REAL ESTATE DEVELOPMENT PRINCIPLES AND PROCESS FIFTH EDITION. Mike E. Miles Lawrence M. Netherton Adrienne Schmitz. Urban Land Institute ULI

Transcription

1 REAL ESTATE DEVELOPMENT PRINCIPLES AND PROCESS FIFTH EDITION Mike E. Miles Lawrence M. Netherton Adrienne Schmitz ULI Urban Land Institute

2 Contents PART 1. INTRODUCTION 1 Chapter 1: Introduction to the Real Estate Development Process 3 Defining Real Estate Development 3 The Eight-Stage Model of Real Estate Development 4 Characterizing Developers 6 Reputation of the Industry 8 The Development Team 9 The Public Sector: Always a Partner 10 Market and Feasibility Studies 10 Design: Never an Afterthought 10 Evolutionary Changes in the Development Process 11 Availability of Data 11 Technology and Social Media 12 Sustainability 12 A Much Longer Venture Capital Period 13 Feasibility from Another Perspective 13 Wall Street (and Related Avenues) 13 Increased Pressure on the Public Sector 13 Summary 14 Terms 14 Review Questions 14 Notes 14

3 X Chapter 2: The Raw Material: Land and Demographics in the United States 15 Population Growth 15 National Demographic Trends 16 Rinding Demographic Data 21 Employment Growth and Economic Cycles 21 Regional and Metropolitan Shifts 22 Finding Employment Data 25 Land Supply 25 Who Owns the Land? How Is It Used? 26 Foreign Ownership of Real Estate in the United States 27 Real Estate, Gross Domestic Product, Wealth, and Employment 27 Summary 27 Terms 28 Review Questions 28 Notes 28 Chapter 3: Developers and Their Partners 29 The Major Players 29 Private Sector Developers 30 Public/Private Partnerships 32 Architects 32 Engineers 33 Landscape Architects 34 Land Planners 35 Urban Designers 36 Building Contractors 37 Site Development and Grading Contractors 37 Environmental Consultants 38 Traffic and Transportation Consultants 38 Biology Consultants 39 Geotechnical and Soils Consultants 39 Hazardous Substance Consultants 39 Air Quality Consultants 39 Greenhouse Gas Consultants 39 Noise Consultants 39 Market Research Analysts 39 Lenders Joint Venture Partners Appraisers Public Finance Consultants Attorneys Accountants Leasing Agents and Sales Brokers Marketing and Public Relations Consultants 41

4 Property Managers 41 Regulators 42 End Users 42 Property Types 43 Residential 43 Retail 43 Office 44 Industrial 44 Hotel and Resort 44 Mixed Use 44 Summary 44 Terms 44 Review Questions 45 PART 2: THE HISTORY OF REAL ESTATE DEVELOPMENT IN THE UNITED STATES 47 Chapter 4: The Colonial Period to the Late 1800s 49 Real Estate as an American Tradition 49 Early Land Transactions so Fee Simple Real Estate Transactions so Developing the District of Columbia 51 Gmund Leases 52 The Holland Land Company 53 John Jacob Astor 54 Capital Improvement Projects 54 Land Subdivision and the Growth of Cities ss The Growth of Inner-City Slums 56 Company Towns, Utopian Communities, and Garden Cities 57 Transportation Advances and the Rise of Suburban Development 58 Llewellyn Park, New Jersey, and Riverside, Illinois 58 Samuel E. Gross 60 The Role of Railroads in Real Estate Development 61 The Effect of Railroads on Industrial Development 63 Railroad Barons as Real Estate Developers 63 Flagler and the Growth of Southern Florida 63 Huntington, the Southern Pacific, and Southern California's First Boom 65 Summary 66 Terms 66 Review Questions 66 Notes 66 Chapter 5: The Late 1800s to World War II 67 Civic Leadership, Reform, and the Public Sector 67 Centralization 69 xi

5 xii Central Business Districts and Commercial Development 69 The Growth of the Skyscraper 70 Downtown Hotels and Department Stores 72 Office Building in the Roaring Twenties 74 Rockefeiler Center: Mixed-Use Innovation 76 Urban Apartment Buildings 76 Decentralization 77 The Streetcar Suburbs 78 The Emergence of the Garden City 7 9 Examples of Early Planned Communities 79 Radburn 80 Shaker Heights 80 The Evolution of Real Estate Finance 81 The Great Depression and World War II 88 Bailing Out the Financial Institutions 85 The Federal Housing Administration 86 Housing after the Great Depression 88 The Professionalization of Real Estate Development 90 Summary 91 Terms 91 Review Questions 91 Notes 92 Chapter 6: The Modern Era: World War II to the Present 93 Suburbanization and the Postwar Boom 94 Production 94 Transportation: The Expansion of Interstate Highways and the Growth of the Suburbs 95 Financing 96 Employment: The Growth of Suburban Office and Industrial Parks 97 The Growth of Suburban Shopping Centers 97 The Growth of the Lodging Sector 99 The Urban Crisis: Race, Housing, and Neighborhoods 101 Urban Renewal 101 The Federal Government's Response to the Urban Crisis 104 Development Movements in Inner-City Neighborhoods 105 Downtown Revivals 107 The Evolution of Planned Communities no EdgeCities 113 The Cyclical Nature of Real Estate 114 Boom and Bust 114 The Great Recession Flanning Movements 117 Public Interests 117 Smart Growth Summary

6 Terms 119 Review Questions 119 Notes 119 PART 3: THE PUBLIC INTEREST 121 Chapter 7: The Role of the Regulatory Sector 123 The Allocation of Power 123 Property Rights and Entitlements 124 Local and State-Mandated Regulation 126 General (Comprehensive) Plans 127 Specific Plans and Planned Unit Developments 129 Conditions of Approval 129 Zoning 130 Subdivision Maps 130 Infrastructure 130 Exactions 132 State Environmental Regulation 133 Other State and Local Agencies 134 Councils of Governments 134 Special Taxing Districts 134 Coastal and Special Focused Commissions 135 Other Site-Specific Development Control Mechanisms 135 Development Agreements 135 Transferable Development Rights 135 Form-Based Zoning 136 Transect Zoning 136 Growth Boundaries 136 Bailot Box Flanning 136 Federal Regulation 137 The Clean Water Act 137 The Endangered Speeles Act 139 The Clean Air Act 140 The Superfund Act 140 Asbestos 142 Americans with Disabilities Act 142 Packaging the Entitlements 143 The Process 143 The Risk Profile 144 Dependence on Others and Management of the Entitlement Process 144 The Importance of Negotiation 145 Summary 145 Terms 145 Review Questions 146 Notes 146 xiii

7 Chapter 8: Decision Makers and Stakeholders 147 Managing Change 148 The Nature of Change 148 Discretionary Approvals 148 Accommodating Stakeholders 1 49 The Participants 149 The Developers Team 1 49 Public Outreach and Public Affairs Professionals 150 The Land Use Attorney 1 50 The Public Sector's Team 151 The Board 151 The Flanning Commission and Other Commissions 151 The Flanning Staff 151 Stakeholders 151 Individual Stakeholders 151 Ad Hoc Croups 152 Formal and Semiformal Croups 152 Issue-Based Croups 152 Supporters 152 Public Outreach 153 Information Gathering 153 Charrettes 154 Disseminating Information 154 Building Support 154 The Public Hearing 155 The Intersection of Flanning Theory and Entitlements 158 Advocacy Flanning 158 Public/Private Partnerships 158 Private versus Public Sector Resources 160 Organizations and the Public/Private Process 161 Principles of Public/Private Partnerships 162 The Objectives of Public/Private Development 163 Formation of Public/Private Partnerships 164 Strategie Decisions in the Implementation of Public/Private Projects 164 Selecting a Developer 164 Terms of the Deal 165 Negotiating the Deal 166 Practica! Problems and Policy Issues 167 Sports Facilities 168 Summary 170 Terms Review Questions Notes 171 xiv

8 PART 4: IDEAS 173 Chapter 9: Stage One of the Development Process: Idea Inception 175 Motivations Behind Ideas 176 The Back-of-the-Envelope Pro Forma 178 Idea Inception in the Corporate Context 181 Techniques for Generating Ideas 182 Risk Control during Stage One of the Real Estate Development Process 184 Summary 186 Terms 186 Review Questions 186 Notes 186 PART 5: FINANCING THE PROJECT 187 Chapter 10: Real Estate Finance: Background 189 The Big Picture 189 The Relationship between the Space Market and the Capital Markets 190 Expected Rate of Return: A Fundamental Underpinning of Capital Markets 191 Inflation and Time 191 RiskPremium 192 Capital Market Segments 193 Private Sources of Real Estate Debt 193 Public Sources of Real Estate Debt 193 Private Sources of Equity 195 Public Sources of Equity 196 Real Estate Cycles 197 The Real Estate Finance Process 197 Financing Predevelopment Activities 198 Land Acquisition Financing 198 Landowner Financing 198 Gmund Lease 199 Construction Financing 199 Permanent Financing 200 Interim and Mezzanine Financing 203 Regulatory Changes Resulting from the Great Recession 203 Summary 203 Terms 204 Review Questions 204 Notes 204 Chapter 11: Real Estate Finance: The Basic Tools 205 The Components of Net Operating Income 206 Potential Gross Income 206 Vacancy, Collection Loss, and Rent Concessions 208 XV

9 xvi Miscellaneous Income 208 Operating Expenses 208 Calculating Net Operating Income 209 Property Cash Flow 209 Estimating Value Using Cap Rates 211 Direct Capitalization 211 Discounted Cash Flow and Internal Rate of Return 211 Capital Structure 215 Loan Underwriting Process 216 Lender's Calculations 218 Debt Service Coverage Ratio 219 Loan-to-Value Ratio 219 Benefits and Costs of Using Debt Financing 220 Adding Income Tax Considerations 220 Industry Tools for Project Underwriting 221 Summary 221 Terms 221 Review Questions 222 PART 6: PROVING THE CONCEPT 223 Chapter 12: Stage Two: Idea Refinement 225 Objectives of Stage Two 226 Creating a Plan 226 Controlling the Site 227 A More Detailed Scan of the Environment: Governments and Competitors 227 Urban Growth Models 229 Choosingthe Site 230 Types of Buyers 231 Types of Seilers 231 The Deal 231 Information Sources 234 The Site's Physical Characteristics 234 Usable Area 234 Geology 235 Hazardous Materials 235 Cultural Resources 235 Infrastructure 236 The Site's Development Rights 237 Initial Feasibility 239 Negotiating for the Site 239 Stage Two Participants 240 Contractors 240 End Users 240 Property Managers 241

10 Lenders 241 Investors 242 The Public 242 Segmenting the Market and Differentiating the Product 242 Financial Feasibility 243 Risk Control during Stage Two 244 Summary 245 Terms 245 Review Questions 245 Notes 245 Chapter 13: Stage Three: The Feasibility Study 247 The Definition of Feasibility 248 Initiating the Feasibility Study 248 Components of the Feasibility Study 251 The Market Study 251 Preliminary Drawings 253 Construction and Total Cost Estimates 254 The Value Statement and Formal Estimate of Feasibility 256 The Enterprise Concept 258 Bringing It All Together 258 Investors and Lenders 259 Investors 259 Lenders 260 Entitlements and Other Government Considerations 261 Feasibility: The Project and the Participants 261 Risk Control Techniques during Stage Three 261 Summary 263 Terms 263 Review Questions 263 Notes 263 PART 7: MAKING IT HAPPEN 265 Chapter 14: Stages Four and Five: Contract Negotiation and Formal Commitment 267 Stage Four: Contract Negotiation 268 Decisions about Financing 268 Finding a Permanent Lender and Securing a Loan Commitment 270 Finding a Construction Lender and Securing a Loan Commitment 271 Using Mezzanine Financing to Complete the Financing Package 272 Entitlements and Financing 273 The Common Thread in All Forms of Financing 274 Working Environmental Reviews into Contract Negotiations 275 Hazardous Wastes: Everyone's Concern 275 CONTENTS xvii

11 Asbestos Wetlands Sustainable Development Decisions about Design and Contractors 278 Architects' Contract 279 Construction Contract 280 Bidding versus Negotiations: Fixed Price versus Cost Plus 284 Fast-Track Construction 285 Bonding 286 Construction Supervision 286 Decisions about Major Tenants 286 Stage Five: Commitment Signing Contracts and Initiating Construction 288 Summary 289 Terms 289 Review Questions 290 Notes 290 Chapter 15: Stage Six: Construction 291 Starting Construction 291 The Major Players during Construction 292 Project Manager 292 Marketing Manager 293 Financial Officer 293 Property Manager 293 Building the Structure 294 Meetings and Scheduling 294 Drawing Down the Construction Loan 295 Leasing and Building Out Tenant Space 296 Landscaping and Exterior Construction 297 Potential Problems 298 Risk Control Techniques during Construction 301 Summary Terms 302 Review Questions Chapter 16: Marketing, Sales, and Leasing 303 The Promotional (Soft) Side of Marketing 305 Strategy and Flanning: SWOT Analysis Strengths 306 Weaknesses 306 Opportunities 306 ThreatS 306 The Marketing Vision 306 Risk Control Techniques during Marketing 308 The Marketing Budget xviii

12 Promotions 310 Image, Identity, and Naming 310 Marketing Environments 310 Targeted Advertising 310 Public Relations 312 Events 312 Sales and Leasing 312 The Marketing and Sales Statt 312 Building the Sale 313 The Contractual (Hard) Side of Marketing 314 The Leasing Transaction 314 Targeting the Tenant 315 Determining the Operating Expenses 316 Investment Property Sales Transactions 317 For-Sale Property Transactions 318 Stage Seven: Completion and Formal Opening 319 Summary 319 Terms 319 Review Questions 320 Note 320 Chapter 17: Stage Eight: Property, Asset, and Portfolio Management The Enterprise Concept and Continuing Management of the Developed Asset 322 The Real Estate Management Triad 322 The Property Manager 322 The Asset Manager 324 The Portfolio Manager 325 Fundamentals of Real Estate Management from the Development Perspective 326 Transitioning from Development to Operations 327 Developing an Initial Strategie Plan for the Property 329 Implementing the Strategie Plan 330 On-Site Staffing 330 Home Office Staffing 330 Marketing and Leasing 330 Operating Budget 331 Capital Program 332 Ongoing Flanning 333 Property Management Contracts 333 The Corporate Real Estate Director 334 The Influence of the Public Sector on Management of Real Estate 335 Globalization and Real Estate Portfolio Management 336 Summary 337 Terms 337 Review Questions 338 Notes 338 CONTENTS xix

13 Chapter 18: Preparing for the Future 339 Learning From the Fast 339 Trends and Issues 340 Known Demographic Changes with Knowable Consequences 340 Environmental Concerns 341 Globalization and Shifting Economies 342 Döing More with Less 342 Technology: Changing Real Estate Practice 343 Smaller, Smarter Spaces 344 Mobility: Driverless Cars, Transit, Smart Parking, and Active Transportation 344 Green Buildings, Sustainable Development, and Resilience 346 Place Making 347 Health and the Built Environment 347 Eternal Issues for Real Estate Developers 348 Property Rights versus Public Interest 348 Neighborhood Self-determination versus Regional Interests 348 Allocation of the Cost of Growth 349 Market Demand versus Good Flanning 350 Summary 350 Review Questions 350 Notes Glossary Bibliography 363 Index XX