introduction to development learning objectives discuss issues specific to the development and...
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INTRODUCTION TO DEVELOPMENT
LEARNING OBJECTIVESDiscuss issues specific to the development and
construction business.Identify the members of development teams and
describe their roles and relationships.Present the typical sequence of steps in a
development project.
INTRODUCTION TO DEVELOPMENT
LEARNING OBJECTIVES
Evaluate the economic feasibility of a simple development project.
Formulate successful strategies for constructing land improvements.
REAL ESTATE DEVELOPMENT
Development and Construction BusinessLand development (horizontal development) is
the process of changing raw land into a usable building site (parcel).
Building development (vertical development) is the process of constructing improvements on a developed site.
The Development Team
Suppliers of Financial Capital:Equity Partners Joint Venture Partners Construction Financing Lenders Permanent Financing Lenders
The Development Team
Consulting Professionals:Lawyers Architects Engineers Marketing Agents
The Development Team
The General Contractor:The general contractor oversees all aspects of the
construction of the project. Subcontractors are hired by the general
contractor to complete specific tasks such as plumbing, painting, and electrical.
The Construction Manager:The construction manager serves as the
developer’s on-site agent.
The Development Process
Stage 1: The IdeaStage 2: The SiteStage 3: Project FeasibilityStage 4: The Contracts and PermitsStage 5: The ImprovementsStage 6: Project Completion
ECONOMIC FEASIBILITY: A VALUE PERSPECTIVE
Consistent with the manufacturing and service industries, the profit motive underlies real estate development.In equilibrium, the market compensates the
developer with normal returns on their investments of money and time.
In disequilibrium, developers stand to make either extraordinary returns or suffer extraordinary losses.
Example: Cost of Office Project
Item Cost Totals
Land $1,951,600
Plus: Hard Costs 6,657,700
Plus: Soft Costs 5,471,900
Total Construction Costs 14,081,200
Less: NOI during lease-up 2,055,900
Development Costs $12,025,300
Example: Value of Office Project
Item Amount
Potential Gross Income $1,800,250
Less: Vacancy 90,013
Effective Gross Income 1,710,237
Less: Operating Expenses 356,250
Net Operating Income 1,353,987
Indicated Value (11% Cap. Rate) $12,308,973
Q-ratio (Value/Cost)
1.0236
Example: IRR on Office Project
Year
Cash Outflow
Cash Inflow
0 Initial Investment $1,951,600 $0
1 0 0
2 Development Fee 0 280,000
3 Equity Reversion 0 $2,235,2
72
IRR = 9.2%