1. Gaining effective control of the site.
Most projects begin with a site, or an idea in search of a site. Unless a specific piece of land, in a viable location, can be obtained at a reasonable cost, there is no basis for further effort. Once a site is found it should be optioned or otherwise tied-up to provide effective control -- that is, assurance of availability when the decision is taken to proceed with the project. The process of gaining effective control of a site must include determining whether there are any potential restrictions on its use that could prevent the project from proceeding and arranging to deal with these potential problems.
Creating a development plan is a team effort. Large real estate groups often field their own teams. Smaller developers may recruit the efforts of specialists in such fields as land planning, architecture, construction, costing, leasing, taxation, and finance, as needed. A developer may do his or her own preliminary development plan, but the final plan requires the inputs of experts in each key area to build accurate, detailed project plans. Experts' time is expensive, but sometimes they will work "on spec" at this phase, in hopes of getting large contracts later. More often they must be used sparingly and paid. The quality of the team, and the quality of leadership given to the team by the developer, often spell the difference between success and failure.
3. Determining the highest and best practical use for the site.
The first major task of project team members is to evaluate the planned use of the site. They must determine what the likely costs and revenues would be for each practical use of the site, taking into account regulations applicable to site use, considering problems in obtaining community reactions, and taking current space availability and competition into account, as steps toward defining the most intensive practical use for the site.
4. Developing Outline Marketing Plans.
Marketing, and the cost of "carrying" the project during the lease-up period, are often significant fractions of the total project budget. The developer must therefore work with brokers and others who know the market to project the prices and rates of sale or leasing that can reasonably be expected, taking into account available supply, other planned construction, recent market leasing and sale rates, demographic trends, and predictions about the extent to which tenants and owners will move from existing premises to the new space you plan to develop. Based on these market projections, it should be clear whether the marketing task will be easy or hard, fast or slow, costly or inexpensive. These factors are then built into the project budget and plan.
5. Obtaining firm commitments from key players for design and construction.
Until firm commitments are received from the key players, one cannot be sure of project costs or of the availability of the services of players who can be counted on to do the job well and on schedule. On complex projects, the developer may obtain an outline plan and specifications from the architect and uses them to solicit preliminary bids or estimates from contractors. These are then refined as final bids and become part of the basis for obtaining commitments of project finance -- debt and equity.
6. Obtaining debt and equity finance.
This must be adequate to see the project through completion. Suppliers of finance want to see detailed, phased budgets that take into account all costs, including finance charges during the construction and leasing or sale periods, and contingencies for cost over-runs and delays. Then, based on these estimates, the developer proposes reasonable debt and equity portions, and approaches short and long term debt sources and equity providers with deal adequately with all phases of the plan and show reasonable rewards for the risks involved.
7. Constructing, leasing and managing the project until the correct moment for disposition.
Once finance has been arranged, contracts are signed and the project proceeds through the construction, pre-leasing, leasing and operating or sale phases. In each of these phases, close, hands-on supervision is required, and the basic plan for any project should include the provision of people and funds for these tasks. If a project is delayed, over budget, or slow to rent or sell, creative means must be found to cut costs, delay payments, increase debt or equity, take in new partners or otherwise rescue the project from disaster. Since most real estate ventures include personal liability on the part of the developer, a single failure may cost you all you have made in several successful projects, and more!
Conclusion.
What makes the planning and implementation of real estate projects complex and difficult is that these seven steps are not simply sequential. Rather, they require cycling and re-cycling during the planning stage of the project.
__________
Copyright ©1987 Professor Larry Isaacson
This note was prepared by Professor Isaacson as an aid to students of Real Estate Development.