The Hoyt Group
The Real Estate Development Process: A Wiki Site Approach
The Wiki site of The Real Estate Development Process will be organized around a 56-cell, stage-task matrix which describes the entire real estate development process from the land banking stage to the redevelopment stage. In each stage, there are eight categories of tasks that need to be addressed. The main thesis of this interdisciplinary development model is that there are discrete stages in the process, and in each stage the real estate developer must (1.) complete different tasks using specialized skills and thereby accepting certain risks and (2.) employ various capital structures with different risk-return characteristics to create or “capture” the value increase in that stage.
| Land Banking | Land Packaging | Land Development |
| Building Development | Building Operation | Building Renovation |
| Site Redevelopment |
Each stage in the process begins with the acquisition tasks and ends with the disposition tasks. Each stage must also address, to some extent, the following categories of tasks, many of which are done simultaneously: financing, market research, public approvals, environmental issues, improvement design and construction, and transportation and accessibility concerns. As with all real world applications of conceptual models, the lines separating the stages and the categories are fuzzy.
The development matrix can be used as a resource and reference for practitioners, academics, and students. For example, a person who was interested in the environmental issues associated with land development could click on the “land development/environmental cell” and find a conceptual discussion of the various Phase II and III issues, LEED–HD requirements, and historical studies as well as real examples of those issues and their resolution.
Another person may go to the “building development/acquisition tasks cell" and research the various feasibility, underwriting, due diligence, and contract tasks that face a developer as well as specific examples of those tasks.
The multi-disciplinary nature of the real estate development process requires the input from a number of experts in all stages and tasks in the planning, construction, and management of our built-environment. Consequently, the intention of the Homer Hoyt Institute is to provide a platform and context for these contributions from the Hoyt Fellows and the Weimer Scholars. The Wiki site format will facilitate the inclusion of comments, examples, and discussions of the numerous issues and tasks and challenges in the development process. This Wiki site will be monitored and controlled by a “matrix manager” who will be responsible for maintaining the quality and quantity of the matrix.
The Wiki Development Matrix will be a useful research tool for the organization and dissemination of the vast breadth and depth of this body of knowledge. The first output from this Wiki Matrix will be a Wiki book on the role of the master developer in urban, mixed-use projects (at least we hope so). Other research publications will follow to facilitate the navigation and use of the matrix.
What is the Real Estate Development Process?
The real state development process is described in a seven-stage model that begins with “land banking” and extends through the “re-development stage.” In each stage value is created by reducing risk and uncertainty and by producing a “finished product” that can be sold to the next stage of development. Effectively, each stage “buys” an input product from the preceding stage and “sells” a finished product to proceeding stage. In each stage, certain economic objectives must be achieved by using a combination of talents to complete certain tasks and by accepting specific risks.
In this process, there is not a single developer or a single source of capital. Since each stage requires specific talents, it is very unusual that a successful developer in one stage can be successful in another stage. Unfortunately, in an attempt to capture the profit in the next stage of development, a some developers may over reach and attempt to develop the next stage as well. The outcome is usually unhappy, because only fools think they have the necessary talents to do all of the stages in the development process.
Because of the differential tasks and risk in each stage, different types of capital or financing are required for each stage. This means that a project must be sold or transferred to different owners of equity capital or re-financed to obtain different debt capital. It is impossible to have a single type of pricing for capital because of the changing risk premiums that must be charged at each stage of development.
What is a Real Estate Developer?
In classic economic terms the real estate developer is the entrepreneur that combines land, labor , and capital to make a profit by creating a finished product whose value is greater than the costs of the component inputs. In doing so the developer takes the risks of the business enterprise in expectation of achieving a return that adequately rewards this risk-taking behavior.
However, the development process is a very public process, so the developer must also obtain the requisite governmental approvals and as well a meet the restrictions and limitations which are the prerequisite conditions for the public approvals.
What Do Real Estate Developers Do?
Real estate developers must form teams that combine multiple professional disciplines such as architects, engineers, contractors, building suppliers, and municipal inspectors, all of whom view the development process differently. Also lawyers, accountants, lenders, and marketing experts have incredibly different expectations of the development process. Each of these professionals must achieve certain objectives in order to be paid in a plethora of ways such as hourly wages, percentage of cost, fixed fees, or commissions. The developer must define the roles, objectives, and compensation schemes for each professional group in such as way that the finished development has a value greater than the costs in order for the developer to make profit. In business school terms, real estate developers must manage up and manage down as well as manage outside and inside of the firm.
The Nature of the Real Estate Development Process
The real estate development process is a complex, multi-stage process in which federal, state, and local governments interact with their citizens (and voters) as well as the private businesses. This is contrary to most individuals’ impressions and business school models in which the developer buys the land, gets the entitlements, and then builds the building. This simple-minded model misses the complex interactions among the multiple levels of government, the citizens, fluctuating market conditions, and various development teams over a time period that can last for several decades. Thus the Development Model attempts to organize the development process into seven stages and eight task categories to demonstrate the complexity of the process and dynamic interaction of the variables over time.
Seven Stages in the Real Estate Development Process
The seven stages in real estate development are:
1. Land Banking,
2. Land packaging,
3. Land Development,
4. Building Development,
5. Building Operations,
6. Building Renovation, and
7. Re-development.
These stages are briefly described as follows:
1. In the Land Banking Stage, the “land banker” passively holds land and waits for general market trends and forces to increase the value of the land. The land banker then sells the land to a “land packager.”
2. In the Land Packaging Stage, the land packager buys the land from the land banker and then improves the value of the land through conceptual land planning, zoning changes, financing schemes or other “paper enhancements” like title insurance, accurate surveys, or environmental studies. The land, thus packaged, is sold to the “land developer.”
3. In the Land Development Stage, the land developer buys the land with its entitlements and paper enhancements from the land packager and then improves the land so it can sold off as finished (building ready) lots to the “building developer.” The improvements often include construction of the horizontal infrastructure such as roads and utilities as well as common area improvements such as water detention or recreation facilities.
4. In the Building Development Stage, the building developer buys the finished lot from the land developer and then constructs the building improvements (the vertical development) so it can be sold to the “building operator.” During the building development stage, the developer usually attempts to pre-lease the building to enhance its value to the building operator.
5. In the Building Operating Stage, the building operator leases and manages the property, and develops a verifiable operating history so the property can be sold to other building operators during its economic life or sold to a “building renovator” at the end of its economic life. Proving a reliable and predictable level of annual cash flows increases the value of the property.
6. In the Renovation Stage, the building renovator buys the property with substantial economic obsolescence and physical deterioration from the building operator and creates value by curing these deficiencies and re-marketing the property. The building renovator can sell the building to another building operator or holding it until it is ready to be sold to a “building re-developer.”
7. In the Re-development Stage, the re-developer buys the property with such serious economic and physical deterioration that it must be torn down or re-constructed for a different use. The re-developer is in essentially the same position as the land banker, as he waits for the general market trends and forces to increase the value of the property as the potential for redevelopment draws closer. The re-developer then sells the property to a land packager and the development cycle begins anew.
Eight Task Categories
In each stage of the development process, there are numerous tasks that must be completed to achieve the desired increase in value and to move to the next stage in the process. As the stages change, the definition and importance of the tasks change. For the purposes of the Development Matrix, these tasks have been separated into eight broad categories as follows:
A. Acquisition,
B. Financing,
C. Market Studies and Marketing Strategies,
D. Environmental,
E. Public Approvals,
F. Improvements, and
G. Transportation and Accessibility.
H. Disposition
These broad categories have different required, specific tasks in each stage. Like stages of development, the lines between the categories are fuzzy as the task are related and often overlap. For example the purchase contract negotiated in the acquisition category may impact the financing, environmental, and public approvals tasks.
Please review the supporting documents available for the development process listed below and provide your feedback and thoughts.