Richard B. Peiser and David Hamilton | THIRD EDITION PROFESSIONAL REAL ESTATE DEVELOPMENT THE ULI GUIDE TO THE BUSINESS Copyright 2012 by the Urban Land Institute Printed in the United States of America. All rights reserved. No part of this book may be reproduced in any form or by any means, electronic or mechanical, including photocopying and recording, or by any information storage and retrieval system, without written permission of the publisher. Urban Land Institute 1025 Thomas Jefferson Street, NW Suite 500 West Washington, DC 20007-5201 Recommended bibliographic listing: Peiser, Richard B., and David Hamilton.Professional Real Estate Development: The ULI Guide to the Business.Third Edition. Washington, D.C.: Urban Land Institute, 2012. Library of Congress Cataloging-in-Publication Data Peiser, Richard B. Professional real estate development : the ULI guide to the business / Richard B. Peiser and David Hamilton. – 3rd ed. p. cm. eISBN 978-0-87420-277-9 1. Real estate development. I. Hamilton, David. II. Title. HD1390.P45 2012 333.3068–dc23 2012016521 ULI Catalog Number: P101 About the Urban Land Institute The Urban Land Institute is a nonprofit research and education organization whose mission is to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide. The Institute maintains a membership representing a broad spectrum of interests and sponsors a wide variety of educational programs and forums to encourage an open exchange of ideas and sharing of experience. ULI initiates research that anticipates emerging land use trends and issues, provides advisory services, and publishes a wide variety of materials to disseminate information on land use development. Established in 1936, the Institute today has nearly 30,000 members and associates from some 92 countries, representing the entire spectrum of the land use and development disciplines. Professionals represented include developers, builders, property owners, investors, architects, public officials, planners, real estate brokers, appraisers, attorneys, engineers, financiers, academics, students, and librarians. ULI relies heavily on the experience of its members. It is through member involvement and information resources that ULI has been able to set standards of excellence in development practice. The Institute is recognized internationally as one of America’s most respected and widely quoted sources of objective information on urban planning, growth, and development. _______________ Project Staff Gayle Berens Senior Vice President Education and Advisory Group Adrienne Schmitz Project Director and Editor Senior Director, Publications James Mulligan Managing Editor Joanne Platt Publications Professionals LLC Manuscript Editor Betsy VanBuskirk Creative Director John Hall Design Group Book and Cover Designer www.johnhalldesign.com Craig Chapman Senior Director, Publishing Operations About the Authors RICHARD B. PEISER Richard B. Peiser, PhD, is the first Michael D. Spear Professor of Real Estate Development in the Department of Urban Planning and Design at the Harvard Graduate School of Design (GSD) and director of the university-wide Real Estate Academic Initiative. Before coming to Harvard in 1998, he was associate professor of urban planning and development at the University of Southern California where he founded and directed the Lusk Center for Real Estate Development, and the Master of Real Estate Development Program. At Harvard, he founded and directs the Advanced Management Development Program and coordinates the other executive education programs in real estate at GSD, as well as joint real estate programs with Harvard Business School. He directs the Master of Urban Planning Concentration in Real Estate and cochairs the Master of Design Studies Program in Real Estate and Project Management at GSD. Peiser has published over 100 articles in academic and professional journals. His primary research focuses on developing an understanding of the response of real estate developers to the marketplace and to the institutional environment in which they operate, particularly in the areas of urban redevelopment, affordable housing, and suburban sprawl. His current research is on urban modeling using Los Angeles as a test case, and nonperforming loan resolution. His other books in progress are on high- end luxury retail development and on the economics of new towns around the world. He teaches real estate development and finance as well as field studies on complex urban development problems. Professionally, he has developed affordable housing in Texas and California as well as land and industrial properties. From 2004 to 2007, he served as a founding partner of the China Real Estate Investment Company and its Shanghai-based subsidiary KaiLong REI Project Investment, investing institutional capital in real estate projects in China’s major cities. He is also a valuation and economic-damage expert for litigation with respect to apartments, land, office, and retail development projects and portfolios. Peiser was born in Houston and grew up in Dallas. He received his BA from Yale University, his MBA from Harvard University, and his PhD in land economy from Cambridge University. His first teaching appointment was at Southern Methodist University in Dallas. He has held visiting appointments at Stanford and Cambridge universities, Seoul National University, the University of Ulster, and the University of Regensburg. He is a former trustee of the Urban Land Institute and former coeditor of the Journal of Real Estate Portfolio Managementand currently serves on the board of Berkshire Income Realty, Inc., a publicly traded company based in Boston, and on the Board of Overseers for the New England Wildflower Society. DAVID HAMILTON Trained as an architect, David Hamilton has managed innovative real estate development projects on a variety of scales, ranging from medical and university campuses to award-winning high-tech office and R&D spaces. As a codirector of the Cambridge Innovation Center, he managed the design and construction of a widely acclaimed private sector incubator for technology-related business. As a principal of Qroe Farm Preservation Development, Hamilton led project design, entitlement, and construction efforts for Bundoran Farm in Charlottesville, Virginia, widely regarded as a model for sustainable development. He speaks and writes on the role of private sector development in the management and preservation of large-scale working landscapes, and the implications of exurban development on agricultural land uses. As chief operating officer of Qroe’s affiliate Geobarns, he has been recognized as a leader in the development of new models of sustainable, affordable homebuilding and light commercial construction. Hamilton has contributed to various ULI publications on topics ranging from inner- ring suburban regeneration to conservation development strategies. He teaches introductory real estate finance and development courses and advises design students on project economics at Harvard University’s Graduate School of Design. He is a graduate of Middlebury College and Harvard University, where he cowrote The Harvard Project on the City: Lagos.Hamilton lives in Middlebury, Vermont. Authors PRIMARY AUTHORS Richard B. Peiser Michael D. Spear Professor of Real Estate Development Harvard University Graduate School of Design Cambridge, Massachusetts David Hamilton Principal Qroe Farm Preservation Development Boston, Massachusetts CONTRIBUTING AUTHORS Sofia dermisi Professor of Real Estate and Pasquinelli Family Distinguished Chair Walter E. Heller College of Business Roosevelt University Chicago, Illinois Alex duval Director Portman Holdings Atlanta, Georgia Nick A. Egelanian Founder and President SiteWorks Retail Real Estate Annapolis, Maryland PRIMARY CONTRIBUTING AUTHORS, PREVIOUS EDITIONS Ken Beck Senior Vice President ASW Realty Partners Woodland Hills, California Anne B. Frej Real Estate and International Development Consultant Santa Fe, New Mexico Dean Schwanke Senior Vice President Urban Land Institute Washington, D.C. Frank Spink Principal Spink Consultancy Annandale, Virginia ADDITIONAL CONTRIBUTORS James McCandless Vice President Streetsense Bethesda, Maryland William Shewalter Principal Vistacor Development Company Boca Raton, Florida Paul Vogel Executive Vice President RDR/SiteWorks Chicago, Illinois ULI STAFF CONTRIBUTORS Adrienne schmitz Senior Director, Publications Ronnie Hutchinson Intern REVIEWERS Heather Arnold Director of Market Analysis Streetsense Bethesda, Maryland Ryan Beible Senior Construction Manager First Potomac Realty Trust Bethesda, Maryland David Falk Senior Fellow School of Public Policy University of Maryland College Park, Maryland David Farmer Managing Principal Keystone LLC Naples, Florida Roy Higgs Chairman Emeritus Development Design Group, Inc. Baltimore, Maryland Nick Javaris Cofounder Terranomics Retail Services San Francisco, California Jeff Kingsbury Managing Principal Greenstreet, Ltd. Indianapolis, Indiana Steven LaPosa Assistant Professor, Finance and Real Estate Colorado State University Fort Collins, Colorado Tom Moriarty Principal The Eisen Group Washington, D.C. H. Pike Oliver Senior Lecturer in City and Regional Planning College of Architecture, Art and Planning Cornell University Ithaca, New York Yaromir Steiner Chief Executive Officer Steiner + Associates Columbus, Ohio STUDENT REVIEWERS Jeremy Hoffman J. Matthew Ritz John sheff Carolina Uechi Graduate School of Architecture, Planning & Preservation University of Maryland Contents Preface Acknowledgments 1 | INTRODUCTION What Is a Developer? The Book‘s Approach and Objectives Requirements for success Paths for Entering the development Field Finding the First deal A Use Looking for a Site A Site Looking for a Use Improving the Chances of Successful Development Managing the development Process Real Estate Cycles Getting Started Stages of Development Conclusion 2 | ORGANIZING FOR DEVELOPMENT Forming Partnerships The Firm‘s Organization and Management Organizational Life Cycles Organizational Structure Compensation Strategic Planning Choosing Consultants and Contractors Locating a Consultant Selecting a Consultant Rates Working with Consultants The Design/Construction Team Architects Landscape Architects Land Planners Engineers Soils Engineers Environmental Consultants Surveyors Parking and Traffic Consultants Asbestos Abatement Professionals Construction Contractors Real Estate Service Firms Market Consultants Appraisers Attorneys Title Companies Surety Companies Brokers/Leasing Agents Public Relations and Advertising Agencies Property Management Lenders Sources of Financing for Real Estate Projects Commercial Banks Savings and Loan Institutions Insurance Companies Pension Funds Foreign Investors Syndications and Real Estate Investment Trusts Private Equity Investors and Joint Ventures The Bond Market and Commercial Mortgage-Backed Securities Credit Companies Mezzanine Debt Construction Lenders Mortgage Bankers and Brokers Permanent Lenders Conclusion 3 | LAND DEVELOPMENT Overview Subdividing Land Land Development versus Building Development Project Feasibility Market Analysis before Site Selection Site Selection and Acquisition Market Analysis after Site Selection Regulatory Process Financial Feasibility Analysis Design and Site Planning Evolution of Subdivision Design