 (file not included in this release)).

• Rising land costs drive higher densities: clusters, PUDs, zero-lot-line, Z-lots, wide-shallow and zipper lots can reach seven to eight detached units per acre (p. 225 (file not included in this release)).
• Sustainability “is no longer optional”; it is “far more effective to be ‘green’ in project design than to attempt to make a conventional project appear thoughtful later” (p. 203 (file not included in this release)).
• Developers should train their eye and rely on market research, focus groups and visual preference surveys. Dan Kassel: “Your target market in any given deal is more likely than not to run counter to your own preferences” (p. 205 (file not included in this release)).
• Conservation development, clusters, new urbanism and PUDs are distinguished; new urbanism requires costly design attention and governance “software” and must be backed by proof of market depth (p. 206 (file not included in this release)).
• Site planning maximizes value subject to absorption and zoning, using features such as a square, lake or creek to generate lot premiums (p. 212 (file not included in this release)). Streets should be no wider than needed, since extra width encourages speed without adding capacity.
• Site engineering should not be left to civil engineers, because “the lowest-cost site engineering is rarely the most profitable subdivision design” (p. 214 (file not included in this release)). Floodplains, wetlands, sewer outfalls and utility timing can make or break a site; low-impact development has cut capital costs 15 to 80 percent in case studies (p. 218 (file not included in this release)).

Financing

The financing argument rests on the absence of a takeout. Land development loans are repaid by lot sales, so lenders limit loans to 30 to 50 percent of projected sale proceeds and often demand extra collateral (p. 226 (file not included in this release)).

• Appreciated land can serve as equity: land bought for $100,000 and worth $400,000 after entitlement can satisfy a $300,000 equity requirement on a $1 million project (p. 227 (file not included in this release)).
• A subordinated purchase money note can reduce or eliminate outside equity, at the cost of a higher price, interest or profit share for the seller.
• Builder commitments strengthen a loan request only when backed by letters of credit. Lender release prices usually run 1.2 to 1.5 times each lot’s prorated loan share (p. 230 (file not included in this release)).
• Joint ventures with landowners, investors or lenders turn on preferred returns, priorities of payback and the profit split. Investors usually insist on recovering all equity before the developer shares profit, to prevent the developer from selling prime parcels and abandoning the rest (p. 233 (file not included in this release)).

Construction, marketing and post-completion maintenance

The final sections argue that land construction is simpler in trades but complicated by public standards, and that marketing and governance carry the developer’s reputation long after sellout.

• Construction: negotiated contracts, an on-site engineer independent of the bidders, 10 percent retention with lien releases, and conversion of unit-price bids to fixed price once quantities are known, to defeat deliberate unbalanced bidding (p. 237 (file not included in this release)).
• Marketing: the primary customer is the builder, but house sales drive lot sales. Marketing budgets run 5 to 7 percent of gross sales (10 to 12 for recreational projects). Don Mackie warns not to let first-tier builders control the subdivision; 300 to 500 lots are needed for an efficient on-site marketing program (p. 242 (file not included in this release)). Interstate and internet marketing of land can trigger state registration requirements.
• Maintenance: warranties, protective covenants, a homeowners association and street dedication protect buyers and the developer. Covenants should be neither too loose nor too rigid, must be enforced consistently (unenforced covenants can be voided), and should allow change over time (p. 255 (file not included in this release)).

Key Concepts and Distinctions

• Horizontal vs. vertical development: Creating finished lots versus building on them.
  • Significance: They have different risks and returns and should be analyzed as separate businesses.
• Capture rate: The share of total market demand a project can realistically take.
  • Significance: Overstated capture rates are the most common market-analysis error.
• Release provisions: Terms under which parcels are freed from a seller’s note or lender’s lien as lots sell.
  • Significance: They govern the developer’s cash flow and ability to give buyers clear title.
• Vesting of development rights: The point at which a developer’s right to build what was approved becomes secure.
  • Significance: Its erosion is a major reason entitlement risk dominates land development.
• Quick-and-dirty vs. multiperiod DCF: A timeless profit summary versus a time-based cash flow with IRR and NPV.
  • Significance: Only the DCF shows loan needs, equity timing and returns that can be compared with alternatives.
• Present-value land allocation: Assigning acres to uses in order of discounted value given absorption.
  • Significance: It turns the land use budget into a market-driven economic decision rather than a planning preference.
• Protective covenants and associations: Private rules and governance that maintain a subdivision’s character.
  • Significance: They extend the developer’s stewardship and reputation beyond the last lot sale.

Essential Evidence and Examples

• Houston oil pools. An environmental report noted open oil pools near a subdivision but no follow-up was done; after more than 300 houses were built the pools proved toxic, and the settlement ran to hundreds of millions of dollars (p. 175 (file not included in this release)). It supports the warning that an environmental review does not protect a developer who ignores what it reveals.
• Atlantic Steel, Atlanta. Integrating remediation with the master plan on a 138-acre brownfield cut cleanup from an estimated $30 million to about $10 million (p. 176 (file not included in this release)). It shows that brownfields can be opportunities when remediation is planned with the development.
• Rock Row, Los Angeles. A two-person firm used a new Small Lot Ordinance to build 15 LEED-rated, structurally independent townhomes; all sold within five weeks of opening during the downturn, at prices raised 4 percent with no concessions (p. 252 (file not included in this release)). It illustrates finding a “hole in the market” through regulatory change, a clear concept and principal-level attention to detail.
• Dallas fencing covenant. An association that failed to enforce a no-fencing easement lost its later attempt to enforce it (p. 255 (file not included in this release)). It shows that covenants survive only through consistent enforcement.

Chapter Conclusion and Significance

The chapter concludes that land development offers real openings for beginners, especially those strong in law, urban design and entitlements, but that its risk must be managed through knowledge and good management, and that it “should be considered a separate business to be evaluated on its own merits” (p. 258 (file not included in this release)). Beginners should favor smaller, simpler deals, use builder commitments, seller financing and landowner joint ventures to build a track record, and beware of years lost to litigation and entitlement disputes.

Its contribution to the book is methodological: acquisition terms, present-value land allocation and DCF analysis become reference tools for the product chapters. The closing tension is civic and financial at once. Cities increasingly shift infrastructure and environmental costs onto developers, whose liability for streets, utilities and drainage extends years beyond sellout; the authors’ answer is that developers must learn to ensure “the fiscal health of their cities” as well as profitable subdivisions (p. 259 (file not included in this release)).

Questions for Reflection

1. The present-value allocation method treats land use as an economic optimization constrained by zoning. When would following it produce a plan that is profitable but bad for the community, and how should a developer weigh that?
2. Pricing land per approved unit aligns the seller with the developer in the approval process. What new conflicts might it create, and how would the contract need to handle them?
3. If new residents increasingly subsidize existing ones through impact fees, does that make developers allies or opponents of slow-growth residents, and what argument could the developer make to both?

Chapter 4: Multifamily Residential Development

Chapter Objective and Through Line

Chapter 4 has two jobs. It explains how to develop rental apartments (and, secondarily, condominiums), and it serves as the book’s general reference for income property, laying out “in detail certain steps common to all product types,” above all the five-stage financial analysis (p. 264 (file not included in this release)). Its thesis is that multifamily development is one of the easier entry points into the industry, especially for those with homebuilding experience, but that it “begins and ends with market analysis”: if the depth and preferences of the target market are misjudged, no design or financing can rescue the project (p. 399 (file not included in this release)).

The problem the chapter addresses is how to turn a perceived housing need into a building that leases at projected rents, finances on acceptable terms and holds its value under management. Apartments are highly cyclical, sensitive to interest rates (which also make home ownership more affordable) and to demographic shifts such as aging baby boomers, echo boomers entering the rental market and household growth driven largely by minorities (p. 265 (file not included in this release)).

The argument follows the development stages. Feasibility (market analysis with conservative capture rates and months-of-inventory, site selection, regulation, and the five-stage financial analysis) leads to a go/no-go decision. Design must follow the market, not personal taste. Financing combines construction loans, permanent takeouts and equity structured through joint ventures, with government programs as an entry point. Construction, marketing and long-term management complete the cycle, and the West River Commons case shows the method applied.

Chapter Structure at a Glance

1. Multifamily product types, history and demographics define the field and its cycles.
2. Market analysis identifies needs (not mere absences), defines the market area and measures months to absorb inventory using pro rata capture.
3. Site selection and regulatory review test whether the identified product can be built on a specific site.
4. Five stages of financial analysis move from simple capitalization to investor returns, each tied to a financing hurdle.
5. Design must serve the target market’s needs at a price it can afford.
6. Financing layers construction loans, permanent loans, equity joint ventures and public programs, each with its own priorities.
7. Construction, marketing and management determine whether the projected NOI is actually achieved and preserved.

Section-by-Section Argument

Overview: product types, history and getting started

The overview argues that the multifamily market is segmented by ownership, building type and tenant profile, and that cost structure determines rent. Garden apartments with surface parking cost less than a third as much per square foot as high-rises with elevators and structured parking (p. 268 (file not included in this release)).

• The 1986 Tax Reform Act ended tax-driven syndication; REITs and institutions later raised prices and lowered cap rates. Low-income housing tax credits produced about 103,000 units a year from 1995 to 2006 (p. 266 (file not included in this release)).
• Randolph Hawthorne notes that new development has polarized into high-end “renters by choice” and tax-credit affordable housing, with little “bread-and-butter” mid-range product (p. 269 (file not included in this release)).
• Beginners should use a third-party general contractor. Contractor profit (6 to 8 percent of hard cost) is separate from development profit (8 to 15 percent of total cost), defined as stabilized market value minus total cost (p. 270 (file not included in this release)).

Market analysis

The central claim here is that need, not vacancy or the absence of a product, should drive the project. “Often a product type is not there because there is no demand for it” (p. 277 (file not included in this release)). Market analysis before site selection finds niches; after site selection it positions the project against a property-by-property catalog of competitors.

• The primary market area is usually a two-to-three-mile radius, bounded by commute times, transit, physical barriers and political lines; mistakes in defining it either omit competitors or inflate absorption (p. 279 (file not included in this release)).
• Absorption “is the most important number in the market analysis,” and must be broken down by product and unit type (p. 281 (file not included in this release)).
• The most common supply error is ignoring units “on the drawing board.”
• Pro rata capture. In the long run a project captures only its share of supply, because competitors who lose share cut prices. “No matter how superior one’s property is,” at least one scenario must assume pro rata capture (p. 282 (file not included in this release)).
• Months to absorb inventory is the key output: 12 or fewer is healthy, 12 to 18 soft, over 18 to be avoided. In the worked example, 1,480 units of supply against 1,200 a year of demand gives 14.8 months (p. 283 (file not included in this release)).
• The Jefferson Pointe market study illustrates the method: 234 units forming 55 percent of new supply, 39 units absorbed per month market-wide, so 22 per month and about ten months to 95 percent occupancy; rents set from age- and amenity-stripped comparables plus a 6 percent premium (p. 275 (file not included in this release)).
• G.U. Krueger warns against “term sheet market research” that justifies decisions already made, and notes that demographics alone do not predict behavior (p. 284 (file not included in this release)).

Site selection and regulatory issues

This section argues that location, site conditions and regulation decide whether the market opportunity can be captured on a particular parcel. “The worst reason for developing a parcel is that you already own it,” though owned land should not be dismissed (p. 286 (file not included in this release)).

• An extension option ($5,000 a month for up to three months) saved a Dallas bond-financed project when the city council kept postponing its hearing (p. 287 (file not included in this release)).
• Macrolocation and microlocation both matter, and value depends on how they change; neighborhoods typically move from peak to trough over 30 to 50 years, faster if poorly built (p. 288 (file not included in this release)).
• Site size can be derived from absorption and density: 180 units a year at 24 units an acre suggests 7.5 acres; 150 to 200 units are usually needed to support full-time on-site maintenance (p. 290 (file not included in this release)).
• Due diligence covers slopes, geology, soils, vegetation, stormwater, existing tenants, environmental issues, easements, covenants and utility capacity. A Dallas developer who assumed nonresidential uses had voided single-family restrictions found that “no bank would lend him money” on the site (p. 295 (file not included in this release)).
• Multifamily faces more NIMBY opposition than any other product. Jerome Frank, Jr.: “Find land that’s already zoned and pay for the zoning” (p. 297 (file not included in this release)). Other regulatory factors include TOD overlays, fire codes, rent control (where even the threat deters financing), building codes, condo conversion rules and impact fees averaging about $7,092 per apartment in 2008 (p. 301 (file not included in this release)).

Financial feasibility analysis

This is the chapter’s analytical core. Income property is analyzed in five stages, each more detailed and each corresponding to a financing hurdle: simple capitalization (Stage 1), DCF of the stabilized operating period (Stage 2), combined development-and-operating analysis (Stage 3), monthly development-period cash flows for the construction lender (Stage 4), and investor returns (Stage 5) (p. 301 (file not included in this release)). “Of all the stages of analysis, Stage 2 is the most important”; it is “the developer’s version of the architect’s sketch pad” (p. 302 (file not included in this release)).

• Stage 1 projects NOI, sizes the loan by the lesser of the debt coverage ratio and loan-to-value limits, totals development costs including construction interest and lease-up reserve, and computes overall return and cash-on-cash return. For West River Commons, a 1.2 DCR at 5.75 percent supports $6.23 million versus $6.55 million under a 75 percent LTV, so DCR governs (p. 307 (file not included in this release)). Overall return is 7.1 percent and cash-on-cash 7.4 percent, both low but helped by subsidies and condominium sales (p. 309 (file not included in this release)).
• Stage 2 projects seven to ten years of operations and computes unleveraged before-tax, leveraged before-tax and leveraged after-tax IRRs (9.15, 21.42 and 18.07 percent for West River Commons). Unleveraged IRRs normally run about 10 to 15 percent (p. 312 (file not included in this release)). It should be rerun before signing the earnest money contract, before going hard and before closing.
• Stage 3 recognizes that equity goes in before construction; it refines interest and lease-up reserves quarter by quarter and gives the developer evidence to negotiate reserves with the lender (p. 316 (file not included in this release)).
• Stage 5 divides cash flows between investor and developer. In the example the investor puts up 95 percent of equity, receives an 8 percent cumulative preferred return and 70 percent of the remainder, earning 19.41 percent, while the developer earns 47.25 percent on 5 percent of the equity. If the investor IRR is below 15 percent, the land price is too high (p. 326 (file not included in this release)).
• What to watch for. Common errors are underestimated costs and expenses, overestimated rents and escalation, omitted reserves and turnover costs, too low a sale-year cap rate and too short a lease-up. Several optimistic assumptions together yield “a very optimistic and unrealistic case” (p. 328 (file not included in this release)). Detail should never exceed the accuracy of the information.
• Go/no-go. Front-end money “is pure risk money.” The two biggest decisions are buying the land and starting construction, and the DCF is weighed with personal questions: is this the project to spend the next three years on, and can the developer survive major delays (p. 330 (file not included in this release))?

Design

The design argument is that the program must come from the target market, not the developer’s preferences, and that the developer sets the program within which the architect works. “No matter how good the pro forma for a project might look, if the product does not satisfy the market’s needs at a price that customers can afford, the project will not succeed” (p. 331 (file not included in this release)).

• Unit mix follows the study: family units for lower-income renters, roommate plans for young singles, studios only in high-rent urban areas. Density thresholds tie to parking: structured parking is needed above about 40 units an acre (p. 337 (file not included in this release)).
• Parking is often the controlling design factor; structured spaces run $15,000 to $20,000 and underground up to about $100,000. Under the 1 percent rule, a $50,000 space needs $500 a month in rent (p. 338 (file not included in this release)).
• Amenities should match what residents will pay for; any amenity should raise monthly rent by at least 1 percent of its capital cost (p. 343 (file not included in this release)). Renters look at total rent, not rent per square foot, and condos should be designed so they can survive as rentals (p. 340 (file not included in this release)).
• Developers should mentally walk every unit, build full-scale mock-ups, involve property managers, meet regulators early (a fire inspector’s tip once saved Peiser and Frank a redesign), and order costly final drawings only after approvals and tentative financing (p. 346 (file not included in this release)). Change orders are the largest source of overruns; a 3 to 5 percent contingency is prudent.

Financing

This section argues that the capital stack is a hierarchy of risk and priority. Construction lenders lend up to the permanent loan amount; equity covers the gap and, after recent crashes, usually 20 to 40 percent of completed value (p. 349 (file not included in this release)). “Equity is the most expensive source of funding” because it is paid last.

• Construction loans are short, drawn monthly against inspected percent completion, priced 1 to 3 points over prime, and usually require all equity in first and a personal guarantee with net worth at least equal to the loan. Jerome Frank, Jr.: the rate matters less than “making sure that he negotiates enough time” (p. 353 (file not included in this release)).
• Permanent loans take out construction loans; participating loans with “kickers” can reach 80 to 95 percent of cost; pay-rate versus note-rate structures increase loan size; mezzanine loans at 12 to 20 percent reduce equity (p. 357 (file not included in this release)).
• A sidebar on the 2008–2009 crisis traces bank capital rules, structured investment vehicles and misrated tranches to the collapse of CMBS lending. Its lesson: “whenever the market seems too good to be true, there will inevitably be a correction,” and the only remedy is cash on hand (p. 358 (file not included in this release)).
• Guarantees can be limited by time, performance or escrow; “top half” and “bottom half” guarantees differ sharply, and ambiguity has sent parties to court (p. 360 (file not included in this release)).
• Equity joint ventures. “The priorities of payback and cash distributions are even more important than the final split of profits”; priorities are how risk is allocated (p. 366 (file not included in this release)). A common structure pays current and accrued preferred returns, then equity, then splits profits 80/20 to 50/50. Cumulative preferred returns favor investors. Developers usually receive 3 to 5 percent of cost for overhead and defer the rest.
• Investor concerns are preferred return, profit split, downside liability, cash calls (with dilution penalties) and front-end fees (p. 370 (file not included in this release)). Private offerings often serve investors better than public syndications, which compensate for low fees by higher project prices (p. 374 (file not included in this release)).
• Government programs. Housing revenue bonds and LIHTCs can supply equity that beginners otherwise struggle to raise: in the worked example, $70,000 a year of credits sold at $0.85 yields $595,000, about 40 percent of a $1.5 million cost (p. 376 (file not included in this release)). The price is paperwork, many attorneys and often a nonprofit partner.

Construction

The construction section separates contracting from development: “if a project makes economic sense only if the developer can earn a contractor’s profit, then it is not worth pursuing” (p. 377 (file not included in this release)). In-house construction gives control over change orders but diverts attention.

• Delays are normal; an experienced superintendent should be on site; multi-building projects can be completed and leased in sequence.
• The August Park pony wall: rather than force a subcontractor to rebuild 20 mistakenly full-height walls, Peiser and Frank accepted them, and the sub later waived a change order. “Rigidly enforcing every construction plan detail usually comes back to haunt the developer” (p. 379 (file not included in this release)).
• Outside inspectors for projects over $2 million, videotaping before wallboard, lien waivers with each draw, and proper insurance protect against liability lasting ten years or more (p. 380 (file not included in this release)).

Marketing

Marketing is presented as continuous from the drawing board to sale; developers “cannot create a market where one does not already exist” (p. 382 (file not included in this release)). The marketing strategy centers on the target submarket and defines what makes the project special.

• Lease-up budgets run about $400 to $600 per unit for suburban garden apartments up to $1,500 to $2,500 for urban high-rises, with 60 to 70 percent spent online (p. 384 (file not included in this release)).
• AvalonBay’s funnel (25 to 30 percent of appointments converted, so about 67 email leads or 14 phone leads per lease) shows why adequate leasing staff pays.
• Pricing “cannot be based on pro forma projections” and should be monitored weekly or daily, because “a vacant unit costs a developer much more than a slight reduction in rent” (p. 385 (file not included in this release)).
• Condominium buyers rarely commit before seeing finished lobbies and amenities; failed condos can sometimes become rentals, but many do not work financially as apartments (p. 394 (file not included in this release)).

Operations and management

The final section argues that “an apartment project will be profitable only if it is well managed” (p. 395 (file not included in this release)). Beginners usually rely on outside managers at about 3 to 3.5 percent of gross rent, with unannounced audits and monthly reports.

• Turnover is “the most volatile element in net operating income”: garden apartments average 55 percent a year, and each turnover costs at least two weeks’ rent plus cleanup (p. 397 (file not included in this release)). Communication, prompt maintenance and firm rule enforcement reduce it.
• Refinancing as NOI grows yields tax-free cash; when selling, short-term cash-flow tricks are inadvisable because sophisticated buyers see through them (p. 399 (file not included in this release)).

Key Concepts and Distinctions

• Need vs. absence of supply: Demand exceeding supply for a defined submarket, as opposed to a product simply not existing there.
  • Significance: It prevents developers from building products the market does not want.
• Pro rata capture rate: A project’s long-run share of absorption equals its share of supply.
  • Significance: It disciplines lease-up projections against the optimism that the project is better than competitors.
• Months to absorb inventory: Total current and planned supply divided by monthly absorption.
  • Significance: It is the key go/no-go market indicator and sizes the interest reserve.
• Five stages of analysis: From simple capitalization to investor returns, each matched to a decision or lender.
  • Significance: It makes analysis iterative and keeps detail proportional to information quality.
• DCR vs. LTV: Two lender tests for maximum loan; the lesser governs.
  • Significance: They link rent and cost assumptions directly to how much equity is needed.
• Priorities and preferred returns: The order in which cash is distributed among investors and developer.
  • Significance: They allocate risk more decisively than the final profit split.
• Turnover: The annual share of units that change tenants.
  • Significance: It is the main operating lever on NOI after stabilization.

Essential Evidence and Examples

• Hines at Diagonal Mar, Barcelona. Focus groups showed resistance to tall towers stemmed from unreliable small elevators; Hines targeted a younger market and enlarged balconies (p. 287 (file not included in this release)). It shows market research changing both the target market and the design.
• Bijou Square, Bridgeport. Losing a construction loan commitment in 2008 forced a half-built 84-unit condo to become rental, with a smaller loan and $3.2 million in subsidies tied to workforce units (p. 333 (file not included in this release)). It supports the warnings about financing commitments and condos that must survive as rentals.
• Bascom Group. Buying “the worst property on the best block,” using single-purpose LLCs and avoiding cross-collateralization helped it through the recession (p. 372 (file not included in this release)). It shows how deal structure limits contagion between projects.
• West River Commons, Minneapolis. A 53-unit mixed-use infill project on a former gas station survived split zoning, 45 neighborhood meetings and a construction fire; it works only because of subsidies and condominium sales, and Lander regrets timid design and uninsured soft costs (p. 405 (file not included in this release)). It grounds the five-stage spreadsheets in a real project.

Chapter Conclusion and Significance

The chapter concludes that multifamily is a good entry point but is becoming harder: fire, energy and parking rules raise construction costs, while scarce land and opposition raise land prices, and rents have historically lagged inflation, so rents “will have to rise more sharply” and pressure for rent control may grow (p. 401 (file not included in this release)). Beginners should aim for a track record that pleases tenants, investors and lenders; “Completing three smaller projects over two to three years will take a beginning developer further than completing one large project.”

Its main contribution to the book is the five-stage analysis and the capital-stack logic that later chapters reuse. The chapter leaves a tension between its rigorous quantitative apparatus and its repeated insistence, through Marvin Finger, that location and people decide success: “Renters rent from an individual” (p. 399 (file not included in this release)).

Questions for Reflection

1. If the pro rata capture assumption holds in the long run, what kinds of project advantages, if any, can justify building into a market with more than 18 months of inventory?
2. Why does the chapter treat Stage 2 as the most important analysis even though Stage 3 is more accurate? What does each stage reveal that the other hides?
3. Preferred returns and payback priorities protect investors but delay developer compensation. How might these structures shape a developer’s behavior during a slow lease-up, for better or worse?

Chapter 5: Office Development

Chapter Objective and Through Line

Chapter 5, written by Sofia Dermisi, applies the book’s development process to office buildings of the kind beginners most often build or retrofit: projects costing around $10 million or less and ranging from 5,000 to 100,000 square feet (p. 412 (file not included in this release)). Its thesis is that office development is “challenging but straightforward” for a beginner, but only when the developer understands how tenants, lenders and the market cycle shape every decision (p. 467 (file not included in this release)). Office space supports the highest rents and land values of any use in the right locations, yet it is highly cyclical, depends on preleasing, and takes at least two years to build and lease, long enough for markets to change dramatically (p. 468 (file not included in this release)).

The chapter is written in the shadow of the Great Recession. It repeatedly contrasts pre-crisis norms (high leverage, 40 to 50 percent preleasing, low cap rates) with post-crisis conditions (75 percent preleasing, 20 to 30 percent equity or more, recourse on nearly every loan), and it adds material the residential chapters lack: shadow space, effective rents, workouts and “zombie buildings.”

The argument moves from classification and trends, through feasibility (market analysis built on office employment, site selection, regulation and cap-rate risk), into design (floor plates, bay depths, measurement, systems, sustainability, tenant improvements), and then financing, leasing and management. Two LEED case studies, a Denver renovation and a Houston build-to-suit headquarters, show the method in practice.

Chapter Structure at a Glance

1. Office space is classified by class, building type, height, use and location, and the market is shaped by cycles, technology and green building.
2. Demand is driven by office employment growth; supply analysis must include sublease and shadow space and use effective rather than quoted rents.
3. Site selection and regulation depend on efficient floor plates, access and negotiated approvals; cap-rate movement is a central financial risk.
4. Design balances efficiency against tenant appeal through shape, modules, bay depth, R/U ratio, systems and tenant improvements.
5. Post-crisis financing demands heavy preleasing, more equity and recourse; workouts follow a predictable sequence.
6. Marketing, brokers, lease structure and management determine achieved rents and value at sale.

Section-by-Section Argument

Overview: categories and trends

The overview establishes the vocabulary and the environment. Office space is graded Class A, B or C by age, location, finishes, amenities and tenant profile; buildings are typical office, mixed-use, garden office or flex; and locations divide into CBD, suburban, neighborhood and business park nodes (p. 413 (file not included in this release)). Single-tenant, owner-occupied, build-to-suit and speculative buildings carry different risks.

• Market history: 1980s overbuilding produced roughly 20 percent vacancy in the early 1990s; the Great Recession left vacancy around 13 percent into 2012, and preleasing requirements rose from 40 to 50 percent in 2007–2008 to 75 percent by mid-2010 (p. 415 (file not included in this release)).
• The crisis was traced to residential losses, heavy bank exposure to real estate, reliance on ratings instead of due diligence, opacity and maturity mismatch. Projects needing workouts were often overleveraged, underbudgeted and underleased (p. 416 (file not included in this release)).
• Green building: Energy Star and LEED dominate. Research has found green premiums of about 3 percent in rents and 16 percent in prices, but payback can exceed a developer’s holding period and the party that pays is often not the one that benefits (p. 418 (file not included in this release)).
• Companies seeking young, specialized workers increasingly prefer downtown or transit locations, though corporate campuses are a countertrend.

Market analysis

The core claim is that “Projected employment growth is the key driver of office space demand” (p. 420 (file not included in this release)). Demand is estimated as office employees times gross space per employee, now about 200 to 250 square feet, or from recent industry employment change times each industry’s office share. Supply analysis catalogs competitive buildings, construction and planned projects.

• Absorption time for vacant space indicates market strength: under 12 months strong, 12 to 24 normal, over 24 (or 18 in slower areas) soft (p. 423 (file not included in this release)).
• Sublease space competes even though it is technically leased; shadow space (leased, paid for, but unused and not yet offered) is invisible in published data, and a nearly empty parking lot at a “90 percent occupied” suburban building is a clue (p. 424 (file not included in this release)).
• Effective rent differs from quoted rent because of free rent, extra tenant improvements and moving allowances; lenders underwrite on effective rents (p. 425 (file not included in this release)).
• Allan Kotin’s cautions: big tenants’ true rents are hardest to discern; a 10 percent vacancy may hide the absence of large contiguous blocks; and many small firms choose space on grounds as unscientific as “where the boss lives” (p. 427 (file not included in this release)).

Site selection, regulation and financial feasibility

This section argues that office sites must accommodate efficient buildings and that high land prices usually reflect real desirability: “developers choosing sites based on a lower price can find themselves unable to compete in the market, even at lower rents” (p. 427 (file not included in this release)).

• Floor plates far from about 25,000 square feet need a second core; small users prefer 16,000 to 20,000; a 100-by-200-foot rectangle is most efficient. Parking structures need at least two 60-to-65-foot bays.
• Offices usually have positive fiscal effects, which tempts cities to load them with fees; San Francisco’s combination of high impact fees and linkage programs contributed to an exodus of businesses (p. 428 (file not included in this release)).
• Zoning tools include FAR limits and bonuses (One South Dearborn in Chicago rose from 16 to 21.27 FAR for a park, retail and a landmark view), transferable development rights and deferred parking (p. 429 (file not included in this release)).
• Traffic is the most politically sensitive impact; fees per peak trip can reach thousands of dollars, and transportation demand management programs are often a condition of approval (p. 431 (file not included in this release)).
• Cap-rate risk. Developers must prepare for cap rates rising during construction and lease-up: a higher cap rate lowers value, lenders may demand the difference in cash, and refinancing becomes harder (p. 432 (file not included in this release)).

Design and construction

The design argument is that an office building must be efficient to build, flexible for fifty years of changing tenants, and appealing enough to command rent. Costs typically split 45 percent shell and interior, 25 percent systems, 18 percent land and site, and 12 percent fees and contingencies; developers expect 20 to 25 percent profit (p. 433 (file not included in this release)).

• Shape involves a trade-off: a square is cheapest per square foot but yields the least window space; rectangles cost more and rent better.
• Planning modules of about 4.5 to 5 feet and bay depths of 40 to 45 feet (36 for many small tenants, 40 to 50 for institutional users) determine office sizes and window offices (p. 434 (file not included in this release)).
• Lenders prefer four parking spaces per 1,000 square feet even where zoning requires less; experienced developers call inadequate parking one of the most common flaws in attracting tenants (p. 435 (file not included in this release)).
• Measuring space. Gross, rentable and usable areas differ; tenants pay usable area times the R/U ratio (about 1.15 for high-rises, 1.12 for low-rises), and pro formas must use actual rentable area (p. 440 (file not included in this release)).
• Systems sections cover elevators (roughly one per 40,000 square feet), lighting, HVAC (rooftop VAV for a 100,000-square-foot building), BIM and smart buildings, energy efficiency, green design and seven rings of security (p. 441 (file not included in this release)).
• Tenant improvements. Work letters define the building standard and upgrades; developers should specify quality rather than dollar allowances so spaces are easier to re-lease (p. 450 (file not included in this release)).

Financing

The financing section argues that post-crisis office lending is “need based,” with little room for speculation (p. 451 (file not included in this release)). The pre-crisis stack of about 65 percent construction loan, 20 percent mezzanine and 15 percent equity has given way to 50 to 60 percent loans and much larger equity demanding 20 to 25 percent returns.

• Lenders now require more equity, recourse of 30 to 100 percent, stricter covenants, strong tenant credit, preleasing of 75 percent or more, and a review of the developer’s other projects (p. 453 (file not included in this release)).
• Construction-loan pitfalls include too little cushion, misunderstood covenants and no exit strategy. Permanent loans fund at about 70 to 80 percent occupancy and are underwritten on the lower of effective or market rent (p. 454 (file not included in this release)).
• Alternatives to a takeout include standby commitments and forward sales with earnouts: in the example, leasing the remaining 45,000 square feet at $26 instead of $28 leaves the developer short of the full $25.4 million price (p. 456 (file not included in this release)).
• Workouts. Covenants test debt coverage (1.3 to 1.4) and debt yield. A developer facing default should consult counsel, prepare a solution and approach the lender before the default letter arrives; “Developer honesty is critical” (p. 456 (file not included in this release)). Nonrecourse loans strengthen the developer’s position, except for “bad-boy” carve-outs. Lenders proceed through notice, inspection, title review, re-underwriting, negotiation and either modification or foreclosure, and dishonesty is one of five listed causes of foreclosure (p. 458 (file not included in this release)).

Marketing and leasing

This section argues that marketing must focus on what the target tenants value: location and access, competitive rent, efficient floors, amenities, distinctive design, landlord stability, good tenant improvements and, increasingly, Energy Star or LEED (p. 459 (file not included in this release)).

• Preleasing begins during design but is hard for large buildings; build-to-suit tenants reduce risk despite later re-leasing problems.
• Brokers are used in nearly all transactions; outside brokers commonly ask about 6 percent in the first lease year on a declining scale, while in-house agents cost 3 to 4 percent (p. 461 (file not included in this release)).
• Leases may be gross, net (including triple-net) or expense-stop; anchors sign ten-year leases with annual escalations, smaller tenants three to five years. Smaller tenants usually want larger TI allowances, larger tenants free rent (p. 463 (file not included in this release)).

Operations and management

The final section argues that management can raise or erode value. Fees run 1 to 6 percent of effective gross income; taxes, utilities and cleaning are the major expenses, and managers control the last two (p. 465 (file not included in this release)).

• Zombie buildings owe more than they are worth; neither owner nor lender will fund build-outs or commissions, so small and mid-sized tenants are hard to attract (p. 466 (file not included in this release)).
• Older buildings will eventually need Energy Star or LEED to stay competitive, but retrofit costs can stop Class B owners after the audit stage.
• The highest IRR usually comes from selling at stabilization, while the highest NPV often comes after the first lease rollover or escalation (p. 467 (file not included in this release)).

Key Concepts and Distinctions

• Office class (A, B, C): Quality grade based on age, location, finish, amenities and tenants.
  • Significance: It sets achievable rent and is the target of repositioning strategies.
• Shadow space vs. sublease space: Unused leased space not yet offered versus space formally offered for sublease.
  • Significance: Both are hidden supply that can push vacancy up when demand softens.
• Effective vs. quoted rent: Rent after concessions versus asking rent.
  • Significance: Lenders and buyers value buildings on effective rent, so concessions directly reduce value.
• R/U ratio (load factor): Rentable area divided by usable area.
  • Significance: It determines what tenants actually pay for and how competitive a building appears.
• Cap-rate risk: The risk that rising cap rates reduce value between start and stabilization.
  • Significance: It can trigger lender demands for equity and block refinancing.
• Earnout: Payment of part of a presale price only as remaining space is leased.
  • Significance: It shifts lease-up risk back onto the developer.

Essential Evidence and Examples

• Effective rent calculation. A five-year lease at $24 with six months free and $3 extra TI, discounted at 12 percent, shows how concessions reduce the true rent (p. 425 (file not included in this release)). It supports the claim that quoted rents overstate value.
• 17th and Larimer, Denver. A 118,263-square-foot 1979 building bought for $16.8 million was upgraded from Class B to A with LEED certification for about $11 million; an 8 percent contingency was entirely consumed, and the team concluded 8 to 10 percent should be the minimum for renovations (p. 475 (file not included in this release)). It shows repositioning as an office strategy and the hidden costs of retrofits.
• 11000 Equity Drive, Houston. Using shared 3-D modeling and BIM on a small 65,000-square-foot LEED Gold project cut costs 10 to 20 percent, eliminated field change orders and delivered occupancy ten months after land purchase (p. 478 (file not included in this release)). It supports the chapter’s claim that technology changes construction economics even for small developers.

Chapter Conclusion and Significance

The chapter concludes that office demand is becoming tenant-specific and opportunistic, often triggered by a major lease; that flexible and sustainable space is “almost a must”; and that tenants pay a premium for locations that attract and retain employees (p. 468 (file not included in this release)). After the Great Recession, leases have shortened, renewals outnumber new deals, and speculative office development “is not expected to commence for a number of years” (p. 469 (file not included in this release)).

Within the book, the chapter adds the most detailed treatment of distress: how capital structures fail and how to negotiate with a lender. Its unresolved tension is between the premium for green, high-quality, well-located space and the post-crisis reality that capital for anything but pre-leased, need-based projects is scarce, which makes repositioning existing buildings a more realistic path for beginners than new construction.

Questions for Reflection

1. Why might high land prices be a better signal than a threat for an office developer, and when would that reasoning fail?
2. The chapter says the highest IRR usually comes from selling at stabilization, but the highest NPV often comes later. What does that difference reveal about how each measure treats time and risk?
3. Given post-crisis lending standards, is repositioning an existing Class B building to Class A a safer first office project than new construction? What risks from the Denver case would a beginner most likely underestimate?

Chapter 6: Industrial Development

Chapter Objective and Through Line

Chapter 6, written by Alex Duval, covers industrial buildings and business parks, a product type that combines building development with land subdivision: site planning, platting and the construction of streets and utilities as well as the buildings themselves (p. 487 (file not included in this release)). Its thesis is that industrial development is unglamorous but structurally attractive. Buildings go up quickly, capital and operating costs are low relative to revenue, and the space suits a wide range of small businesses, yet success depends on picking a niche that experienced competitors underserve and on mastering site conditions, truck access and tenant-specific functional detail (p. 550 (file not included in this release)).

The problem the chapter addresses is how a small developer can compete in a field that has consolidated since the Great Recession. Its answer is to occupy niches large firms will not fill, avoid common errors (overpaying for land or capital, underestimating competition, building the wrong product, hiring an inexperienced architect, neglecting local stakeholders) and treat green design and flexibility as competitive advantages (p. 488 (file not included in this release)).

The argument follows the familiar sequence. It defines product types and business parks, identifies rehabilitation opportunities, sets out market analysis before and after site selection, regulatory and incentive structures, financial feasibility, site and building design, financing (including institutional joint ventures with lookback returns and promotes), marketing, leasing and management. The Ameriplex case in Nashville ties the pieces together. A key insight running through it is that while industrial buildings have become standardized, “sites are highly variable,” which concentrates the risk in the land (p. 517 (file not included in this release)).

Chapter Structure at a Glance

1. Industrial space is divided into manufacturing, warehouse, flex and specialized types, and organized into several kinds of business parks.
2. Rehabilitation of older industrial areas offers bargain opportunities with environmental and code risks.
3. Market analysis must separate genuinely industrial demand from office and retail uses that zoning allows into industrial space.
4. Site selection favors ready-to-build, flat, well-served land; regulation, fees and incentives shape feasibility.
5. Design concentrates on site conditions, truck circulation, clear heights, column spacing, floors and systems.
6. Financing is similar to other income property, but institutional equity introduces lookbacks, tiered promotes, clawbacks and control clauses.
7. Marketing, leasing terms and three-stage management protect long-term value and the residual sale.

Section-by-Section Argument

Opening and product types

The opening claims that speculative industrial buildings can be more profitable than build-to-suits but are much harder to finance, requiring deep pockets, extra collateral and personal guarantees (p. 487 (file not included in this release)). Business parks evolved from manufacturing estates to office and R&D settings; heavy industry now prefers cheaper outlying sites, and older inner-city sites with freeway access are attractive again.

• Manufacturing buildings are often designed for one process and hard to re-lease, but a new tenant that values special equipment tends to stay long.
• Warehouse/distribution buildings have grown larger (single tenants of 750,000 to 800,000 square feet) and taller (32 feet clear rising to 40), driven by consolidation and third-party logistics (p. 491 (file not included in this release)).
• Flex buildings (20,000 to 100,000 square feet) are shifting toward more office; R&D buildings depend on tailored tenant improvements; multitenant buildings serve 800-to-5,000-square-foot users; office/tech serves back-office users needing high parking ratios (p. 492 (file not included in this release)).
• Business park types range from industrial and distribution parks to logistics, research, technology, incubator and corporate parks (p. 494 (file not included in this release)).

Rehabilitation and adaptive use

This short section argues that older industrial districts give beginners access to “a large pool of bargain-priced properties,” provided they perform due diligence (p. 495 (file not included in this release)). The easier opportunities were taken in the late 1990s and early 2000s, leaving properties with more serious problems: cost overruns, title and code issues, poor infrastructure and, above all, contamination, where responsibility “is still evolving” (p. 496 (file not included in this release)).

Project feasibility: market analysis and site selection

The market argument is that industrial demand must be measured by the right indicators and the right product definitions. Before site selection, analysis identifies users, product and location, drawing on economic trends, employment by industry, absorption and vacancy, and on conversations with brokers and tenants (p. 496 (file not included in this release)).

• Location factors include local business links, clustering and agglomeration, highway and airport access, foreign trade zones and quality of life (p. 498 (file not included in this release)).
• The Valwood (Dallas) sample analysis used fair-share capture of 10 to 15 percent and concluded construction would outpace absorption, so only smaller spaces under 40,000 square feet would see healthy rent growth (p. 501 (file not included in this release)).
• Beginners should avoid land not ready for immediate development and seek flat sites with adequate utilities. Howard Schwimmer won a foreclosed 240,000-square-foot building in a hot market by offering a simple letter of intent with a three-week cash close, then used an environmental contingency, triggered by lead migrating from next door, to gain time and a below-market price (p. 504 (file not included in this release)).
• Engineering due diligence centers on water, sewer and power capacity and on federal statutes from NEPA to Superfund; Massachusetts pioneered covenants not to sue for brownfield redevelopers (p. 507 (file not included in this release)).
• After site selection, supply analysis must account for how quickly industrial buildings can be added. Demand tracks employment and gross metropolitan product but lags office demand (p. 509 (file not included in this release)).
• Allan Kotin warns that permissive industrial zoning blurs categories: half-office space renting at about $1 a square foot cannot be averaged with 10 percent-finished space at $0.45, and “incubator” tenants are often marginal firms (p. 510 (file not included in this release)).

Regulatory issues and incentives

The regulatory section argues that industrial approvals resemble land subdivision (tentative map, then final plat) and that communities are split between wanting jobs and fearing trucks, noise and fumes (p. 511 (file not included in this release)).

• Zoning may be by right, PUD (floating) or special district; CC&Rs and design guidelines govern business parks privately (p. 512 (file not included in this release)).
• Public/private negotiations and development agreements trade certainty for amenities and fees; public partners can share risk through land writedowns, utility districts, loans and tax treatment (p. 513 (file not included in this release)).
• Fees come from many agencies and vary widely; incentives include incubator parks, enterprise zones, grants and tax increment financing. Industrial development bonds were curtailed in 1986 after abuse (p. 515 (file not included in this release)).

Financial feasibility

The financial section argues that analysis should be updated at least three times before closing on land and that two methods apply: business parks are analyzed as land development (chapter 3) and buildings as income property (chapter 4) (p. 516 (file not included in this release)).

• Developers like unleveraged IRRs of 13 to 15 percent; a 15 percent unleveraged return typically yields leveraged returns in the high 20s at 70 to 75 percent loan-to-value, and investors need 20 to 30 percent (p. 517 (file not included in this release)).
• Sensitivity tests should cover leasing pace, rent, concessions, costs, interest rates and, for parks, whether lower land prices or more upfront amenities speed sales enough to raise returns.

Design and construction

The design argument starts from risk: “Site design is the biggest unknown variable,” since buildings are standardized but soils, hydrology and topography vary (p. 517 (file not included in this release)). Industrial projects need large flat tracts and cannot adapt to steep terrain.

• Lots of 200 to 300 feet deep suit most users; coverage of 50 to 70 percent is typical. More access points are better: a 160-acre park with about 2,900 cars needs at least three (p. 519 (file not included in this release)).
• Truck aprons should be at least 135 feet; trailers have grown to 53 to 55 feet; rail easements must be secured at the outset if ever wanted (p. 521 (file not included in this release)).
• Buildings follow structural modules (multiples of four feet), with column bays of 24 by 48 or larger; clear heights above 30 feet are costly and should be built only if demand justifies them (p. 522 (file not included in this release)). Floors rated for 250 pounds per square foot provide flexibility.
• Concrete tilt-up dominates because panels serve as structure, interior and exterior wall and go up in a day or two (p. 525 (file not included in this release)). Single-ply roofs, skylights, extra electrical conduit and ESFR sprinklers (which cap practical clear height near 40 feet) are standard concerns (p. 529 (file not included in this release)).
• The most frequent problems are drainage and roof leaks. “Cost-saving construction tips do not save money in the long run if they make a building less marketable,” and beginners should not pioneer new techniques alone (p. 530 (file not included in this release)).

Financing and institutional joint ventures

Financing follows the income-property model, with some lenders seeing industrial as more stable. Business parks may need separate land, development and construction loans; construction loans run about 65 to 70 percent of value, and permanent loans fund at 75 to 80 percent leased with DCRs of 1.25 to 1.3 (p. 532 (file not included in this release)). Developers who plan to sell should avoid permanent loans with onerous prepayment terms.

• Equity is “always the most difficult piece.” Beginners rely on family and friends; owner-occupiers can become joint venture partners (p. 532 (file not included in this release)).
• Lookback returns, introduced by pension fund advisers, defer most developer profit until sale; promotes compensate sweat equity with a disproportionate profit share; tiered hurdles raise the developer’s share as the investor’s IRR passes successive thresholds (p. 533 (file not included in this release)).
• Nine deal points matter, but “It is a mistake … to focus on the operating partner’s share of the profit,” because priorities and lookbacks determine actual returns; deals must be modeled under different scenarios (p. 534 (file not included in this release)).
• Clawbacks across pooled deals stop the operating partner from “swing[ing] for the fences”; dead-deal costs may be loaded onto the operating partner to encourage care; buy/sell clauses are where control is fought (p. 535 (file not included in this release)).
• In the three-tier example, the investor earns 29.6 percent on $100,000 and the operating partner, with no equity, receives $68,031 (p. 538 (file not included in this release)). Buying below replacement cost is the favored strategy, because new competition cannot appear until rents justify construction (p. 539 (file not included in this release)).

Marketing, leasing and property management

The final sections argue that a strong seed tenant sets the tone for a project and that management must evolve through development, lease-up and stabilization.

• Developers should approach tenants as soon as a site is optioned; small developers can sell hands-on attention and lower overhead. First-year marketing budgets run 4 to 5 percent of anticipated gross revenue (p. 540 (file not included in this release)).
• Tenants focus on effective rent, location and building design. Developers should avoid obligations to rebuild after uninsured losses, unlimited renewal and expansion rights, and promises to hold space vacant (p. 544 (file not included in this release)).
• The seed tenant’s size sets the pattern for later tenants; performance bonds can stop other builders from leaving unsightly shells; long-run management focuses on the “residuals” and regular inspections of triple-net properties for contamination and decline (p. 546 (file not included in this release)).
• Many developers sell buildings with ten-year leases in year four, just before the rent step-up (p. 549 (file not included in this release)).

Key Concepts and Distinctions

• Industrial product types (manufacturing, warehouse, flex): Categories distinguished by function, clear height, office share and parking.
  • Significance: Each implies a different design, tenant pool and re-leasing risk.
• Clear height: Distance from floor to the lowest roof member.
  • Significance: It drives warehouse value, but extra height costs money and must match tenant demand.
• Speculative vs. build-to-suit: Building without or with a committed user.
  • Significance: Spec can be more profitable but is much harder to finance.
• Lookback return and promote: Investor protection that defers developer profit, and the developer’s disproportionate profit share for sweat equity.
  • Significance: Together they determine the operating partner’s real return more than the nominal split.
• Clawback and buy/sell clause: Recovery of profits across pooled deals, and a mechanism for one partner to force a sale or buyout.
  • Significance: They allocate risk and control between capital and operating partners.
• Below-replacement-cost acquisition: Buying existing space for less than it would cost to build.
  • Significance: It gives a margin of safety because new supply cannot compete until rents rise.

Essential Evidence and Examples

• Kotin’s averaging warning. Space half-finished as office at about $1 per square foot per month cannot be averaged with traditional industrial space at $0.45 (p. 510 (file not included in this release)). It supports the claim that industrial market data must be segmented by finish and use.
• Ameriplex, Nashville. Holladay bought a 35-acre site that others had passed over because of steep topography, bad fill, a sinkhole, a pipeline and an endangered crayfish habitat, solved the fill problem by excavating and reusing material, secured a use-specific rezoning through careful neighborhood outreach, phased construction when the economy weakened, and leased the first building fully within about six months of the anchor lease (p. 556 (file not included in this release)). It shows that difficult sites can become niche opportunities for skilled small developers.
• Ameriplex value creation. Phase I with NOI of $552,000 is valued at $9.9 million at a 9 percent cap rate, creating almost $1 million of equity; the full project is projected at $20.5 million against $16 million of cost (p. 560 (file not included in this release)). It illustrates value creation as capitalized NOI minus cost.

Chapter Conclusion and Significance

The chapter concludes that industrial development offers lower capital expenditure, lower operating expense ratios and faster construction than other types, so developers can react quickly to downturns, and that warehouses and flex space become affordable office alternatives in tight markets (p. 550 (file not included in this release)). It forecasts consolidation of distribution, more tenant services, demand for connectivity, lower yields requiring more equity, and higher entitlement costs.

Its distinct contribution to the book is the treatment of institutional joint ventures, which applies to any product type. The tension it leaves is that the field’s standardization makes buildings easy to replicate while making the developer’s edge depend almost entirely on site knowledge, niche selection and the capacity to absorb site risk, exactly the things beginners have least of.

Questions for Reflection

1. If industrial buildings are highly standardized, where exactly does a developer create value: in site selection, entitlement, leasing, capital structure, or somewhere else?
2. Why does the chapter warn against focusing on the operating partner’s profit split, and how could a developer test whether a deal with a 50/50 split is actually better than one with 70/30?
3. Ameriplex succeeded on a site others rejected. What conditions made that risk acceptable for Holladay but perhaps not for a true beginner?

Chapter 7: Retail Development

Chapter Objective and Through Line

Chapter 7, written by Nick A. Egelanian, uses the shopping center as its model because it “encompass[es] all the aspects of retail development that a developer needs to consider” (p. 564 (file not included in this release)). Its central thesis is that retail is governed by “a largely different set of rules and practices than any other type of real estate,” because retail value depends directly on the volume of transactions on the site: “success in shopping center development depends almost entirely on the success of the tenants” (p. 590 (file not included in this release)).

The chapter’s organizing idea is a distinction between commodity and specialty retail. Commodity centers deliver daily needs on a price/convenience equation; specialty centers serve discretionary time and income on a product/place equation. The two motivate shoppers in nearly opposite ways, so a developer must decide which game is being played before choosing a site, an architect, a tenant mix or a marketing plan (p. 565 (file not included in this release)).

The argument begins with history: the shift from downtowns to regional malls, then to discounters, big-box category killers and power centers, which hollowed out department stores and malls and left specialty retail without a reliable template. It then reclassifies centers, identifies development opportunities (population growth, urban infill, mall failures), and runs a project through four predevelopment “filters” (market, physical, regulatory, financial). Design, construction, financing, merchandising and leasing, marketing and management follow, closing with the Bayshore Town Center redevelopment.

Chapter Structure at a Glance

1. Transportation and distribution changes produced three eras of retail format, ending the dominance of department stores and regional malls.
2. Traditional size-based classifications are now misleading; the real divide is commodity versus specialty retail.
3. Opportunities lie in growing areas, urban infill, specialty voids left by failed malls, and careful use of crossover tenants; hybrids are risky.
4. Feasibility passes through market, physical, regulatory and financial filters, with trade-area spending and leakage at the core.
5. Design and construction differ by type: efficiency for commodity centers, place-making for specialty centers.
6. Financing favors credit tenants, long leases and preleasing; commodity centers are seen as safer.
7. Leasing, tenant placement, lease terms, marketing and active management sustain sales and value.

Section-by-Section Argument

The evolution of shopping centers

The historical section argues that each change in transportation and retail distribution produced a new format. Automobiles created suburban shopping, and the “city under a roof” regional mall became the centerpiece of retail for about 30 years, producing nearly 3,000 enclosed malls (p. 566 (file not included in this release)).

• Discounters (Kmart, Walmart, Target) and then big-box category killers (Best Buy, Staples, PetSmart) took commodity categories from department stores. Power centers, named at 280 Metro Center in 1982, combined them (p. 567 (file not included in this release)).
• More than half of America’s malls lost anchors between 1980 and 2000; ownership consolidated into Macy’s and Simon Property Group, which now hold many underperforming stores and malls (p. 568 (file not included in this release)).
• Some malls survived by turning to specialty retail (often with Nordstrom), but between 1980 and 2005 fewer than 100 Nordstroms opened while nearly 2,000 malls failed or converted (p. 569 (file not included in this release)).
• Lifestyle centers emerged to fill the specialty gap, but developers and retailers “could not agree on a replicable development formula,” leaving uneven sales and returns. Easton Town Center in Columbus is the ambitious success; its designer stresses that in specialty centers “the space between the buildings … requires more design attention” (p. 570 (file not included in this release)).

Classifying shopping centers and the new paradigms

This section argues that traditional categories (convenience, neighborhood, community, super community, regional, super regional) “are no longer adequate” and are “often misleading” (p. 571 (file not included in this release)). Big-box retailing removed commodity goods from the best regional centers, so the two classes now run on different logic.

• Commodity retailing works like a warehouse: “the more convenience a commodity retailer offers, the higher the price of its goods will be, by design” (p. 572 (file not included in this release)).
• Specialty retailing depends on “the shopper’s perception of the aesthetic of the place and the quality and mix of retailers and their products,” and successful specialty centers rarely follow a replicable physical format (p. 577 (file not included in this release)).
• A sidebar adapted from Edward McMahon argues the commercial strip is ending: retail space per person grew from 4 to 38 square feet between 1960 and 2000, much of it now vacant, while retail is rediscovering cities and suburbs are being urbanized (p. 573 (file not included in this release)).

Development opportunities

The opportunities section claims that despite overbuilding, openings remain where population grows (Texas added 4.3 million people in 2000–2010), where dense urban areas are underserved (Walmart and Target now design smaller urban prototypes), and where failed malls leave specialty demand unmet (p. 578 (file not included in this release)).

• Hybrid centers that mix commodity and specialty in one center are “generally a risky option,” because price and convenience weaken place-making, and the costs of place-making weaken price and convenience (p. 579 (file not included in this release)).
• Crossover tenants such as Costco, Whole Foods, Trader Joe’s and Bed Bath & Beyond can succeed in either environment but must be merchandised with care (p. 580 (file not included in this release)).
• E-commerce was under 5 percent of retail spending in 2011, and the author finds “no evidence” it had significantly affected center development; product technology (books, music, video) changed stores more than online purchasing did. Apple Stores, at $5,647 per square foot, show experience still draws people (p. 581 (file not included in this release)).

Predevelopment analysis: the four filters

The analytical core is a sequence of four filters: market, physical, regulatory and financial (p. 582 (file not included in this release)). The author warns against justifying “a predetermined market conclusion” when a site arrives before the analysis.

• Market filter. Define a trade area by time and distance, competition and barriers (physical and socioeconomic); add demographics, psychographics, daytime and tourist populations (p. 583 (file not included in this release)). Then compute spending potential, compare it with actual sales to find leakage, estimate market share from analog centers, and add 10 to 25 percent for non-trade-area sales (p. 586 (file not included in this release)). The Village Mart example projects $65.7 million of sales, about $365 per square foot, against large surplus demand (p. 587 (file not included in this release)).
• Physical filter. Small suburban centers typically have 0.25 FAR (about 9,000 square feet per acre), regular sites, multiple access points and good visibility; even the side of the road matters (bagel shops on the drive-to-work side, gas stations on the drive-home side) (p. 590 (file not included in this release)).
• Redevelopment vs. new construction. Obsolete centers offer prime locations, existing zoning, public support and lower costs, but bring cost overruns, construction while open, lease buyouts and possible loss of grandfathered rights (p. 592 (file not included in this release)).
• Regulatory filter. Traffic, compatibility, stormwater and design standards dominate; zoning standards are often “incompatible with retailers’ needs” (p. 594 (file not included in this release)).
• Financial filter. Income projections rest on a leasing plan with space allocated to tenant types; overage rents are part of the owner’s return, but lenders do not count them (p. 596 (file not included in this release)).

Design and construction

The design argument is that the first decision is whether the center is commodity or specialty, because “formulaic design approaches that create efficiency and predictability … are not well suited to specialty centers, which value aesthetics over efficiency” (p. 602 (file not included in this release)).

• Commodity layouts (linear, L-shaped, U-shaped) need good sight lines, flexible store depths of 60 to 100 feet and truck service at the rear; urban sites require street-oriented buildings, multilevel stores and creative loading (p. 604 (file not included in this release)).
• Parking “forms the customer’s first impression”; standards are set to cover all but the 20 busiest hours of the year, and shared parking can serve uses that peak at different times (p. 606 (file not included in this release)).
• Site engineering favors near-level sites (ideal parking slope 3 percent), managed stormwater and lighting that gives a real and perceived sense of security (p. 609 (file not included in this release)).
• Shells should be efficient, utilities placed for flexibility, restaurant slabs left unpoured until leased, and tenants usually delivered a “vanilla shell” plus an allowance of roughly $5 to $25 per square foot (p. 616 (file not included in this release)). Construction should not start before anchors and their requirements are committed.

Financing

The financing section argues that lenders treat commodity centers as more stable because they sell nondurable necessities, while specialty centers are “inherently more difficult to finance” (p. 619 (file not included in this release)). The best terms usually require 75 to 80 percent preleasing to long-term creditworthy tenants, with 65 to 70 percent of potential income from credit tenants.

• Construction loans are short, floating and recourse; the 2008 collapse pushed even cash-flowing centers into technical default as valuations and loan criteria shifted (p. 620 (file not included in this release)).
• Permanent loans are typically ten-year, nonrecourse, fixed-rate, at 65 to 70 percent of value with 1.2 to 1.3 coverage (p. 622 (file not included in this release)).
• Selling pads to anchors, restaurants and banks can recapture equity and produce profit as entitlements raise their value (p. 623 (file not included in this release)).

Merchandising and leasing

This section argues that “Leasing a shopping center is more complex and demanding than leasing any other type of development”: the aim is “not simply to lease space but to lease the right space to the right tenant” (p. 624 (file not included in this release)).

• A leasing plan with at least two tenant types targeted for each space provides flexibility. Small centers usually cannot proceed without anchor commitments; anchors can include cinemas, restaurant clusters or a library (p. 625 (file not included in this release)).
• Superstores and convenience stores may demand exclusives that make other leasing difficult. Anchors should sit at opposite ends so shoppers pass smaller stores (p. 627 (file not included in this release)).
• Percentage leases align landlord and tenant: a $24,000 base rent at 6 percent produces a natural break point at $400,000 of sales, so $500,000 in sales yields $30,000 in rent (p. 628 (file not included in this release)). National tenants increasingly refuse percentage rent, so fixed or CPI increases are alternatives.
• Triple-net leases, tight use clauses and shared pass-through costs (taxes, insurance, CAM) are standard (p. 631 (file not included in this release)).

Marketing and management

The final sections argue that shopping centers must be actively managed because retail changes faster than any other real estate: centers “that are not actively managed and merchandised risk being rendered functionally obsolete” (p. 633 (file not included in this release)).

• Promotion should be mandatory for tenants and present the center as one unit; publicity should start at least six months before opening; merchants associations or developer-controlled marketing funds pay for it (p. 633 (file not included in this release)).
• Managers earn 2 to 6 percent of rental income; the most important management task is to “stimulate merchants to operate their stores at the highest level of professionalism,” backed by regular store reviews and lease enforcement (p. 634 (file not included in this release)).

Key Concepts and Distinctions

• Commodity vs. specialty retail: Daily needs bought on price and convenience versus discretionary purchases chosen for product and place.
  • Significance: It governs every later decision from site to design, tenant mix, financing and marketing.
• Trade area: The geographic area that supplies most of a center’s sales, bounded by time, distance, competition and barriers.
  • Significance: It is the unit in which spending potential and market share are estimated.
• Sales leakage: Spending potential that exceeds actual local sales and flows to other markets.
  • Significance: It is the evidence that unmet demand can support new space.
• Hybrid center and crossover tenant: A center mixing both retail classes, and a retailer able to operate in either.
  • Significance: Hybrids usually weaken both logics; crossover tenants offer a controlled way to blend them.
• Percentage lease and natural break point: Base rent plus a share of sales above the level where the percentage equals base rent.
  • Significance: It ties rent to tenant success, though national tenants increasingly resist it.
• Credit tenant: A large national or regional retailer with strong credit.
  • Significance: Lenders size and price loans on the share of income from such tenants.

Essential Evidence and Examples

• Power center origin. Terranomics named the format at 280 Metro Center in 1982; its founders later converted obsolete malls into power centers (p. 568 (file not included in this release)). It shows how retailer-driven formats displaced the mall model.
• Rouse at Quincy Market. Pushcarts paid percentage rent with zero base rent on month-to-month terms, supplying distinctive character at little risk (p. 629 (file not included in this release)). It illustrates using lease structure to recruit tenants that create place.
• Bayshore Town Center, Glendale. A 1950s mall averaging $300 per square foot was rebuilt into a 1.3-million-square-foot mixed-use town center with $63 million of public financing (including a $45 million TIF), extensive remediation of a former brewery dump and a $235 million construction loan; sales rose 180 percent to $310 million and taxes from $2.4 million to $8 million (p. 643 (file not included in this release)). It demonstrates specialty repositioning through public/private partnership and shows why the developer would split financing by use next time.

Chapter Conclusion and Significance

The chapter concludes that population growth will keep requiring neighborhood centers, that obsolete centers offer repositioning opportunities, and that small centers are easier to develop than regional ones, needing fewer tenants, simpler approvals and less capital (p. 635 (file not included in this release)). It warns that many areas are overbuilt, that superstores and their exclusives can crowd out small tenants, that financing small centers has become harder, and that “retail development tends to follow rather than lead” growth cycles.

The chapter’s contribution is a framework, commodity versus specialty, that explains why retail behaves differently from other property types. Its main unresolved tension lies in specialty retail: the author says the future belongs to compelling places and better product mixes, yet admits there is no replicable formula, which makes the most promising segment also the hardest to underwrite and finance.

Questions for Reflection

1. If commodity and specialty shopping motivate customers in nearly opposite ways, why do hybrid centers keep being built, and under what conditions might one succeed?
2. The author found no evidence in 2011 that e-commerce had significantly affected center development, while a sidebar in the same chapter predicts fewer and smaller stores. How should a developer weigh these two readings?
3. Bayshore depended on public assembly, condemnation and a record TIF. What does that imply about whether specialty redevelopment is realistically open to a beginning developer?

Chapter 8: Trends and Issues

Chapter Objective and Through Line

Chapter 8 steps back from product types to survey “ongoing structural changes in the real estate industry, emerging demographic and technological changes affecting developers, current planning and development issues, and the changing social responsibilities of developers” (p. 648 (file not included in this release)). Its framing claim, stated at the outset, is that “the development of land represents a civic responsibility,” and that developers keep the public’s trust only by making “a positive contribution to their communities and to the urban environment.”

The chapter addresses a beginner’s question that the earlier chapters leave open: what kind of industry and society will a new developer be working in? Its answer has two sides. Structurally, development has become more institutional, more capital-intensive and more regulated, and two crashes (the S&L collapse and the 2008–2009 crisis) have taught hard lessons about leverage and liquidity. Yet small developers will not disappear, because diversity, infill sites and local relationships create niches large firms cannot serve efficiently.

The argument moves from market history and finance, through infrastructure costs, eroding development rights and technology, to demographic and lifestyle trends, then to development issues (smart growth, place making, environment, open space, transportation), and finally to social responsibility, community support, advice from seven industry leaders and personal integrity. It closes the book by returning to the preface’s theme: developers shape a fabric that lasts for generations.

Chapter Structure at a Glance

1. Inflation, tax rules and two financial crises have restructured the industry and taught durable lessons about leverage, cash and inventory.
2. Consolidation favors large firms, but niches, infill and relationships preserve a place for small developers.
3. Fiscal stress shifts infrastructure costs to developers while regulation erodes development rights and moves toward performance standards.
4. Technology changes acquisition, design, marketing, management and finance, though it should be adopted with caution.
5. Demographic diversity, aging boomers and shifting city-suburb patterns create demand for new product types.
6. Smart growth, place making, environmental regulation, open space and congestion define the development agenda.
7. Social responsibility, community trust and personal integrity are the developer’s long-term assets.

Section-by-Section Argument

Changing market factors and industry restructuring

The opening section argues that cycles are formative for developers, and that each one “seems to be just different enough,” as Don Killoren puts it (p. 648 (file not included in this release)). Inflation in the late 1970s and early 1980s made real estate a perceived hedge and pushed tax-driven building ahead of demand. The crash of the late 1980s and early 1990s followed from overbuilding, the S&L crisis, the 1986 Tax Reform Act, rising regulation and rolling regional recessions (p. 649 (file not included in this release)).

• The Resolution Trust Corporation recycled nearly $400 billion of failed assets between 1991 and 1995 and is presented as a government success, though Kenneth Leventhal argued its speed caused a 40 percent value decline instead of 10 to 15 percent and created the vulture funds.
• The 1990s brought institutionalization, securitization, tax-driven equity drying up, developers becoming “merchant builders,” and large firms building service businesses for steady income (p. 650 (file not included in this release)).

The crisis of 2008–2009 and its lessons

This section argues that the recent crisis “supplanted the S&L episode as the greatest challenge to the real estate industry since the Great Depression” (p. 651 (file not included in this release)). Cheap credit, underexamined assumptions about absorption and appreciation, the distance between debt holders and assets, and unrecognized systemic links turned a real estate downturn into a broad contraction.

• Lessons listed: keep a lean team; leverage works both ways; “Cash is king”; an institutional partnership is not a guarantee; “Acquisition terms can be as important as price”; quality is a hedge; and “don’t get stuck with a lot of standing inventory” (p. 652 (file not included in this release)).
• Buzz McCoy expected persistent anxiety, modest leverage, tighter underwriting, more recourse and lower real returns for five to ten years.

The demise of small developers?

The chapter answers no. Large firms enjoy lower capital costs, “first look” at deals and staying power against delay and litigation, and consolidation has targeted mid-sized builders (p. 653 (file not included in this release)). But many of the worst failures were regional and medium-sized firms, and diversity, infill and secondary markets favor nimble local players: “As long as personal relationships remain central to doing business, small developers will continue to thrive.” Gerald Hines: “You have to find a specialty and a niche where you can have some expertise above someone else.”

Financing, infrastructure and development rights

The financing section argues that real estate’s supposed low volatility and steady income “require reevaluation” after two decades of volatility and complex structures (p. 654 (file not included in this release)). Beginners will start with small banks and friends-and-family equity but should prepare for institutional partners; Robert Larson stresses alignment of interests, and notes that only well-capitalized entrepreneurs will succeed now that leverage is scarcer (p. 656 (file not included in this release)).

• Paying for infrastructure. Impact fees, exactions, community facilities districts and concurrency rules have replaced general revenue funding; higher fees worsen affordability, while fiscal stress also gives cities reasons to partner with developers on public land and redevelopment areas (p. 656 (file not included in this release)).
• Erosion of development rights. Understanding when rights vest is crucial, since vesting ranges from plan approval in some states to a built structural frame in California. Entitlement contingencies and development agreements hedge this risk (p. 657 (file not included in this release)).
• Regulation is not simply an enemy: zoning protects long-term values and creates barriers to entry. “It is not regulation per se but the uncertainty about new regulation that can be the greatest risk.” Matt Kiefer describes “a period of regulatory experimentation” toward performance standards, which preserves flexibility but makes compliance more subjective (p. 658 (file not included in this release)).

The technological revolution

The technology section argues that tools have changed every stage of development: GIS and online data let a developer “three states away” screen a property almost as easily as a local one; BIM and extranets compress design; websites and contact software reshape marketing; property management software expands portfolios (p. 659 (file not included in this release)). The caution is to avoid being “the first to adopt an innovation” while staying ready to invest when tools prove themselves, and to remember that online listings can commodify unusual products: “The model home is where buyers make the big decision” (p. 661 (file not included in this release)).

Trends: demographics, lifestyles, cities and suburbs

This section argues that demographic change creates demand for new living environments, though “the safest bet on the future is usually that it will look rather like the recent past” (p. 661 (file not included in this release)).

• Minorities accounted for 91 percent of population growth in the 2000s, and two-parent households with children are now only a quarter of households, requiring a wider variety of housing.
• Aging boomers want active lives, smaller low-maintenance homes and aging-in-place features, but most are staying in the suburbs rather than moving downtown or to the Sunbelt; walking trails now top desired amenities (p. 663 (file not included in this release)).
• Immigrants increasingly choose suburbs, suburbs are becoming more like cities, and urban resurgence is real but uneven, driven by boomers, young creative workers and some immigrant groups, many of them renters (p. 664 (file not included in this release)).

Development issues

The development-issues section argues that the industry’s agenda has shifted. Matt Kiefer: “The postwar view was of development as an engine of growth. The 21st-century view is of development as a generator of impacts” (p. 664 (file not included in this release)).

• Smart growth directs growth to where it is wanted, but “smarter” plans with higher density often face more opposition, not less; developers should involve stakeholders and still confirm demand for each product type (p. 666 (file not included in this release)).
• Place making creates long-term value because pleasant, adaptable streets and plazas hold value better, though developers are constrained by street standards and lenders’ preferences (p. 666 (file not included in this release)).
• Environmental concerns include contamination (which can be an opportunity), water, habitat, stormwater (illustrated by the Chesapeake Bay regime) and climate change, where regulation is moving from qualitative checklists to quantitative carbon accounting (p. 668 (file not included in this release)).
• Open space can be protected through zoning, easements and land trusts; conservation easements generate tax deductions and have spawned conservation development (p. 670 (file not included in this release)).
• Congestion is best reduced by compact, mixed-use, transit-accessible development; developers should support coordinated transportation planning or bear a disproportionate share of costs (p. 671 (file not included in this release)).

Social responsibility, community support and integrity

The final argument is that developers carry special responsibilities because they increasingly build public infrastructure, and communities “have a right to expect the highest possible quality” (p. 671 (file not included in this release)). In return, developers can expect fair, consistent, merit-based decisions and timely public infrastructure.

• The developer’s negative public image is sometimes undeserved, when developers are blamed for demographic change, and sometimes deserved, when they build shoddily or break promises (p. 672 (file not included in this release)).
• Opposition often reflects misinformation, but Kiefer notes it is now socially acceptable to oppose projects purely on personal impact. Gerald Hines treats community consultation as part of market analysis (p. 673 (file not included in this release)).
• Advice from seven ULI leaders. Do not buy land with debt (Terwilliger); capital now differentiates by location and quality (Thurber); off-location buildings fall furthest (Hines); “DROOC!—Don’t Run Out of Cash” (Fascitelli); never guarantee a loan you cannot meet (Newsum); start with infill, distressed or rehab projects and do not pioneer (Chaffin, Terwilliger); avoid attached product as a first project (Engstrom) (p. 676 (file not included in this release)).
• Integrity. “A developer’s reputation is the foundation of long-term success.” Dan Kassel’s rule, to fax what you promised on the day you promised it, illustrates how trust is built; when trouble comes, lenders and partners “like surprises even less” than bad news (p. 680 (file not included in this release)).

Key Concepts and Distinctions

• Merchant builder vs. long-term owner: Developing to sell to institutions versus developing to hold.
  • Significance: It reflects how capital requirements have reshaped the developer’s role and risk.
• Vesting of development rights: The point after which regulatory change cannot remove approved rights.
  • Significance: It determines how much time and money a developer can lose to moratoriums or downzoning.
• Performance-based regulation: Rules that set outcomes rather than prescribing methods.
  • Significance: It gives flexibility but raises uncertainty and shifts the burden of proof to developers.
• Smart growth: Principles that direct growth toward centers, transit and mixed uses while protecting other areas.
  • Significance: It shapes approvals, yet often intensifies local opposition where density is proposed.
• Development as generator of impacts: The modern public view of development as imposing costs to be mitigated.
  • Significance: It explains exactions, environmental review and the political character of approvals.
• Social responsibility and reputation: The developer’s obligations to the community and the trust earned by meeting them.
  • Significance: The book treats them as both an ethical duty and the developer’s most durable business asset.

Essential Evidence and Examples

• The RTC debate. The RTC recycled nearly $400 billion of assets quickly, which set up recovery, but critics argued it deepened value losses to 40 percent (p. 649 (file not included in this release)). It frames the unresolved question of whether distressed assets should be sold fast or held.
• Terwilliger’s land lesson. Financial partners walked away from land bought with debt when values fell by half or more; his conclusion was that a merchant builder should buy land only with equity or wait until ready to build (p. 674 (file not included in this release)). It supports the chapter’s emphasis on liquidity over leverage.
• Trammell Crow Residential’s 75 percent cap. By never borrowing more than 75 percent of cost and giving away ownership as needed to raise 25 percent equity, the firm survived the downturn (p. 676 (file not included in this release)). It shows conservative capital structure as a survival strategy.

Chapter Conclusion and Significance

The chapter concludes that American cities “fall short of their potential,” that greenfield development remains easier and cheaper than maintaining or redeveloping older areas, and that the development community “must exercise stronger leadership” in correcting the harmful aspects of the development system: “By looking after the interests of the community at large, developers serve their own interests” (p. 681 (file not included in this release)). It ends with Robert Nahas’s observation that great developers want “to leave a footprint in the sand,” and with the reminder that street layouts, parks and urban design “will last for hundreds of years” (p. 682 (file not included in this release)).

As the book’s closing chapter, it ties the technical method of the earlier chapters back to the preface’s civic argument. Its unresolved tension is between that civic ideal and the economic reality it also documents: capital, regulation and public fiscal stress push developers toward conservative, profitable, easy projects, while the civic agenda calls for harder infill, place-making and redevelopment work.

Questions for Reflection

1. The chapter argues that regulation can benefit developers by protecting values and limiting competition. When does that argument hold, and when does it become a rationalization for costs that harm housing affordability?
2. Several leaders advise beginners not to pioneer, yet the chapter also praises developers who outperform regulations and shape new places. How should a beginner reconcile these two pieces of advice?
3. Is the claim that developers serve their own interests by serving the community an empirical observation, a moral exhortation, or both? What evidence in the book supports or complicates it?

Highlights

• Although this book was conceived as a practical guide for developing five major real estate types—land, residential, office, industrial, and retail—it is intended to do much more. Successful developers must have a thorough understanding of urban dynamics, of how and why cities grow. They must be informed critics of architecture; they must be knowledgeable about construction, law, public approvals, and public finance; and they must have the fundamental real estate skills in finance, market analysis, leasing and sales, and property management. Real estate development is the art—and, increasingly, the science—of building real estate value by managing development risk. Development expertise can be applied to much more than building new buildings and subdivisions. Development talents are essential for such activities as buying empty office buildings and leasing them, renovating older warehouses, repositioning shopping centers by changing the tenant mix, securing development entitlements for raw land, and buying distressed debt and workout properties from banks and turning them around (Page 21)
• triple-check everything. The Developers must think big, but development is a detail business. Successful developers know that they must double- and clause overlooked in a title policy or the poorly done soils test can have serious consequences. Developers are ultimately responsible for their projects, and even if someone else is negligent, developers must deal with the consequences of an error or omission. A good developer is flexible, ready for the unexpected, and adaptable to rapidly changing conditions. During the approval process, for example, a 26 (Page 26)
• developer must often negotiate with neighborhood groups that seek major changes to a proposed project. If the developer is unwilling to compromise or if the project has been conceived in a way that does not allow flexibility, the group could have the power to kill the project altogether. A developer must be able to address all stakeholders’ concerns without compromising the project’s economic viability. (Page 27)
• Developers work with a variety of people and groups: most obviously, building professionals, including surveyors, planners, architects, and other designers; specialized consultants, contractors, and tradespeople; and tenants and customers hailing from many different businesses—sometimes with divergent goals. Developers must work closely with attorneys; bankers and investors; planners; elected and appointed officials at the city, regional, and state levels; and an increasingly complex network of regulators and inspectors. In addition to professionals, the developer must communicate effectively with citizens groups, homeowners associations, and community organizers with varying degrees of sophistication. Success comes from knowing the questions to ask and whom to ask, having a familiarity with best practices and rules of thumb, and being able to sift and evaluate conflicting advice and information. (Page 27)
• The spark of creativity—in designing, financing, and marketing—can distinguish successful developers from their competitors. Management of an innovative project team is a balancing act. Too much guidance may stifle creativity; too little may lead to a chaotic process and unmanageable results. obtaining creative, cutting-edge work from the team without exceeding the budget is one of the fundamental challenges of managing the development process, and it requires the combination of a rigorous overall process along with room for flexible exploratory work within this regimen. (Page 27)
• The real estate industry is divided into five main product types: residential, office, commercial, industrial, and land. The market for each product type can differ dramatically by region and by location relative to employment centers, transit stops, or other location factors. Interestingly, such historic correlations of value and location no longer necessarily hold across the board. (Page 28)
• Building design and site density represent two other primary dimensions for categorizing different segments of the property market. Each combination represents a different building type, cost structure, and end-user profile. For example, high-rise apartments with structured parking cost much more to build and operate than do garden apartments. Rents must be higher, and to be successful, the market study must demonstrate sufficient unmet demand for units from higherincome people who want high-rise rental apartments in a given location. Choices made in development must continually balance market demands with project economics. (Page 29)
• Developers also manage risk. They minimize, share, hedge, or eliminate risk at each phase of the development process before moving forward. They attempt to minimize the risk at an early stage to make sure that the risk of investment for upfront costs—when a project’s prospects are most uncertain—is balanced with the likelihood of success. Beginning developers must usually accept greater risk than experienced developers do, because beginners lack a strong bargaining position to transfer risk to others. They must often begin with projects that experienced developers have passed over. Beyond this basic truism, though, Phil Hughes argues that beginning developers often take on more risk than they have to. They need to look harder to find the right opportunity, but every project includes opportunities to reduce risk. (Page 30)
• Development’s risks, however, require a certain kind of personality. Individuals must be able to wait a relatively long time for rewards. Three or more years often pass before the developer sees the initial risk money again, not to mention profit. Generally, this delay is growing as projects and approvals become more complicated. Developers risk losing everything they have invested at least once, and sometimes several times during the course of a project. Events almost never go exactly as planned, especially for beginners or those moving into new product types or markets. Developers must be able to live with some level of constant risk. (Page 30)
• The impact of local politics on real estate development cannot be overstated, especially for a beginner. A project’s feasibility is a function not just of market demand but also of what the local jurisdiction demands. A project might work financially but if local officials, or neighborhood activists, don’t agree, approvals will not be granted, and the project will not go forward. It is crucial for the developer to build a good relationship with local officials and the community and to understand their interests. (Page 31)
• Even the smallest projects today typically require $50,000 to $100,000 cash up front, or “pursuit capital,” to advance it to the point where equity and debt funding can be raised. A developer should never begin a project without having at least twice as much cash on hand as seems necessary to get the project to the point where other funding is available. The upfront cash is only part of the total cash equity that a developer will need to complete a project. Most lenders today require a developer to invest cash equity to cover 25 to 40 percent of total project cost. Total cash equity need not be in hand or even sufficient to purchase the land, but it should carry the project through to a point where the developer can raise other funds from investors or lenders or has cash flow from operations. (Page 31)
• Developers can limit risk substantially by taking care in their acquisition (see chapter 3). For example, closing on land should take place as late in the process as possible. If 60-day or 90-day closings are typical in a community, beginning developers should look first for a land seller who is willing to allow 180 days. The land might cost more, but the added time may be worth the difference. If public approvals such as zoning changes are necessary, developers can often make the necessary approvals a condition of purchasing the land. Doing so will allow developers to shift some of the risk of approval to the seller, and it will align seller and buyer interests in the approval process. If public approvals or financing falls through, the developer will avoid spending precious capital on sites that cannot be developed profitably. Purchase options 31 (Page 31)
• on property that provide control over a site without having to purchase it immediately are one of the greatest tools for developers. They reflect the developer’s ability to negotiate and to satisfy the seller’s needs at the same time. (Page 32)
• Options may overcome many financial obstacles with creatively constructed purchase agreements, but sellers must have confidence that financing is available. (Page 32)
• The most difficult project is the first one, and if it is not successful, a beginning developer may not get another chance. Thus, selecting a project that will not cause bankruptcy if it fails is imperative. Because of increasing difficulty in obtaining public approvals and financing, a developer should not be surprised if he has to attempt five or more projects before one gets underway. (Page 32)
• Many experienced developers are willing to undertake joint ventures with a new partner if the partner brings a deal to the developer that strategically expands his current business. (Page 34)
• Finding the First Deal (Page 34)
• beginning developers must control at least one of four assets—land, knowledge, tenants, or capital. If they control more than one, the task becomes easier. (Page 34)
• A USE LOOKING FOR A SITE (Page 35)
• All development is ultimately driven by demand. Determining who needs space —potential buyers or tenants—and what type of space they need is the starting point for all development projects. The initial market analysis should define the gaps in the market and the product or products that will fill them. (Page 35)
• A SITE LOOKING FOR A USE (Page 36)
• Another possible starting point is controlling a well-located piece of property. Many developers start by developing family-owned or company-owned land. Others begin by convincing a landowner to contribute the land to a joint venture in which the developer manages the development. In both cases, development is driven by supply. (Page 36)
• Whether to develop immediately or to wait depends on an assessment of changes in use or density in the future. This calculation involves an understanding not only of market demand but also of town planning, infrastructure development, and the political and regulatory process. A tract at the corner of two highways on the edge of town, for example, might eventually make a good site for a shopping center; but if current demand for retail space does not justify a shopping center, the most profitable current use may be single-family lots. Waiting five years, however, would offer a higher profit because the shopping center could then be justified, but of course carrying costs, price changes, and regulatory risk might mitigate this differential. The apparently simple “highest and best use” analysis can quickly become dizzyingly complex, bearing on assumptions about timing, future value, and opportunity cost. (Page 36)
• Many respondents highlighted mistakes made at the front end of their projects that came back to haunt them, such as team selection, due diligence, and the entitlement process. During planning and construction, the majority cited the importance of selecting competent, experienced team members and of effectively coordinating them. As James Ellison, cofounder of Mode Development, LLC, wrote: “Projects are very complex and are comprised of a very eclectic cast of characters. Your job as the developer is essentially the same as the director of a movie. You have to make the best of your location, get the best out of your actors, and stay within the budget of the studio all in a short period of time. Organization, accounting, relationships are all key.” Having partners that understand your operations and vision is essential, and many respondents highlighted the importance of thoroughly vetting team members and joint venture partners. (Page 38)
• Another major concern was being skilled at the intricate details of the approval process to avoid resource-draining delays. Many spoke of the importance of forming strong relationships with local regulatory bodies and bringing in the community early in the process. Brian McCarl, vice president of acquisitions for Newland Communities, echoed this sentiment: “Real estate is a unique endeavor that often engages community and political structures in decision making about how to deploy private capital for private ownership. All real estate is in essence a public/private partnership. Failure to factor in the public decisionmaking process and values into decision making is a good recipe for failure. Do your homework at the neighborhood, city, and state level before you invest and start spending money.” (Page 38)
• Another dominant concern was thorough due diligence in acquisitions. Many agreed that a bad acquisition is almost impossible to rectify, although many successful deals made their profits in the acquisition and 38 (Page 38)
• entitlement phases. Land value comes through entitlements so developers should ensure that their acquisitions have approval strings attached. Understanding the market through extensive preliminary study will alleviate the risk of getting stuck with an unworkable project. As Michael Brodsky, CEO of Hamlet Companies, summed it up, “Time spent planning lessens time spent fixing.” Many highlighted that developers should use the market to shape their decisions, think about the end user, and not seek to impose a use on a site. “Focus on what the market is and wants, not what you want or what zoning allows,” wrote George Casey, president of Stockbridge Associates. (Page 39)
• It is crucial to recognize which obstacles are immediate, short term, and temporary, and which ones are deal breakers. Many respondents addressed the importance of maintaining a critical distance from the project and allowing research and a conservative pro forma to generate a commitment to the deal—not an emotional excitement for building or site. As Chris Squier, vice president of mixed-use development for Crosland Development, LLC, wrote, “Don’t fall into the trap of entering into a project with a ‘best case’ pro forma that only gets worse as time goes on.” (Page 39)
• Many discussed the importance of knowing when to walk away. Although it is difficult to let go of a project, knowing when to cut losses differentiates successful developers. Stephen Arms, managing member of Marthasville Development, LLC, gave the following advice: “Don’t be afraid to walk away from a project if conditions change. Believe in ‘sunk cost’ accounting (also known as the more common phrase ‘don’t throw good money after bad’).” (Page 39)
• Looking forward, a number of those surveyed commented on the increased importance of urban, mixed-use, and infill projects, as well as sustainable development. “Sustainable development practices are not optional. A balance between economic, environmental, and social objectives must be planned into every 21st-century project,” advised Elias Deeb, president and owner of Cedrus, LLC. (Page 39)
• Selecting the location and type of the first development project should not be left to serendipity, nor should beginners necessarily grab the first opportunity they see. Failure will make it that much harder to obtain backing for another opportunity. The first deal (1) establishes the developer’s track record; (2) sets the tone for the quality of future developments; (3) establishes an image in the marketplace; (4) creates a network of consultants, brokerages, and other business relationships for future deals; and (5) builds relationships with bankers and investors. Still, every beginning developer makes mistakes. One should get the best advice possible but not be afraid to make a decision and move on. (Page 41)
• A principal objective of the developer’s first deal is to establish a track record, the absence of which is perhaps the beginning developer’s greatest handicap, so the right size project is critical. A rule of thumb is to look for a project that can be put together in about six months; one that is within the developer’s financial capabilities—personal resources plus those that can be raised through family, friends, or other currently identifiable partners. A general rule of thumb is that the combined financial net worths of the partners must be at least as large as the project’s total cost. In times of tight money, net worth requirements may be even greater. (Page 41)
• When money is more readily available, it becomes much easier for beginning developers to find financing. In such times, there is often more money available than there are “good deals.” Another successful strategy for beginning developers who have extensive local relationships, especially brokers, is to meet in advance with potential financial partners (especially local private investors) to determine what kinds of deals they are looking for. Armed with this information, developers can look for deals that meet the investor’s preferences. If a suitable property is found, the developer can tie it up and present it to the financial partner quickly for a “go” decision. Time is critical: often the developer must “go hard” on the land purchase within 30 to 60 days, so having the financial partner ready and waiting to look at deals quickly is very important. When money is widely available, the market is likely to be hot, with lots of activity. In such times, sellers are more likely to demand shorter closing times and shorter free-look periods during which the buyer does feasibility studies before putting up a nonrefundable deposit (“going hard”). The customary amount of deposit, or terms of diligence, may increase in severity as well. (Page 43)
• The Concept of Present Value An understanding of present value is essential for developers. (Page 43)
• The landowner’s dilemma about developing the land immediately into single-family lots or waiting for five years to develop a shopping center is solved by applying present value analysis (Page 44)
• No generally accepted definition exists to determine who is a developer and who is not, but a developer can be defined as the person or firm that is actively involved in the development process and takes the risks and receives the rewards of development.4 (Page 45)
• Development companies increasingly serve as development managers for major institutions. In this role, they perform all the normal functions of developers except that they bear little or no risk. The institution—a bank, an investment group, an insurance company, a foreign corporation, or a major landowner—bears the risk. The developer works for a management fee and usually a percentage of the profits (10 to 20 percent) if the project is successful. (Page 46)
• Historically, developers have preferred to own real estate rather than to manage it for others, because ownership has enabled them to leverage completed projects into new deals as they amass wealth. Nevertheless, major developers have increasingly accepted roles as managers, either to keep their staffs busy during slow periods or to enter new markets with minimal risk. Firms that succeeded in finding these scarce roles in the Great Recession of 2007–20095 have benefited from steady, though modest, cash flow. (Page 46)
• The importance of real estate cycles cannot be overemphasized. Like other large, capital-intensive purchases, real estate is highly sensitive to changes in interest rates and macroeconomic conditions like employment and migration. (Page 46)
• Even in a period of relatively stable overall economic growth, real estate markets are cyclical, as a result of the lagged relationship between demand and supply for physical space. Glenn Mueller, professor of real estate at the University of Denver, divides the market cycle into four distinct phases: recovery, expansion, hypersupply, and recession (see figure 1-4). Each phase is characterized by different changes in vacancy and new construction, as well as changes in rent. The position of property in the market cycle differs by property type and location. This type of analysis is helpful for understanding market timing—when the market is most favorable for new development. (Page 47)
• Starting in Phase I—Recovery at the bottom of a cycle, the marketplace is in a state of oversupply from previous new construction or negative demand growth. At this bottom point, occupancy is at its trough. As excess space is absorbed, vacancy rates fall and rental rates stabilize and even begin to increase. Eventually, the market reaches its long-term occupancy average where rental growth is equal to inflation. In Phase II—Expansion, demand growth continues at increasing levels, creating a need for additional space. As vacancy rates fall, rents begin to rise rapidly, pushing rents to cost-feasible levels. At this stage, demand is still rising faster than supply, and there is a lag in the provision of new space. Demand and supply are in equilibrium at the peak occupancy point of the cycle. Phase III—Hypersupply commences after the peak/equilibrium point when supply is growing faster than demand. When more space is delivered than is demanded, rental growth slows and eventually construction slows or stops. Once the long-term occupancy average is passed, the market falls into Phase IV. Phase IV—Recession begins as the market moves past the long-term occupancy average with high supply growth and low or negative demand growth. The extent of the down cycle is determined by the difference between supply growth and demand growth. The cycle eventually reaches bottom as new construction and completions slow or as demand begins to grow faster than new supply added to the marketplace. (Page 49)
• GETTING STARTED (Page 49)
• The first step in the development process for beginning developers who do not already own land is to select a target market, in terms of both geographic area and type of product. (Page 49)
• After deciding where to do business, the next question is what to develop. For beginning developers, the answer is simple: develop a product with which you are familiar—provided that lenders will make the money available. Even developers with no experience can sell potential investors and lenders on their knowledge of the product type if they study the local market to determine rents, competition, the regulatory environment, local tastes, local construction methods, and the types of units or buildings in greatest demand. Although beginners can successfully branch out into a new product type, they lack the background to fine-tune information about design and construction costs or to predict potential pitfalls. Beginners who do branch out cannot work alone; they will probably have to bring in an experienced partner to get financing. (Page 50)
• Identifying a product that the market lacks can make a project successful: finding that niche is the developer’s challenge. Market niches are defined geographically and by product type. They can be as narrowly defined as, say, an apartment complex that has more two- and three-bedroom units than do other projects in the area or a multitenant warehouse building with frontloaded garages. (Page 50)
• Designing for a specific market is how developers create a competitive advantage. Finding that special market, however, usually requires more than a good market study. It requires a perception of the market that other developers do not have, because if a market opportunity is obvious, another developer is probably already building to satisfy the demand. Thus, the beginner must understand the market well enough not just to act, but to do so before other developers see the opportunity. (Page 50)
• STAGES OF DEVELOPMENT (Page 50)
• The six main stages of development—feasibility and acquisition, design, financing, construction, marketing and leasing, and operations and management—are described for each major product type—land, apartments, offices, industrial space, and retail space—in chapters 3 through 7. (Page 50)
• The funding for the development was a mix of federal (one of the last Urban Development Action Grants), state, city, and other resources. This mix remains typical of Enterprise’s approach to today. financing developments (Page 51)
• “I didn’t buy a home; I bought a community,” (Page 51)
• She says that utility companies can be challenging to coordinate but are essential to the project, so building good relationships with them is key for future developments. Soil problems can also slow projects down—they had significant problems in the Baltimore City development—and she recommends performing as many advance soils tests as possible. (Page 52)
• She identifies the challenge of always having enough capital as the most difficult part of getting started. “It typically takes two to four years to see revenue; meanwhile, you need to make money to stay in business, which requires capacity and expertise.” Her approach to developing housing is twofold: “To develop, you need land, money, will, and perseverance. For success, you need a great product at a very competitive price.” (Page 52)
• The most difficult part of starting a development company is the uncertainty. Funding predevelopment for an uncertain amount of time can be challenging, and nothing ever goes as anticipated. “There are usually one to two years of predevelopment; then you break ground and need time to lease it up,” she explains. These prolonged periods can add up before one realizes any revenue. Often a new developer is required to pay out of pocket for all aspects of the predevelopment process, including funding approvals. (Page 54)
• He advises young developers to focus on the parts of development where they excel and to find partners, staff, and consultants to do an equally good job on the tasks outside your “sweet spot.” (Page 55)
• Joining community developer Erling Speer, Killoren helped develop the ULI-award-winning Mariner Sands golf course community and country club, where he began to understand the increasing importance of “software,” or community organizations and programming. Increasingly for clubs, community integrated and sophisticated governance, and educational from their beginnings in golf course development to become a part of most masterplanned communities, and Killoren foresees the trend continuing. “Education, health care, and community-based volunteerism are all becoming a more integrated part of the community development toolkit, and real estate project managers must manage these entities with the same intensity they apply to physical planning and construction. We’re moving from building stuff to building community. structures functions have grown (Page 55)
• Assembling a partnership, CA assessed its strengths and divided tasks into financial (primarily Adams), planning and development (primarily Killoren), and sales and marketing (shared responsibility). Building a team, the partners looked for “smart, energetic, and intelligent utility players” who could manage many different kinds of activities. In the early years of the partnership, they focused on consulting, requiring less capital investment, and structured deals to work toward sweat equity positions. To maintain a lean structure, they depended on consultants for virtually all nonexecutive functions. They still prefer to staff projects, rather than the central office, but have expanded to a group of partners that oversees particular areas of expertise, such as sales and marketing or design, in all CA projects, even as these individuals may take a particular role within one or more project teams. (Page 56)
• Reflecting on his nearly 40-year career, Killoren says his most important lesson has been that for an individual to succeed in development over the long haul, his interest cannot be solely financial. “It has to be about more than money. A good developer is giving an enduring gift to the community. Find something you like, do it well, and make that amount of money adequate.” (Page 57)
• created a hierarchy approach to urban regeneration. His framework blossomed into a structure that he calls “The Five Stages of Development.” The five-stage progression is categorized as “1: Neglect; 2: Hope; 3: Rebirth; 4: Awareness; 5: They’re there” and represents a perspective that is central to the way he approaches projects today. (Page 58)
• Four of the six stages of development occur during predevelopment: feasibility studies, design, financing, and marketing. In fact, a developer should be reasonably confident about the prospects for success on a project before he even signs the initial purchase contract. Developers rarely “go hard” (remove contingencies) on the purchase contract until they are very confident that they can obtain all necessary public approvals to build what they want and can raise all necessary financing for it. The primary purpose of predevelopment is to give the developer the necessary confidence to move forward. Before closing on a new project, a developer should be almost absolutely certain that the proposed project can be developed profitably according to his plans and objectives. (Page 59)
• As figure 1-5 shows, certain steps can be taken simultaneously, whereas others must be taken sequentially. For example, active preleasing for an office building begins as soon as preliminary design drawings are ready to show to prospective tenants. Preleasing occurs throughout the development period, from financing through construction. (Page 60)
• FIGURE 1-5 | Timeline for Development of an Apartment Building or Small Office Building (Page 60)
• The early stages of development are especially important and involve many iterations of planning and analysis before the architectural plans and other arrangements are finalized. A common mistake is to go into too much detail too soon. For example, obtaining detailed working drawings before a market feasibility study has been completed is a waste of money. The market study should influence the design. And if the market is not as healthy as it appeared, the developer may want to abandon the project before sinking additional costs into it. (Page 63)
• Advice for Beginning Developers Three themes emerge from the advice given by members of ULI’s SmallScale Development Council: (1) be well prepared at all times; (2) work with experienced people, even if they are more expensive; and (3) anticipate delays throughout the development process. SITE ACQUISITION • Correctly analyze the purchase price of a site to include usable, not total, square footage. • Anticipate problems with sellers who are not familiar with real estate and delays while a disputed estate is being settled. • Analyze the site’s physical constraints, including the availability of utilities. • Conduct a soils test and check for hazardous waste. • Identify the site’s legal and political constraints, such as the availability of the required zoning or the existence of a moratorium on building. • Research the market before purchasing the site. REGULATORY PROCESS, OBTAINING APPROVALS • Be prepared to work with the community to resolve concerns and challenges to the project. • Take time to understand the local political climate. 64 (Page 64)
• • Prepare for the local regulatory process and public hearings. • Use qualified and experienced consultants, lawyers, and architects to give your project added credibility. • Anticipate and do not underestimate delays in the approval process. PRODUCT SELECTION, MARKET, AND ECONOMIC FEASIBILITY • Remember that when an opportunity is obvious, it is obvious to everyone—resulting in a great deal of competition. • Develop toward the higher end of the market for your product type, where there is more margin for error. Low-end projects typically have slimmer profit margins. • Choose a respected market consultant with a strong reputation in the city where your project is located. • Decide how much time to allocate for the feasibility study. Some developers consider this step to be vital and maintain that the study should be thorough; others feel it should not be belabored. • Make sure that extensive primary research accurately identifies all competition, whether under construction or still on the drawing boards. DESIGN, SITE PLANNING, ENGINEERING, AND CONSTRUCTION • Do not complete the design without paying attention to the market study. • Work closely with the architect and the contractor. • Be careful not to ignore important information, even if it requires redesign or additional approvals. • Use a flexible design that can be easily adapted to different tenants’ needs. • Accept the design and recognize that it will never be perfect. • Spend sufficient time and money to check all references before retaining contractors and subcontractors. CONSTRUCTION AND DEVELOPMENT FINANCING • Establish relationships with several lenders to eliminate lengthy delays. 65 (Page 65)
• • Deal with experienced lenders. • Make adequate allowances for contingencies. • Remember that it could take three to four months to process a $10 million loan—even if the lender says that it will take only six weeks. • If the market softens, be able to cover interest out of your own pocket until the market comes back. PERMANENT FINANCING • Establish good communications with the lender. • Prepare a detailed, professional presentation package for the lender. • Secure the permanent loan before beginning construction. (Beginning developers might be forced to do so, even if they would prefer to wait until after the project is built and leased.) • Be aware of trends in interest rates. EQUITY FINANCING • Investigate the financial records of sources of equity. • Find two or three compatible partners who can provide or raise equity for the project. • Do not give away too much equity position to secure funds, because nothing may be left to give if you come up short. JOINT VENTURES AND PARTNERSHIPS • Structure a fair deal so that no partner is burdened with excessive risk and meager profits. • Make clear who is in charge of the project. • Avoid establishing goals that conflict with those pursued by other partners. • Have agreements ready to cover dissolution of the partnership. • Monitor changes in tax legislation that could affect returns. • Establish a record of regular, honest communications with partners. MARKETING AND LEASING • Be prepared for unanticipated changes or a weakening market. • Find a broker you trust and can work with. • Understand the importance of marketing the project yourself. 66 (Page 66)
• • Create a suitable tenant mix for commercial projects. • Be specific about tenant improvements and tenants’ responsibilities in the lease, and include escape clauses for your own protection. • Be creative about concessions. Consider buying stock in a tenant’s startup company, paying moving expenses, or providing furnishings. • Understand the implications of leasing versus sales on tenants’ earnings and balance sheets. • Advertise that you have made a deal or signed a lease. • Recognize brokers with incentives, such as dinners and awards. OPERATIONS, MANAGEMENT, AND MAINTENANCE • Pay close attention to building management and operations. Find a first-rate building manager. • Budget properly for postconstruction maintenance. IN GENERAL • Stick to geographic areas and product types with which you are familiar. • Think small. Find a first project that is within your financial capabilities and can be developed in a reasonable amount of time. • Never begin a project just because you have financing available. • During the feasibility stage, keep investment in the project low to maximize your flexibility • Do your homework. Know what the holes in the market are and how to plug them—quickly. • Never enter a negotiation that you are not prepared to leave. • Attend to details. Whether you are designing a building or negotiating a lease, you personally must be on top of every detail. You must rely on your professional consultants, but if you do not understand the details, you should arrange for someone else to help you. • Do not be afraid to make a nuisance of yourself. The people you are dealing with are usually very busy and hard to reach. You may have to make several telephone calls or personal visits before you talk to them. Learn to be tenacious—nicely. • Do not deceive yourself by ignoring facts and warning signs as they are presented to you. Be aware that self-deception occurs most often with evaluation of the market. • Increase the time you think you need to develop a project—perhaps by 67 (Page 67)
• twice as much. Do not promise cash payments to investors by a certain date. Be neither overly optimistic nor overly conservative in your assumptions. • Be able to turn on a dime and switch your strategy instantly. • Follow up on everything. Never assume that something has been done just because you ordered it. • If you promise something to a lender, a professional consultant, a tenant, or a purchaser, deliver. • Communicate honestly and often with your lenders and investors. Avoid deals that show early signs of being contentious. • Recognize that the buck stops with you. A million excuses can be found for things that go wrong in a development project, but you have the ultimate responsibility for ensuring that they go right. (Page 68)
• Jerry Rappaport offers the following advice to beginning developers: • Use your competitive advantage, whatever it is, to source deals. If you find them, the money will come. • Control over your life is a complete myth. The deal grabs you by both ankles and pulls you down. • Take a long view of the business. You won’t make it all happen in one transaction. (Page 70)
• The key to successful development is serving the needs of a particular segment of the market in a particular location. In almost every instance, it also means serving the needs of a particular individual (whether a mayor, corporate president, business owner, landowner, or homebuyer), who must have his or her needs met in a particular manner. Above all, it requires an understanding of what the local market is missing. No one—not even the most experienced developer—has a monopoly on this knowledge. Beginning developers succeed by identifying an opportunity and pressing ahead. They will face obstacles that they cannot envision in advance, but perseverance, hard work, and integrity will enable them to succeed. (Page 70)
• The most important questions to be answered concern the market for the proposed product type: • Where are the most desirable areas or parts of town? • What are the hottest segments of the market? • Who are the most active buyers? What are their characteristics and preferences? • Are there competitors other than new subdivisions (that is, renovations, conversions)? • If a builder owned land in that area, what would he build? • For what types of building are lenders giving loans? • For what types of building are lenders not giving loans? • Where are building permits being issued? What kinds of permits are they? • What physical features and amenities are especially popular? • Are amenities built into the sale price or are they fee supported? • Who are the main builders? Are they producing custom, semicustom, or tract home products? • Who else is developing in a particular area? What are they building? How many units (or square feet) are planned or in the approvals pipeline for the future? • How many units are they selling per month, and how long at this pace? • What are the standard deal terms that builders are using to buy lots? • Are other developers subordinating lot prices, financing construction, or offering other hidden subsidies? (Page 149)