Class 7
Oct 12, 2011
Go over HW: crossover rate & excel spreadsheet.
Ch 11: Residential Land Uses (RE Development)
Other examples of RE investment analysis: Show the MW
Orlando office building deal (NNN – tenant pays rent & taxes &
insurance & maintenance) IRR depends on sales price, use cap
rate (NOI/value), cash on cash return (CF/cash investment)
Show the Manor House Apartments – offering memorandum
Also used by developers in financial feasibility studies
Outline
I. Types of Residential Development
II. The Real Estate Development Process
III. Milford Hills Saga Case Study
IV. US Assets Group
What is a developer?
Prepare land so it can be build on & then build on it
I. Types of Residential Development
•single-family detached houses
(some open land on all sides of the house)
most popular of all housing types for families in US
advantages: privacy, space, own some land
disadvantages: costly, lot of maintenance
•single-family attached houses
(sharing some common walls with neighbors)
Advantages: cheaper (lower development cost, social, less
maintenance, usually condominium association takes care of
common areas), more security, less environmental impact.
Disadvantage: less privacy, no land/space,
- row houses example: front of book
houses in a row attach at either one or two sides.
- townhouse: (suburban version of row house) same as row house,
each unit has its own entrance, front & backyard
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- plexes, two or more units (duplex, triplex, quadruplex)
each has its own entrance
- patio or zero-lot-line houses, your neighbors house wall is right on
the lot line, it often becomes the wall of a courtyard.
patio house: outside living space in a little court, often has a pool,
enclosed in walls
•multifamily residences (neighbors share a common entry door)
Advantage: cheaper & easy to take care off
Disadvantage: no privacy, no yard.
–garden apartments (2-3 story building, 10-20 units per acre, some
land in between buildings)
–mid-rise apartments (4-8 stories), elevator is a must, for more than 8
stories: you need a second elevator
–high-rise apartments (over 8 stories, expensive to construct, often
high-end units), more than one elevator
(Beau Ciel Building in Sarasota)
Rental vs. Condomium vs. cooperative ownership
many rental units are converting to condominium/coop ownership,
because the cost of operating a rental have increased more than
rents, (there were limits to rents.)
Condominium ownership: the purchased has ownership of the unit,
and shares ownership of common areas,
Condo association in charge or maintenance, insurance of building
Coop, not as popular any more:
you purchase stock in a corporation that holds ownership to the
property, each “owner” has rights to stay/live in a particular unit.
•manufactured homes (mobile home)
home or piece of it is made in a factory
rental or many are individually owned,
image is getting better??
LBK has very expensive mobile homes (owners were offered over
$400,000, they rejected)
right on water!
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used to be considered personal property (high interest, short term
loans) 2% over mortgages and only 10-15 years long.
but today (as long as mobile home is permanently attached: get a
FHA mortgage)
25% of new single-family homes are mobile homes!
•second homes
used for leisure
often rented out when not used
located in “attractive” areas, ski resorts, beach or golf resorts
to reduce cost:
time-share concept was established:
several owners own the same unit, and share the use of it.
Each owner entitled to only a particular amount of time.
Started in 1960s, became very popular in 1990s, but have fallen out
of favor, because limited appreciation/or even depreciation.
II. Real Estate Development Process
A developer has to know about
• develop concepts, design
• feasibility study (differs across different property types):
- legal aspects, zoning/re-zoning & permits
(is it legal to build what you want to build?), often it is better to go with
the current zoning, as opposed to try to rezone & make zoning even
less favorable because loose an advantage that was grandfathered
in)
- do market analysis:
delineation of the market area
the area in which it will compete with other developments
analysis of demand & supply factors (recent & future):
employment (basic & non basic employment), increase will mean
increased demand in homes
disposable income (more income more demand)
population (economic base analysis)
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household characteristics (less children, more condos, smaller
homes)
absorption rate (high absorption rate: high demand)
also:
transportation facilities (see comprehensive plan of a county)
will influence demand, a new highway will increase demand for
homes close to the highway for convenience.
demand for different types of properties, apartments vs. homes
was increase of past demand only temporary (because of one time
event, building of a large convention center?)
analysis of supply, including other possible competing projects
note: RE has long gestation period: you better know what others will
be building in the future.
- do financial analysis (see analysis in Ch 19 and in this ch.)
- develop land & build
(some developers are also builders, others are only developers and
sell developed land to builders, some builders only build others build
and develop).
- marketing/selling: show Alinari DVD
Note: very long-term, assumptions/estimates are very
important!!
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III. Millford Hills Saga Case Study
• Real Estate Today feature p. 236
By land and house for $825,000 and develop it into lots, sell 125 lots
for $30,000 each.
Financial analysis: projected cash flow statement in Table 11.2
Main observation:
- 1. not a good analysis, does not take TVM into consideration (no
NPV or IRR)
- 2. No cash coming in until lots are sold: quarter 3.
- cumulative CF: negative until quarter 10 (2.5 years)
- 3. At quarter 2: highest neg. cum CF: $1,873,625
- At end positive cumulative CF: 1,213,594 (no TVM consideration)
- At 8% quarterly: NPV = -$27,687.06 reject (IRR 7.74%)
- but if 8% APR: 2% quarterly rate: $809,981 accept
- 4. RE development industry: very capital intensive, and very longterm therefore very risky.
IV. US ASSETS GROUP – Residential Real Estate Development
Firm
developers vs. builders:
Some developers are only developers, some are also builders
- Pulte Home Corporation, WCI & US Homes are competitors,
publicly traded, developers & builders
- Lee Wetherington, John Cannon: only builders
- Family that owns Lakewood Ranch (E of 75 in Sarasota): only
developers (they develop the land build golf course & tennis courts &
clubhouse, sell off the land to builders
- (show brochure) Tom Brown & Jay Tallman are the two owners of
US assets group
In 10 years: managed over $1 bil worth of RE on 10s of thousands of
acres
Tom Brown started out in the real estate consulting business
(visionary, generalist)
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US Assets group is both a developer and a builder
Depending of the project
Specialize in condominiums & high-end golf courses
Condominium: developers & builders
Golf course: only developer sell lots to builders
Projects:
- Hunters Green in Tampa
- En Provence LBK
- Viscaya LBK (sold out before it came on the market)
- Beau Ciel (Sarasota) brochure, I sold the penthouse unit
- Orchid Beach Club (Lido Key), current, brochure
54 units for average $2 mil
- Founders Club in Sarasota (3 miles E of 75 on Fruitville)
current, see brochure
Stages of a Project:
1. Develop Concept: Tom had concept in mind and found land
Develop the concept (use Realtors opinions & appraisers)
2. Legal: Zoning & permits (SEE PLAT MAP)
for condo: it takes 2 years to get permit
for Founders club: 3 years to rezone from
86 homes on 700 acres to 262 homes + golf course on 700 acres)
plus 2 years to get permits for total of 5 years. $2.5 mil investment
3. market analysis: They have in – house marketing research people
& use outside research firms as well
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4. In-house financial analysis
Financing by investors typically
Investors are not taking part in profits, they get a fixed return
no IRR because they have no $ into it: IRR would be huge. They look
at the profit margin (NI/sales), has to be at least 20%
very important: cost to build: General Contractor does the actual
building, gives bid: cost + 10% (admin & profit), but there is a
maximum
5. Sales: in house sales team: used to us Michael Sounders for Beau
Ciel and other projects on LBK, not enough attention, she had all new
developments listed: conflict of interest.
Founders Club: umbrella brochure by US Assets to market the club to
end buyer
But separate brochure to sell lots to builders (aerial photos, backup &
research materials, research study results, details on all lots,
background on golf course builder)
Initially, US assets owns the pro-shop & club house & golf course and
is responsible for management of those (pain in the butt): goal to sell
the equity in these facilities to the members, and let association run it.
Important for success in his field:
- Market knowledge and experience is very important:
- Stay in your geographic area of expertise
- Companies that are in other fields and then switch to RE
development often fail.
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Ch 12:
Commercial & Industrial Land Uses/Development
Outline
I. Shopping Center Types & Development
II. Office Buildings
III. Industrial & Distribution Facilities
IV. Lodging Facilities
V. Special-Use Properties
I. Shopping Center Types
before WW II and advent of cars: cities with central business district
individual stores along a street
but new trend: suburban shopping centers (in Europe, they have also
become very popular).
- structures of architecture that house one or more than one store
- managed as one unit to benefit all tenants by one
owner/management company
- on-site parking
- space for deliveries
•neighborhood shopping center (1.5 mile radius)
(Publix and Walgreens, personal services such as hairdresser)
usually in one row, strip center
•community shopping center (3-5 mile radius)
build around a junior department store, Ross dress for less (discount
shopping center)
strip or square
•regional shopping center (7-12 mile radius)
1-3 full-line department store (Sacks)
open or enclosed pedestrian malls
•superregional shopping center (over 50 mile radius)
at least 4 department stores
huge malls, International Mall., Sawgrass Mills
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•other shopping centers
Factory outlet centers (Ellenton Outlet Mall)
Is dying bread 1/3 of all factory outlet malls are obsolete.
(competition from internet & Walmarts)
specialty shopping centers (Bal Harbor in Miami, only high-end)
Shopping Center Development
•Feasibility (& market) Analysis
–Primary and secondary trade areas
from what areas is patronage coming?
Primary: 60-70/80 % of sales will come from this trade area
Secondary: 20% of sales will come from this area (people will drive
20 minutes from that area to get to the shopping center)
–Market size
how many people,
what are their demographics?
disposable income
use trends into the future
–Competitive survey
what are competitors? What other centers are planned?
- Site Location
Location, location, location
access is very important
zoning, drainage, shape, utilities
close to a center that offers complementary shopping
- Tenant Selection
Anchor tenant very important, selection has to carefully made,
Complimentary tenants have to be selected.
Often anchor tenant purchases site from developer and builds its own
store
if bank financing: loan is only made if long-term lease by high quality
anchor tenant.
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II. Office Buildings
Service industries have seen large growth: increase in office space
demand
Are categorized by location and by multi vs. single tenant
•Location
- Central business districts
has traditionally been the main location for office space
most downtown space is office space:
Businesses pay the high rent: gov’t, financial services, lawyers
offices, corporate headquarters
- Secondary office nodes
outside of central business district, on a main street leading to
suburbs
- Office parks (in suburbs)
similar to suburban shopping centers
Several structures that hold office space that is under one
ownership/management
(looks like a campus)
Tenants are from sales and manufacturing, high-tech (internet access
important)
Easy parking, very pleasant, customers come from suburbs
•Single vs. multi-tenant buildings
single tenant: Raymond James, Jabil
either owner occupied or leased from investor
multi-tenant: Bank of America Building
Bank of America only on bottom floor, the other offices are leased
(owned) by other companies
Could be owned as a “condominium”
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III. Industrial Facilities
They house: manufacturing, warehousing, distribution
Used to be located where zoned and where the transportation was
appropriate, water and utility accessibility
now: industrial parks are build specifically with that use in mind: easy
access, utility and water accessibility.
Environmental pollution is a big issue:
CERCLA (comprehensive environmental response compensation &
liabilities ACT of 1980)
National List of polluted properties
Innocent landowner act: owner is not liable if he/she does not have
knowledge and was reasonable about investigating and fixing
environmental problems.
•analysis technique:
- forecast demand (employment in industrial sectors, is industrial
sector a basic sector?)
- determine existing and potential supply (will other parks be built?)
(estimate absorption rate)
- compare competitiveness with other projects
IV. Lodging Facilities
•commercial hotels, cater to businesspeople and conventioneers
Hilton in St. Pete
•highway or airport hotels and motels, businesspeople or vacationers
in transit. A Days Inn in Orlando. German tourist traveling through
FL, stopping in Disney World
•resort hotels :Destination hotels, people on vacation:
Grand Floridian in Orlando: family stays there for the weekend to see
the theme parks
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•extended stay hotels
important part of market analysis: overall economy and disposable
income, and growth in the travel sector
Tate DeWeeze, Worked as project manager, Marriott hotels
Westshore Dr. in Tampa he developed Marriot & Double Tree hotel
He uses a lot of judgment in selecting sites
- Proximity to airport, mall, restaurants, business district
- Risk of hotels (rent out one unit every night no long-term lease, few
banks loan money, high rates or high down payment)
- High-end hotels are not franchised but often managed by
management company, difficult to maintain QC for franchises
Low end hotels are franchised
- Marriott does not own but it manages hotels, it only owns few
V. Special-Use Properties
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Hospitals
Nursing Homes (growing lately)
Schools
Marinas
Power Plants
Sports Complexes
Sports Complexes: (by Mike Carpenter, works for Devil Rays)
- Population
Total
Rings (Total within 5, 10, 25, 50 miles of stadium)
- Effective Buying Income
- Retail Spending
- Unemployment Rate
- Corporate Inventory***
- Cost of Living
- Economic Impact (new stadium generates $x for community)
- Political Landscape (ease of getting public $ and land)***
- MLB policies (where can/can't build)
- Construction Cost (hard and soft costs)
- Survey data (i.e. are they interested in a team)
- Other professional teams in area (they compete for suites, fans)
- Environmental factors (don't build on wetlands)
- City zoning issues (don't build in quiet residential neighborhood)
- City infrastructure (can the area near stadium support 2 Mil people?)
Mass transit,Parking ,Retail etc.
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