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fina 310: real estate development > class 1: Intro > Flashcards

class 1: Intro Flashcards

1
Q

Property Types

A

residential:

–> single family + multi family

commercial:

–> office

–> retail

–> industrial

–> hotel

–> Mixed-use

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2
Q

What is Real Estate Development?

A

the continual reconfiguration of the built environment to meet society’s needs

It is the creation and re-creation of housing, office buildings, shopping centers, warehouses, roads, sewer systems, landscapes, etc.

Acquisitions, renovations, construction, leasing, purchase of raw land, etc.

It is complex and, as much intuitive as logical and as much creative as mathematical

–> No two developments are exactly alike

It involves many players with congruent or divergent goals and objectives

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3
Q

is Real Estate Development considered risky?

A

considered a highest risk and highest return area of real estate investing

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4
Q

Sources of risk to a developer

A

Market risk (Ability to lease up/sell units)

Government approval and permitting (entitlement) risk

Legislative risk

Site risk (Physical condition, environmental risk, infrastructure)

Financial risk (Access to credit risk, cost of financing , interest rate risk)

Construction risk (On time and on budget)

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5
Q

Real estate market are affected by the economy and interest rates

what is the demand for space related to?

A

related to broad economy as well as specific industries and employment trends

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6
Q

Real estate market are affected by the economy and interest rates

what does the Feasibility of a project depend on?

A

on ability to access capital at low cost

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7
Q

Real estate market are affected by the economy and interest rates

Demand from households for single family homes and condos are related to what?

A

are related to market mortgage rates

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8
Q

what is the relationship between Real Estate Cycles and development lead time?

A

Projects approved in boom times, but when they are delivered several years later, economic conditions may have changed

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9
Q

why are Cycles are exacerbated by overbuilding?

A

Many developers choose the same, favorable moment to start projects

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10
Q

Real Estate Cycles

A
  1. Recovery
  2. Expansion
  3. Hypersupply
  4. Recession
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11
Q

Demand Drivers for residential single family and condos (owner occupied)

A

Population

Household formation (child rearing ages)

Interest rates (Bank of Canada)

Employment growth (business and professional occupations)

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12
Q

Demand Drivers for Multi-family residential (renters)

A

Population

Household formation (non-child rearing ages)

Local housing affordability

Employment growth (blue collar occupations)

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13
Q

Demand Drivers for Retail

A

Disposable income

Household wealth

Traffic wealth (specific sites)

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14
Q

Demand Drivers for Office

A

Economic growth

Employment in office occupations (Finance, Insurance, Real Estate, Business and Professional Services, Legal Services)

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15
Q

Demand Drivers for Industrial

A

Mfg. employment

Transportation employment

Airfreight, rail and truck volume

Online sales

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16
Q

The developer must compose a team having the skill set for what specifically?

A

for the unique requirements of each project

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17
Q

Fee developer

A

hired by a client and does not usually own equity in the project

Little downside risk

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18
Q

Speculative developers

A

own all or part of the equity in the project

Downside risk for upside potential

19
Q

risks involved with speculative developers

A

the cost of pre-development work for projects that may not go forward

Due diligence

Feasibility studies

Market analysis

20
Q

Developers are usually compensated by one or more of the following:

A

Development fees: payment for services

Profits on sale of the project

Promote fee

Ownership of entities that sell services related to the development process

21
Q

promote fee

A

when a developer earns a disproportionate share of the profits

Often given to the developer as a form of bonus for achieving a higher IRR

Generally applies to profits after the financial partner has achieved his targeted IRR

22
Q

“Ownership of entities that sell services related to the development process” compensation to developer

A

Leasing

Property management
General contractors

23
Q

roles of architects in development

A

Participate in the development of the concept

–> Site selection advice

–> Alternative concepts

–> Feasibility

Participate in communicating the vision

–> Illustrations

–> Models

-> Integration into the neighborhood

–> Videos

Creation of the detailed plans

–> Used for construction, public authority review and approval, costing and contractor bids

Use other professional firms in developing the plans

–> Structural engineers

–> Mechanical engineers

Monitor the construction work

–> Construction work phases completed satisfactorily

–> Approval for construction loan draws

–> Attestation of compliance with plans

24
Q

Building contractors

A

turn designs into physical form

25
Q

The general contractor

A

responsible for the overall construction project

hires subcontractors to perform specialized work

–> Excavation

–> HVAC installation

–> Electrical wiring

–> Plumbing

26
Q

how are general contractors often chosen?

what is considered for the selection process?

A

often chosen through a bidding process

Cost, experience, keys employees, financial strength are all considered in the selection process

27
Q

can it be possible for the developer serves as his own general contractor?

A

yes

28
Q

Contractor fees are dependent on what?

A

size

complexity

risks of the project

29
Q

role Geotechnical and soil engineers in development

A

determine the ability of the ground to support the proposed development

This information becomes part of the design requirements, in the specifications of the required depth and type of foundations, compaction, and setbacks

Geotechnical reports are also part of the information that excavation and grading contractors need for determining their scope of work

30
Q

how do Geotechnical and soil engineers determine the ability of the ground to support the proposed development?

A

Their surveys identify major structural features such as:

–> Earthquake faults

–> Landslides

–> Bearing capacity of the soil

31
Q

The key component of development project feasibility

A

market potential

32
Q

what will the market study measure?

A

supply and demand conditions for the project

determine potential pricing

estimate the sales or leasing period

33
Q

appraisers’ role

A

Appraisers produce an estimate of a property’s value

34
Q

when are appraisers involved in the development project?

A

before, during, and after project completion and often take part in the financing process

35
Q

other services provided by appraisers

A

investment analysis to litigation support

36
Q

one must you control when starting your first deal?

A

one of the following (or more):

Land

Capital

Knowledge

Tenants

37
Q

the importance of owning land when starting a development project

A

Supply: a site looking for a use

If you have or control land, a development strategy can be created once the developer has acquired information about the market, engineering, public approvals required, environmental issues, etc.

The market analysis will be a key tool

38
Q

the importance of having tenants when starting a development project

A

Demand: a use looking for a site

Having a tenant ready and committed to leasing a property can make it easier for the beginning developer to access capital

It also eliminates or reduces the lease-up risk

39
Q

the importance of having tenants when starting a development project

A

Demand: a use looking for a site

Having a tenant ready and committed to leasing a property can make it easier for the beginning developer to access capital

It also eliminates or reduces the lease-up risk

40
Q

the importance of having knowledge when starting a development project

A

Demand: a use looking for a site.

In depth knowledge of the local market can give a starting developer a competitive edge by knowing where space is in short supply and which tenants are looking for space.

The ability to convince potential lenders and investors of these opportunities through the use of market studies or letters of intent from prospective tenants can start to make up for the lack of track record in development.

41
Q

the importance of having capital when starting a development project

A

Supply or demand

Obtaining capital is the biggest hurdle for a new developer

With capital in hand a developer can attempt to match a site with the best possible tenant

A starting developer can use capital to gain knowledge, secure a site and attract tenants.

42
Q

When starting out, what should you do if you wanna start a development project?

why?

A

develop what you know best in the market you know best

Keep it to a size and complexity level that you can easily manage.

The first deal will:

–> Establish your track record

–> Establish your image in the marketplace

–> Create contacts within the municipalities

–> Create a network of consultants and other players

–> Build a relationship with investors and lenders

43
Q

Key Success Factors for a Developer

A

Ability to access capital from equity partners and lenders

Ability to identify high-potential sites for development

Knowledge of needs/preferences in local market

Ability to close a deal with a tenant/buyer

Ability to thrive in high risk environment

Ability to persevere through frustration

Great analysis, negotiation and management skills

Drive to succeed/strong work ethic

44
Q

8 stage development model

A
  1. idea inception
  2. idea refinement
  3. feasibility
  4. contract negotiation
  5. formal commitment
  6. construction
  7. completion and formal operating
  8. property, asset, and portfolio management

fina 310: real estate development (8 decks)

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