Studied by 12 people
What are setbacks?
The amount of land between the property and the street before you can begin building
What is the authority for regulating real estate use?
The authority to regulate land use is a result of the “police power” afforded governments at both the local and state level
What are the primary rationales for government interference in real estate markets?
Markets are imperfect and market participants may be ignorant of facts that significantly affect their welfare
Every land use has the potential to generate externalities that may positively or negatively influence adjacent property values
Real Estate values may be enhanced with good land use planning
What is zoning?
Zoning is the regulation of permitted land uses, as well as minimum or maximum structures, upon geographically defined contiguous districts
What is the purpose of zoning?
Zoning limits potential land uses and often use a cumulative type hierarchy system
What happens within a cumulative zoning system?
Less offensive uses are permitted even in more restrictively zoned areas, but not the reverse; highest order classifications: single family homes
What was the original purpose of zoning? How has this changed?
The original economic purpose of zoning was to help minimize negative externalities by grouping similar uses of land together. Today, zoning has largely become a political process as opposed to an economic process
What is NIMBY?
“Not in my Back Yard” - can exert a large influence over zoning decisions at the local level
What should we expect from zoning in the future?
More cities are realizing the importance and benefits of mixed use developments
We should expect to see more flexible zoning in the future
What happens by grouping similar land uses together through zoning codes?
There is less negative impair on other types of land uses that may be less noxious
What are building codes?
A series of standards and specifications designed to establish minimum safeguards in the erection and construction and construction of buildings, and to protect those who live and work in them
What are included in building codes?
Building codes describe in great detail the materials, methods, and techniques to be used in the construction of buildings
What have been the criticisms of building codes in recent years?
They have been criticized on the grounds that they go beyond protecting the ignorant participants in the market to inhibiting the market and constraining innovation
Why did tax credits become available?
In 1987, tax credits became available to encourage rehabilitation and preservation of historic real estate structures
What is the value of a tax credit?
A tax credit is more valuable than a deduction from income for the calculation of taxable income since tax credits are dollar for dollar tax savings
What is the two tiered system for tax credits?
A two tiered system is still in place today where property candidates for tax credits must either have:
Been placed in service prior to 1936
Be certified as “historic” through a registration/approval process administered by the Federal government via the Secretary of the Interior
What are the major building codes for design review and aesthetic controls?
“Highway Beautification Act” under President Johnson
Other design guidelines to limit the colors or control the use of lighting or signage or materials to enhance the uniformity of image
Consistent environmental quality - EQD
ADA requires that facilities that are generally open to the public be accessible to all members of society
What does ADA require of real estate properties?
ADA requires that facilities that are generally open to the public be accessible to all member of society
How do property taxes impact a property’s value?
They exert negative influence on property values because they increase the cost of ownership
How do public expenditures impact a property’s value?
They exert a positive influence on property values
How do property taxes and public expenditures influence property value in an ideal world?
The negative influence of property taxes on property values would be more than offset by the positive value effect of good schools, nice parks, or good fire protection
What is fiscal redistribution?
The mismatch of service receipt and cost support - city vs. suburbs; transfer of income from higher to lower income households via tax and transfer schemes
Property Tax Assessment and Calculation
The appraised market value of a house
Times: The assessment ratio for personal residences
= Assessed value
The sum of the millage rate of the city, county and schools then made into a percentage of the appraised market value
How do you calculate the effective property tax rate?
(Property taxes due each year/Appraised market value)*100
How can local/state governments encourage or directly support private development?
Property tax abatement for many years
Land buy downs
Industrial revenue financing
Tax increment financing (TIF)
Infrastructure improvements
What is the most common form of public assistance today?
Tax increment financing (TIF)
What do part of property taxes paid go to?
Part of the property taxes normally paid, e.g. 75% are diverted and used to support local government bonds that are issued at the time of development. These bonds may be used for a variety of subsidy approaches
State/Local Level Subsidies
Use of abating local and state income taxes on the earnings of a new local employer in order to encourage a location move to an area in a given statement and/or county or city
Competition for large employers has been so strong in some urban areas, especially in areas that border two states, that governments end up in a bidding war of economic incentive packages
At the local level, the investment required to lure a key employer into an area might well be worth the cost
However, at the national level, it is a zero sum game
What is the focus of environmental regulation?
Most environmental regulation, like early building codes, is focused on protecting the health, safety and welfare of our citizens
What is environmental activism?
Environmental activism officially began at the Federal level in 1969 with the passage of the National Environmental Policy Act
What is the environmental impact statement?
The first assessment of the impact of any proposed development
What is CERCLA?
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
The primary federal statute that may result in personal liability from the acquisition, ownership or operation of real property
What is the purpose of CERCLA?
This is also referred to as the “Superfund”, it sets forth a complex regulatory scheme to identify, investigate, analyze, and remediate property contaminated with hazardous waste
Who is liable in CERCLA?
Current/past owners, generators/possessors and transporters of hazardous substances
CERCLA liability is ___________
strictly retroactive
What is the result of CERLA?
There are three defined stages of mandates reports and actions to try and avoid liability for clean up costs of a contaminated site, or investigate the extent/cost of actual clean up
What are the phases of CERCLA?
Phase 1: To determine whether there is evidence of past or current environmental problems on the subject site
Phase 2: To test and verify the extent of the actual contamination
Phase 3: Actual action plan that usually includes remedial cleanup efforts
How did wetlands used to be perceived? How are they viewed now?
For many years, wetlands were thought to be useless mosquito infested swamps. Today we are learning that they are wondrous sources of life and diversity, with species that are crucial for a healthy environment. Wetlands help control floods, which are important ecological processes
What is green design?
Green design involves a more environmentally oriented approach to building design, construction and maintenance
What is sustainable development?
Sustainable development plans include a more holistic approach to the environmental impact of the entire development
What characterizes a developer?
Developers must have vision and see the opportunities, requires strong analytical and people skills
New concept
Follow the path tested by others
What is the highest risk sector in the industry?
Real Estate Development
Why is real estate development most risky?
Most opportunity for value and most opportunity for challenges/mistakes
Usually a high use of leverage
Who are the players in real estate development?
Developers
Designers and physical planners
Environmental consultants
Regulators
Neighbors
Competitors
Tenants or buyers
Leasing or sales agents
Property managers or facilities managers
Lenders
Owners/investors
What is the chronology of development?
Conceptual stage
Resource assembly and planning
Implementation and contractual period
Absorption and operational period
Harvesting and disposal
Who is the father of feasibility analysis?
Dr. James Graaskamp (Univ. of Wisconsin)
What are the two primary situations for feasibility analysis?
Site looking for a use
Use looking for a site
What are the five major components of feasibility analysis?
Strategic analysis
Market and competitive analysis
Political and legal analysis
Physical and design analysis
Financial analysis
What are the components of financial analysis?
Project costs
Front door/back door techniques to determine feasibility
What are the types of project costs?
Hard costs and soft costs
Absorption costs
What are the front door/back door techniques to determine feasibility?
Front door = costs to rent
Back door = rent to costs
Graaskamp’s Approach to Feasibility Analysis
What are office market trends?
Parking
Energy supply
Wired or wireless
Warehouse Trends
Retail Property Types and Trends
Single Family Housing
Multifamily Housing
What does a developer do?
Creates value
What are the four major risks that a developer faces?
Entitlement risk, financing risk, construction risk, and absorption risk
What is the value created by developers?
Difference between total project costs & stabilized value
What is stabilized value?
Property value realized at stabilized rents and stabilized occupancy
What is included in total project costs?
Includes land costs, hard costs, soft costs, and absorption costs (Note: Some developers may include a portion of developer profit in total project costs)
Describe absorption costs
Monthly operating expenses + monthly leasing/marketing fees + monthly construction loan interest carry in excess of monthly EGI
Describe breakeven cash flow
Monthly EGI = monthly operating expense + monthly leasing/marketing fees + monthly construction interest due (“interest carry”); i.e. no more accumulation of project costs
Why is breakeven critical?
Because if costs continue to accumulate past their budgeted amounts it decreases the value created, i.e. starts defeating the developer’s purpose and very likely may be reduced at a rapid rate to zero or worse after years of work and risks. On the other hand breaking even earlier than projected provides the opportunity to create more value than projected, i.e. a higher margin
How much value should a developer create?
Enough to compensate him or her for the risks taken
How do we estimate sufficient value creation?
Percentage mark up over total project costs, i.e. more risk more markup
Return on Costs v. Cap Rate of Return on Value
What is the rule of thumb?
It assumes total costs do not include developer profit
20% low risk (Build to suit or similar)
35 to 50% higher risk (speculative)
Return on Costs v. Cap Rate or Return on Value
Ex. NOI = 100,000, Total Costs = 1,000,000, Market Cap Rate = 8%
ROC = 100,000/1,000,000 = 10% > 8% cap rate by 2% or 200 basis points; value creation equals the difference between value and total costs, i.e. value is NOI/cap rate or 100,000/.08 = 1,250,000 less total costs of 1,000,000 or $250,000
What financial analyses’ do we relate to our mark up percentage?
Construction Cost Analysis for total project costs, and GRM, Traditional income approach or discounted cash flow approaches for value
How do we decide the specifics of a potential development plan?
Feasibility analysis
What four areas are considered in executing the project’s strategy and goals?
Market
Political
Physical
Financial
What does an “iterative” process mean?
Run scenario after scenario through the areas of the feasibility analysis, one impacting the other, until a recommended development plan consistent with the decided strategy and goals is achieved
Hard costs
Amounts of capital committed in development projects to materials, labor, and other tangible or nonservice inputs
Soft costs
A component of construction cost including the cost of permits, legal fees, financing and insurance fees, architectural and design costs, other professional fees, and the cost of marketing
Stabilized value
The value of a property after it reaches projected occupancy rate and operating expenses
Tax rate
(The budgeted expenditures - the income from sources other than property tax)/(The total assessed value of all properties - the value of property exemptions)
Taxable value
Assessed value - Exemptions
Millage Rate
the tax rate converted into mills (dollars per $1000 of value
Millage Rate x Taxable Value = Taxes Levied
Return on Costs
NOI/Total Cost
Return on Value
(NOI/Cap Rate) - Total Costs
Note 
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