Real Estate Principles Real Estate Development

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Real Estate PrinciplesReal Estate Development

• Paul Silverman
• April 10, 2008

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What Real Estate Development Is Not

• A trip to Macau with your Chinese uncles money
• Creation of what you think will work
• A get rich quick activity
• An occupation for those that dont have any other
  skills, knowledge or experience.

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What Quality Real Estate Development Is

• Creation of a physical structure that meets
  demonstrated needs of society based and improves
  the built environment using solid market
  research, thorough due diligence, market based
  cost and income assumptions and financial
  structuring that will produce at least a market
  return.

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What exactly is a Real Estate Developer?

• An individual who has gained deep and extensive
  knowledge of at least one subset of real estate
  activity
• A generalist capable of seeing major trends with
  a keen eye to also be able to balance myriad
  details
• Best comparison is to the conductor of a symphony
  orchestra

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What is the Process?

• Market Research- Find a need and fill it
• It should always start with a complete
  understanding of the market which will be served
  by the project. Supply, demand, rents/sales,
  comparable land prices, design trends and tenant
  industry trends.
• Once a market niche has been identified, prepare
  a simple leasing plan
• Talk to potential users
• What brokers have the best market knowledge in
  this product type
• What design professionals have the most
  experience and creative ideas in this product
  type
• What contractors have the most expertise in this
  product type

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What is the Process? (Cont)

• Due Diligence- Turn over every rock you can find
• Title
• Survey
• Solids condition
• Environmental
• Infrastructure connections
• Planning and Zoning
• Neighborhoods
• Archeology
• What specialty consultants are needed to solve
  problems uncovered

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What is the Process? (Cont)

• Prepare a financial model- Does it work on paper?
• Determine land price
• Determine hard construction costs
• Formulate soft construction and financing costs
• Spread costs over a reasonable timeline or the
  expenditures and the pattern of lease up
• Input assumed rental rates
• Did you assume that there would be a major
  recession in the middle of your project?
• Create a Proforma operating statement at
  stabilized occupancy
• Assume a financial structure
• What is your all cash return?

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What is the Process? (Cont)

• Now it is time to go get the money
• Investment Memorandum
• Test different structures
• Test different lenders
• Loyalty means something in this business

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What is the Process? (Cont)

• Next steps- mitigate risk whenever and wherever
  possible
• Option land
• Prepare outline specs and plans
• Obtain all entitlements
• Obtain 5 construction costs
• Obtain anchor tenant commitments
• Finalize Proforma
• Commit construction financing
• Close on land
• Prepare working drawings
• Issue notice to proceed to contractor
• Launch marketing program