REAL 5070S Exam 1 - Richard Martin

Land Development

Adding improvements on the land to raw land and taking land up to the point where it is ready to be built upon.

Building

Adding improvements to the land on improved land.

Yields finished property that is ready to meet someones space needs.

Devlopment of residential subdivisions usually consists of...

Land Development

Development of commercial real estate usually consists of...

Both land and building development

Real estate development can also include:

Redevelopment (teardown and rebuild) and rehabilitation/renovation

Real Estate Development

The continual reconfiguration of the built environment in order to meet society's real estate needs

Two types of real estate development:

1. Site looking for use

2. Use looking for site

Sources of real estate development needs:

1. Population and employment growth

2. Changing geographic distribution of population and employment

3. Changing tastes and preferences of households and firms

Population and employment growth

Increase in the AMOUNT of space needed

Changing geographic distribution of population and employment

Changes WHERE space is needed

Creates vacant space in some areas but creates the need to create new space in other areas

Changing tastes and preferences of households and firms

Changes the TYPE of space that is needed

New space needs to be created to replace functionally obsolescent space

What is a real estate developer?

Entrepreneur and manager

The public sectors role

- Every real estate development project is a partnership with the public sector.

- Public infrastructure is necessary to support the development.

- Can't build without a building permit that is issued by the local government.

- Zoning approvals, environmental permits, etc. are issued by the local/state/federal governments.

- Life is so much easier for a real estate developer who stays on the good side of the local government.

Suppliers of financial capital:

Equity partner, Joint venture partner, Construction lender, Permanent lender.

The general contractor:

Lawyers (Contract with developer)

Architect (Contract with developer)

General contractor (Contract and Oversight)

Engineer (Oversight)

Marketing (Oversight)

Construction Manager

Person who supervises all or part of a building project

Has contract with developer and oversees the general contractor

The development process

1. the idea

2. the site

3. feasibility

4. the contracts and approvals

5. the improvements

6. on to the next project

Option

Developer buys right to purchase property at set price over specific period

Cost 1 to 3 percent of purchase price

Contract for sale with contingencies

Developer makes offer contingent upon certain events occurring

Low cost with earnest deposit

Binder

Developer buys a right of first refusal from property owner

Low cost

Letter of intent

Developer issues letter demonstrating intent to buy property from owners

Zero cost

Dual Obsession

-Keep the project on time

-Time = Money

-Interest on construction loans

-Delays push cash flows further into the future

Market the Project

Leases and sales are a result of marketing

Preleasing and presales may be a requirement for financing

Lease and sale deposits can create revenue to help out during the construction phase

How do we measure market performance?

Supply and Demand

Outcome Indicators

- price/rent

- vacancy rate

Supply Indicators

- stock of space

- starts

- under construction

- completions

Demand Indicators

- absorption

Vacancy Rate

Empty SF/Total SF

Space that is not under lease

Indicator of equilibrium (balance between supply and demand)

Why does it matter to landlords that vacancy rates are space not under lease?

It does NOT matter because leased space generates rent regardless of whether the space is occupied or not.

Why does it matter to market analysts that vacancy rates are space not under lease?

To the market analyst, it DOES matter because it indicates how growth will impact the market.

In a market with lots of leased but unused space, the existing space can absorb the initial growth and there will be a lag between when growth begins and when there will be a need for new space.

Availability rate

vacancy rate adjusted for sublease space

There will always be some levels of vacancy in a market because of...

Frictional vacancy and the tendency for supply to stay out in front of demand

Frictional Vacancy

- It takes time to match tenants and available space.

- Not always optimal to take the first deal

- It takes time to find the best deal

Market Rent

The average rent on new leases in the market over a particular period of time

Contract Rent

Contractual rent PSF thats being paid

Effective Rent

Net rent factoring in TIS, concessions, ect.

Absorption

The change in occupied space over a specific period of time

Gross Absorption

- Total new lease signings

- Problem: Includes moves within the market

- Sometimes referred to as leasing activity

Net Absorption

Net change in occupied space

3 primary components of a site analysis

Physical elements, legal elements, economic elements

Location

Summarizes the sites ties to the external world

The most important economic indicator

How is location quality determined?

Determined by the ease with which the spatial service provided by the site can be consumed by the users of space

3 goals of site analysis

1. establish development potential and cost

2. identify competitive differentials

3. evaluate site selection

Physical Characteristics

- Boundaries and shape

- Size (acreage, street frontage)

- Buildings and other improvements (Location, size and configuration, architectural features, physical condition)

- Natural features (Topography, soil, drainage, vegetation)

- Utilities and Infrastructure

Legal Characteristics

- public sector (zoning, subdivision regulations, building codes, environmental regulations, licensing, historical)

- private sector (restrictive covenants/deed restrictions, easements, contractual obligations)

Econonmic Characteristics

- Location quality

- Market conditions

Main considerations when evaluating location quality

1. Linkage quality

2. Mircoaccessability

3. Environment/Exposure

Linkages

The relationship between two properties that results in the movement of people and/or goods between the two properties

Linkage quality is primarily determined by...

Travel Costs (Costs that users of a site incur to maintain the linkages)

Linkage orientations

- Inward Orientation

- Outward Orientation

- Neautral Orientation

Inward Orientation

Property serves as point of destination

Ex: Retail Developments

Outward Orientation

Prperty serves as point of origination

Ex: Residential Developments

Neautral Orientation

Property serves as a point of origination and destination

Ex: Office Buildings

Non-monetary costs of travel

Value of time spent traveling

Distress costs

Terminal costs

Distress costs

Anxiety, aggravation, and frustration of encountering congestion, delays, or other travel difficulties

Terminal Costs

Costs associated with getting from the point of origination to the beginning of the journey or from the end of the journey to the point of destination

Ex: Time it takes to get from parking spot to resteraunt

How to do a linkage analsysis

- What types of people and goods will be coming tothe site from other locations and leaving the sitefor other locations?

- What specific locations will they be coming fromand going to?

- What routes will they beusing to travel to and from the site?

- How high/low are thetravel costs associated with the routesthat will be used?

Linkages macroaccessability

Ease of getting to and from the site

Linkages microaccessability

Ease of getting into the site (ingress), around the site (circulation), and out of the site (egress)

Exposure/Environment

The impact that surrounding land uses have on a site's ability to satisfy development objectives

Informal Feasabiity Tests

Determine whether a preliminary idea hasenough merit to warrant further (and moreexpensive) scrutiny

3 approaches to feasability tests

Value vs. Cost Approach:

- Estimate projected NOI.

- Divide by market capitalization rate to obtain estimate ofmarket value

- Determine whether the value exceeds the expecteddevelopment costs

Debt/Equity Investment Approach:

- Estimate the total investment (debt and equity) the project can attract and determine whether this generates enough money to complete the project

Required Rent/Price Approach:

- Estimate total cost of project and determine the rent/pricenecessary for the project to generate enough revenue to justifythe cost

Debt Service Coverage Ratio (DCR)

NOI/Annual Debt Service

Maximum equity investment ratio

BTCF/IRR required

Why are feasibility tests insufficient for determining feasability?

Tells you if you CAN get it done not if you SHOULD get it done

Economic basis for land use controls

Economic theory suggests that markets are efficient as long as certain conditions are met

One condition is that there are no externalities

Ex:

Government regulation has the potential to improve market outcomes in the presence of externalities

Externalities

The unintended and unaccounted for consequences of one land users upon another

Why do externalities cause markets to fail?

Externalities lead to market failure because a product or service's price equilibrium does not accurately reflect the true costs and benefits of that product or service.

Legal Basis for zoning

Exercise of the police power of the government

Compensation not required unless a regulation becomes a taking

One exception...Landowner will be owed compensation if they are left without an "economically beneficial" use of land

Most land use regulation is performed by local governments

2 rules that local governments have to follow

Must be LEGITIMATE PUBLIC INTEREST

Local government must follow due process in creating and administering the rules

When is zoning illegal?

When it is EXCLUSIONARY

When it intentionally reduces values (downsizing)

Regular parking spaces

9 feet wide 18 feet deep 24-foot backup space Note: This means that parking arranged as two rows of spacesseparated by a back-up area will use an average of 270 ft2 of lotarea per parking space

Accessable parking spaces

Space must be at least 8 feet in width Five-foot access aisle between adjacent spaces. Two accessible spaces may share an access aisle

Van accessable parking space

8 foot access aisle

Legal Basis for zoning

Exercise of the police power of the government

Compensation not required unless a regulation becomes a taking

One exception...Landowner will be owed compensation if they are left without an "economically beneficial" use of land

Most land use regulation is performed by local governments

Why are feasibility tests insufficient for determining feasability?

Exposure/Environment

Distress costs

Anxiety, aggravation, and frustration of encountering congestion, delays, or other travel difficulties

Terminal Costs

Costs associated with getting from the point of origination to the beginning of the journey or from the end of the journey to the point of destination

Linkage quality is primarily determined by...

Travel Costs