Real estate development and investment

Contents Preface Acknowledgments CHAPTER 1 Overview of the Development Process Economic Perspective Relevancy of Universal Knowledge Ground-Up Development versus Redevelopment The Six Ph

Real Estate |

Development — and Investment i

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Real Estate

Development — and Investment i

A Comprehensive Approach

STEPHEN P PECA

WILEY John Wiley & Sons, Inc.

Copyright © 2009 by Stephen P Peca All rights reserved

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

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Library of Congress Cataloging-in-Publication Data:

Peca, Stephen P

Real estate development and investment: a comprehensive approach/Stephen P Peca

p cm — (Wiley finance series)

Includes index

ISBN 978-0-470-22308-6 (cloth)

1 Real estate development 2 Realestate investment Il Title

HD1390.P43 2009

333.33—de22 2008047052

Printed in the United States of America

10987654321

Contents

Preface

Acknowledgments

CHAPTER 1

Overview of the Development Process

Economic Perspective

Relevancy of Universal Knowledge

Ground-Up Development versus Redevelopment

The Six Phases of Development

CHAPTER 2

Business Ethics

Relevancy to the Real Estate Industry

Legislated Ethics

CHAPTER 3

Project and Development Teams

Types of Developers

Functional Disciplines in the Development Process

Factors to Consider When Forming a Development Team

CHAPTER 4

Historical Perspective of Real Estate Development

The Beginnings of Real Estate Development

Major Events Causing Change in the United States

CHAPTER 5

Market Research

Inception of the Idea

Markets, Market Research, and Marketing

(Analysis of Development Potential)

14

15

21

21

24

23

29

30

34

38

38

45

51

Sl 32

Concepts That Define Marketing (and Markets) 56 Using Market Studies and Preparing for Marketability

Sources of and Methods for Gathering Information 62

Validate the Data and the Importance of Revisions

and Updates 64

CHAPTER 6

Showing That Your Development Concept

Importance of Marketability Studies Revisited 68 Idea Refinement and the Application of the

The Process of Idea Refinement 69

CHAPTER 7

Elements of Design 77

Public and Private Restrictions on Land Use 86

CHAPTER 8

Project Programming and Design 95 Elements of Design—Again 95

Talking to End Users 95

A Brief Word about Architectural Drawings 103

CHAPTER 9

Entitlement Process and Public-Private Partnerships 105

Typical Community Approval Process 105 Public-Private Partnerships 107

Contents vil

CHAPTER 10

Budgeting, Financial Analysis, and Capital Structure 113

Preparing for the Financial Analysis and Pro Forma 113

The Operating Pro Forma 115

Review of Common Analytical Measurements 115

Short- and Long-Term Financing 122 Financing Cycle—Anticipating Requirements 126

Elements of a Feasibility Study or Deal Book 127

Guarantees 132

CHAPTER 11

Contractors, Consultants, and Construction Contracts 134

Budgeting and Scheduling 134

Preparing for Construction: Bid Proposals and Review 138

Construction Documents and Construction Agreements 139

Risk Management: Part 2 141

Bonding and Insurance 142

Construction Monitoring: Draw Meetings,

Managing Change Orders 145

CHAPTER 12

Leases and How They Are Used 151 Value Creation 151 What Is a Lease? 151 Common Lease Structures 152 Lease Management and Analysis 154

CHAPTER 13

Marketing Focus of Development 157 Know Your Target Audience 157 Your Essential Vision 160

The Importance of Branding 161

CHAPTER 14

Function and Goal of Property Management 166 Function and Goal of Asset Management 167 Function and Goal of Portfolio Management 168

Property Life Cycle 169

CHAPTER 15

Recent History—Where We Left Off 171

Social Responsibility and Ethics 177

Glossary 179

Preface

have been involved in the real estate industry and development business in one aspect or another now for 30 years I was trained as a CPA, went to

law school for a year, was an accountant, was a chief financial officer, have been part of several development teams, was a commercial banker, was an

investment banker, and now am an entrepreneur and a teacher While these roles seem to be disjointed and unrelated, they are not Virtually all of my roles have been focused on the real estate industry, with a brief departure into corporate banking and project finance When | started in real estate

development, very few academic programs were available to teach people

about the business | was trained, just like everyone else in the industry, by on-the-job training Today, there are many more academic programs—even internationally—proving the demand for the knowledge

This book provides a systematic and practical analysis of the phases of

the real estate development process, including conceptualization, site acquisition, planning and design, the construction process, financing, and

leasing and marketing, followed by investment management The linear process I have outlined for you, the reader, will help you pursue your first

real estate development or redevelopment project, or help the experienced

person refine the process he or she has been using This book, at the very

least, will perhaps help you look at real estate development from an entirely

different perspective The book addresses details of the development pro-

cess, but does not get so detailed as to address the fine points of each area of

the development process, and, as a result, is highly readable

Being a developer, the leader of the development process, requires expe-

rience and thought | try to scatter the book with quotes from famous and

not-so-famous people that should help the reader gain a philosophic under-

standing of the top’

I have been teaching a course on the real estate development process for

more than five years at a major university This book offers an all-inclusive approach; that is, many developers simply focus on the financial or con-

struction aspects of development and give only passing reference to the other—and no less important—aspects of the development process, such as idea refinement, branding, or investment management

x PREFACE

Frankly, real estate development and investment, while exciting and sexy, is still viewed as an odd investment type Major changes have occurred over the years, such as institutional investors directly investing in real estate development projects in the 1990s So, real estate is now consid- ered a solid alternative investment Hedge funds are investing in real estate projects Private equity firms are investing in real estate So real estate has finally come into its own But many still think there is a mysterious element

I think the mystery is because the essential way

to obtain the knowledge is still by on-the-job training and experience Even

as students complete my course on the subject, they have the motivation, they have the knowledge, and now they have to actually go do it

What I hope to accomplish in this book is to impart my knowledge and experience to the reader | will try to get you to think differently when ap- proaching a real estate development Let me point out here that when | am saying real estate development, | am talking about ground-up development, renovation, brownfield development, and everything in between Thus, this book should be of interest not only to the active real estate developer—new

or experienced—but also to the institutional investors, hedge funds, private equity firms, commercial banks, and investment banks that are trying to understand the industry so they can make better investments or understand their clients’ activities

Leadership, management and control of the development team, and

public-private partnerships are featured issues The book will take readers

through the development process from historical considerations to financial feasibility to asset disposition by using a number of illustrations and anec- dotes Each chapter finishes with a section on learning points, things that

you should understand after reading each chapter

Useful to all readers is that once you understand the overall develop-

ment process, you can pursue development anywhere in the world Yes, the

laws are different, but the laws are different everywhere—New York, Des

Moines, Beijing, or Kabul—yet the development process is exactly the same

So my aim is for you to learn the entire development process, learn a way of thinking, and use this book as a reference as you pursue your exciting career

or business in real estate development anywhere in the world Additionally,

no matter what the state of the economy might be in a given geographic location, following the development process as | have outlined it will almost always result in a successful development project

Overall, this book has the following learning objectives for readers:

= Understand the key steps in the development process: A key to suc-

cessful development is following a standard path from the beginning to