Real Estate Principles: A Value

Approach
by

UMIT SARHAN

Process of development
Operation: ongoing management

A use in search of a site:

New locations for expanding franchise.

Need for a new school.

A site in search of a use:

Raw land in path of urban growth.

Land adjacent to new freeway intersection.

Resources in search of an opportunity:

Pension fund with money to invest.
Private investor looking for high-yield
investment.

1.
2.

3.
4.
5.
6.
7.
8.

Establishing site control

Feasibility analysis, refinement, and
testing
Obtaining permits
Design: Architect and other professionals
Financing
Construction
Marketing and leasing
Operation

Wide differences in access to land.

Land already owned.

Dream case.

Land assembled for specific purpose.

Difficulty of land assembly often justifies
government involvement in urban renewal.
Assembly of land for Walt Disney Worlddevised
elaborate blind entities to acquire all of the pieces
of land to eliminate a hostage/holdout situation.

The builders have since excavated a 10-metre pit around

Yang's house, so he is holed up there without water or
electricity, threatening to use his martial arts skills
against anyone who tries to dislodge him.
Source: CBC News; AP

Source: AP

Options: right (but not obligation) to

purchase land in future before a certain
date, at a predetermined price.
This gives time to developer for conducting
feasibility analysis, run construction and
environment evaluation, to obtain necessary
zoning, etc.

Joint venture: landowner puts land into

development in return for share of profits.
May do joint venture with future tenants as well.

Financial feasibility question: does the

value, when built, exceed the cost?
An application of NPV analysis.

Tests and surveys that may be necessary:

Soil tests.
Environmental tests.
Critical habitats (Endangered Species Act).
Seismic tests (earthquake vulnerability).
Archaeological (prehistoric ruins).

Multiple layers of permits may be needed.

Site plan review.
Regional and environmental impact review.
Zoning change.

Site plan review: an inevitable hurdle.

Complex set of issues.

Rules and criteria involve interpretation by authorities.
Neighbors usually resist change.
Negotiation is critical skill: important to building support
of authorities and citizens in advance.
Negative decision can kill a project in one meeting.

NIMBY: not in my back yard.

BANANA: build absolutely nothing anywhere
near anything.
Every successful developer is a good
negotiator . Through a thicket of
obstructions and objections.

Architect: represent developer in hearings

for permits; provide pre-design schematics
of user functions and resulting spatial
interactions; provide complete design;
serve as project manager.
Land planner: creates development layout
or map.
Landscape architect: Shapes topography,
soils, vegetation, and other objects around
a structure to harmonize with and
enhance it.
Engineers: soil, mechanical, electrical,
civil, etc.

Toyota Motor Sales USA likes green the way

Henry Ford liked blackthe division's new
Torrance, California, headquarters is one of the
largest environmentally friendly building
complexes in the U.S All good intentions aside,
Toyota went green more for the payback than the
praise. At a minimumthe Leadership in Energy
and Environmental Design (LEED)-guided design
for the complex had to surpass a 10 % return on
investment. "The project focused on long-term
operational savings to increase the rate of
return."
Source: CFO.com.

 Development

has a sequence
of financial needs:
Land acquisition and
preconstruction.
Construction.
Gap or mezzanine financing.
Postconstruction.

Land acquisition cost: cost of the land.

Preconstruction costs (soft costs): title
examination; feasibility analysis, market
research and testing, permitting process
(legal and architectural fees).
Typical dilemma: developer faces capital
constraint, but banks and other institutions
are reluctant to lend on asset with no cash
flow.
Solutions: use of option, joint venture, and
equity partners.

Covers soft costs and hard costs (for

direct costs of materials, labor, etc.).
Typically from a bank.
Floating rate is popular (over prime rate
or LIBOR).
This type of financing is less risky than
land acquisition financing: No title,
environmental or ecological risks;
permits all in hand.

Construction is a complex organizational

problem with dozens of subcontractors and
hundreds of steps.
General contractor: oversees and controls
project.
Construction manager: liaison and
representative of developer during
construction.

Marketing normally is carried out by an

outside broker.

Effective management is important to

maintain and increase value.

1. Layout: homesite is cleared and staked

out.
2. Excavation: grading with proper
drainage.
3. Footing: foundations foundation, a
concrete base below the frost line, upon
which the foundation sits.

4. Foundation
5. Framing: floor, wall, and roof framing
forms the "skeleton" of the home.
6. Mechanicals: heating, cooling, plumbing,
electrical systems.
7. Insulation

8. Drywall
9. Flooring
10. Trim: a carpenter installs doors,
cabinets, and molding.
11. Paint
12: Final trades: light fixtures, faucets,
commodes, and appliances.
13: Carpet/wood flooring and final cleaning.

Asset management: asset manager deals with

physical, financing, or ownership structure of the
property.

Managing the principals RE portfolios

Refinancing
Expansion
Making recommendations for buying and selling
properties

Property management: property manager is

responsible for day-to-day operations of the
property.
Marketing
Selecting tenants
Collecting rents

Asset manager (who has RE expertise)

usually work for institutional investors (who
do not have RE expertise).
Usually requires an advanced degree.

Before property is acquired:

Finds specific assets in which owner/client can
invest.
Researches/arranges the financing.
Negotiates acquisition price.
Oversee due diligence and closing process.

Compare to asset managers of stock or

bond portfolios.

After property is acquired:

Monitor and control operating performance.

Site visits, property tax assessments, etc.

Report value-enhancing opportunities for

rehabilitation, historic preservation,
modernization, and conversion.
Suggest strategies for lowering owners cost of
capital.
Be aware of opportunities to restructure equity
ownership.
Continually reassess sell vs. hold decision.

Portfolio theory
Asset pricing
Capital market (financing)
Urban economics (location)
Investment value analysis
Appraisal
Property management
Get an MBA, MSRE, or MSRED.

Prudential Real Estate Investors (PREI ) is the real estate

investment management business of Prudential Financial.
PREI, comprised of fund management centers in the US in
Parsippany, New Jersey and Atlanta, Georgia; and globally
in Munich, London, Singapore and Mexico City; is supported
by a network of local offices throughout the world. PREIs
specialized operating units offer a broad range of
investment opportunities and investment management
services in the United States, Europe, Asia and Latin
America. As of December 31, 2006, PREI managed $36.9
billion of gross assets ($26.2 billion net) on behalf of more
than 400 clients and is ranked among the largest real
estate investment managers.
www.prudential.com/prei

Often needs to report to an asset manager.

Detail-oriented.

Marketing the property

Leases are perishable assets.
Independent brokers are usually paid on a
commission basis.
Selecting tenants
Credit tenants.

Vast majority of potential tenants are not credit tenants.

Tenant mix.
Signing leases
Collecting rent
Repairing and maintaining property
Communicating with owners
Maintaining tenant relations

University education rarely focuses on this

profession; the closest one may be hotel
management.
A number of professional and trade
organizations (education providers) exist:

Institute of Real Estate Management (IREM)

Building Owners and Managers Association
International (BOMA)

Human skills.