Introduction to Real Estate Development and Finance

This book provides readers with a basic understanding of the principles that underlie real estate development. A brief historical overview and an introduction to basic principles are followed by examples from practice. Case studies focus on how cities change and respond to the economic, technological, social, and political forces that shape urban development in North America. It is important to have a framework for understanding the risks and rewards in real estate investing. In measuring return, consideration must be given to both investment appreciation and the cash flow generated over the life of a project. In addition, metrics are presented that can be useful in assessing the financial feasibility of a real estate development proposal. This book also provides an overview of the forces of supply and demand that gauge the potential market for a new project. In determining the size of "residual demand", estimates for population growth, family formation, and new development are important. All development projects fall under the auspices of one or several jurisdictions. Though every jurisdiction has different rules and procedures, basic knowledge of the planning process is critical to the success of all development projects regardless of location. Furthermore, all projects have a legal component. Basic issues of land ownership, property rights, property transfer, and land registration are reviewed, all of which need to be considered when a property is sold or purchased. This book also provides a primary on the design and construction process. In constructing a building, a team of experts is first required to design the architectural, structural, and heating, ventilation, and air conditioning (HVAC) systems for a building. An overview is provided of each building system: wood, concrete, and steel. Critical to a successful real estate development, project management principles for the processes of design, bidding, and construction are explored, with close attention given to budgeting, scheduling, and resource management. Essential reading for anyone involved in the development of our built environment, this is a must-read introduction for students and professionals in architecture, urban planning, engineering or real estate seeking an approachable and broad view of real estate development and finance.

Richard Levy, M.Arch, PhD, was formerly Professor of Planning at the University of Calgary, Canada, where he taught courses in urban planning and real estate development for 26 years. He currently teaches in the College of Business at the University of Rhode Island.

Table of Contents Preface Organization of this Book Chapter 1: Introduction to Real Estate Development and Finance What is Real Estate? What Determines Value? Learning from History Boom Bust Economies When Communities are in Decline The Road to Recovery Too Much of a Good Thing The Two Big Questions in Real Estate Development Supply Side of the Equation Supply Constraints Geographical Constraints on Supply Zoning, Bylaws and other Planning Controls The Case of the Unreasonable Seller The Case for Climate Change The Demand Side of the Equation The Demographics of Urban Development Demand and Supply in a Changing Technological Landscape Financial Factors Lending Measuring Demand Competitiveness Building the Team Chapter 2: An Introduction to Financial Analysis Risk and Reward Risk Free Rate Measuring Return Sharpe Ratio After Tax Rates of Return Proforma Cash Flow, Profit and Loss. Income Expenses Rates of Return Debt Borrower and Lender Loan Mechanics Debt, Depreciation and Cash flow Statement Leverage Balance Sheets Assets and Liabilities Cautions Chapter 3: Model Building and Real Estate Development Models and Decision Making What is a Model? Issues in Model Building: The Practice of Model Building Model Building and Statistics Data and Curve fitting: When relationships are Non-linear Appraisal Models Dynamic Models Two Big Questions in Real Estate Development Spatial Modeling of Land Values Gravity Models and Retail Transportation Modeling Urban Land Use Models Building Models and the Need for Data, A Practical Approach Conclusions Chapter 4: Financial Modeling Introduction Cap Rates Time Value of Money Net Present Value and Internal Rate of Return Applying Theory to Practice Sensitivity Analysis Case Study - Multi-Family Development: The Value of Forecasting Scenario1: Business as Usual Scenario 2: Optimistic Projection Scenario 3: Level property values. Scenario 4: Sudden Decline in Property Values Scenario 5: Sudden Decline in Property Values with no Recovery Scenario 6: Reinvestment in the Property from Excess Cash Flow Scenario 7: Negative Return Scenario 8: Negative return, accompanied by a reduction of mortgage rates Summary and Conclusions Chapter 5: Marketing Analysis Market Analysis: Supply, Demand, and Geography Market Study and the Real Estate Development Process Concept development Design and Marketing Marketing Studies, Planners and Government officials Investors and Lenders Buyers and Tenants Role of Consultants Market Research: Basic Principles and Techniques Market Area: Drawing the Boundaries Residual Demand Population Projection and Cohort Models Demand, Affordability and Residential Development Case Study: Condo Apartment Development Introduction Site and Location Demographics Competition Residual Demand Estimates Creating a Marketing Program Retail Commercial Office Space Clients and Landlords Summary and Conclusion Chapter 6: The Planning Process The Planning Process Introduction Getting Started Land Use Control, A Brief History Zoning Defined Zoning is Never Perfect What is Wrong with Zoning? Architectural Guidelines and Historic districts Americans with Disabilities Act Subdivisions Planning Process: Getting to a Successful Conclusion Hiring a Consultant Enlisting the Media Case Study: Inner City Development Project Background Site Development Options Scenario Evaluation: Design Review Step 1: First Meeting with Planners Step 2: Second Meeting, Bringing the Architect into the Process Step 3: Review of the Development Application Step 4: Review of the Revised Proposal Step 5: Meeting the Community Step 6: Second Revised Plans Step 7: Meeting the Community to Review the Revised Plans Step 8: Project Revaluation Step 9:.Starting Over? Lessons Learned Chapter 7: Real Estate and the Law Introduction Foundations and Principles of Private Property The law and Real Estates: Statues, Common Law and Regulations Collective Ownership of Property Right of Use What is a Fixture? Water Rights Mineral Rights Air Rights Forms of Ownership Fee Simple or Fee Simple Absolute Life Estate Co-ownership Joint tenancy with right of survivorship Tenancy in Common Community Property Tenancy by Entirety Condominium Cooperatives Ownership and the Investment Community Sole Proprietorships Partnerships Ventures Corporations Limited Liability Partnerships Limited Liability Companies S Corporations Real Estate Investment Trusts (REIT) Real Estate Transactions, Agents and brokers Mortgages Secondary Market Construction Loans Real Estate Closings, Land title and Registration Trasnfer of Property Land Registration Leases Eviction Construction Contracts Chapter 8: Design and Construction A Team of Experts Site Planning, Massing and Space Planning Mastering the Art and Science of Construction Technology and the Modern Building Building from the Ground Up Foundation Design Structural Systems Structural Systems: Concrete, Steel or Wood Wood Construction Concrete Steel Exotic Structures Historic Restoration and Preservation Projects Heating, Cooling and other Building Systems Managing the Design Process Chapter 9: Project Management Introduction: Why do I need Project Management Skills? Time, Budget and Performance Project Management Defined Application of Project Management to Real Estate Development Bidding Process Design/Build: A Different Approach Construction Phase Scheduling and Resource Management Project management Teminology Network Analysis Lags and Network Analysis Gantt Charts Project Management Software Project Management with Microsoft Project: Renovation of an Office Building Crashing a Project Project Evaluation and Control Earned Value Management (EVM) Project Termination Index