Frequently Asked Questions (FAQ)
Frequently, the following questions are asked about the Stages of Development and the Development Task Groups in the context of the Real Estate Development Matrix. These questions are sometimes difficult to answer, but they need to be discussed.
Questions Regarding the Stages of Development
Who is a Land Banker?
Is every farmer or forester really a Land Banker? The determination of the highest and best use of the site is critical to answer this question. If the highest and best use of the site is clearly not farming or forestry, then these activities are interim uses that the developer employs to minimize the holding costs of the property. A gray area occurs when the existing use is the highest and best use, but changing market conditions may alter this determination in the “investible future.”
Doesn’t Land Banking occur in other stages of development?
For example, the Land Packager may acquire a large tract of land from the Land Banker, but decides to only rezone part of the tract. In this case, the developer would be both a Land Packager and a Land Banker. More problematic are Land Developers who buy a large tract of zoned and permitted land and decide to develop it in several phases. Similarly, Building Developers may buy several building-ready pads and decide to develop them sequentially over time. In both cases, these developers are not Land Bankers in the Matrix sense, but rather they are developers who have difficult and tricky financing tasks to hold the additional parcels until they are ready for development.
Is Land Packaging really a stage of development?
Land Packaging probably creates more value compared to the cost than any other stage. It is also the stage of development with the highest risk because of the uncertainty regarding the outcome and timing of the Land Packaging process. There are special skills and talents that are required to gain public and political approvals, as well as to determine which issues need to be researched and defined in order to create value for the Land Developer. It is true that every stage of development requires approvals and permits of some kind. However, the Land Packager is changing the legal use of the site, as well as the Land Developers’ and public’s perceptions of the appropriate use of the site in the future.
Why is Building Operation considered a stage of development?
Building Operations is a labor intensive activity that can add value or lose value. The Building Operator adds value by leasing the property to credible tenants with valid leases, as well as by keeping accurate records of the building operations and expenses. By reducing the perceived market risks and reducing the uncertainty about the operating expenses, the Building Operator increases the value the property. Also, the Building Operator can increase value by decreasing the cost of capital. This is usually done by refinancing the property at lower interest rates. Sometimes, the Building Operator may add additional debt to the capital structure and then distribute some of the loan proceeds to the equity capital investors. This would increase the equity capital returns if the interest rate on the borrowed capital is below the required returns of the equity investors. This is referred to as positive financial leverage, but the increased returns to the equity capital must justify the increased financial risks involved.
When does a Building Operator become a Building Renovator?
The Building Operator becomes a Building Renovator when the size of the tenant improvement project requires building permits because the size of the project exceeds certain thresholds. This an imprecise or “fuzzy definition” because if a building remodeling project is big enough, it becomes a renovation. Whether an improvement to the property is defined as a large remodeling job or a building renovation is not a critical, as long as the Building Operator or the Building Renovator is adding value to the property. A building improvement project that requires specific financing is probably a real estate renovation, and a building improvement project aimed at re-positioning the property in the market place is also probably a real estate renovaton.
How often can the renovated property be sold back to a Building Operator?
The renovated property can be sold back to Building Operator as long as the Building Renovator can find a willing and ready Building Operator. This circular process may last for decades. However, at some point, no Building Operators can be found to buy the renovated property, so the Building Renovators will continue to operate the property until the entire property is ready for redevelopment. It should be noted that sometimes in large real estate organizations, the renovated property is not actually “sold” to the Building Operator, but rather it is transferred back to the Building Operations Department for management.
What is the difference between the Building Renovation Stage and the Property Redevelopment Stage?
There are two major differences between these two stages. First, Building Renovators are very active in constructing the new renovations while Property Redevelopers are passively holding the property with interim uses until it is ready to be rezoned for an alternative use. Second, Building Renovators keep the property in its current use, i.e. residential stays residential, retail stays retail, etc. However, Property Redevelopers anticipate and plan for a change of use to the property, i.e. a warehouse becomes loft apartments or a shopping mall becomes a mixed-use project. This is why Property Redevelopers need a Land Packager to take over control of the site and initiate the necessary zoning changes.
Why are so many Property Redevelopers public agencies?
Many times, old, worn-out properties are abandoned so local municipalities acquire the properties because of unpaid back taxes. These municipalities transfer the control of these properties to redevelopment agencies. In a similar manner, state or federal governments may acquire properties for nonpayment of taxes. While each redevelopment authority or agency has its own mission statement, their goals are to transfer the control and ownership of these properties to private sector Land Packagers for development, which usually requires zoning changes of some kind.
How is the Property Redevelopment Stage different from the Land Banking Stage?
Land Banking usually involves “green fields” (previously undeveloped land) while Property Renovation usually involves “brown fields” (previously developed land). That is, redevelopment properties have a history of non-agricultural land uses, which can cause special problems (and opportunities) for future development.
What is a Master Developer?
“Master Developers” usually are defined by government agencies who want a private developer to be the Land Packager, Land Developer, Building Developer, and Building Operator. While these are convenient propositions for the government agencies to make, they are very unrealistic expectations. Very few properties are held by the same private sector owners throughout all of the stages of development. However, many public agencies do not want to deal with the complications involved with a series of owners, so they prefer to ignore them by using the term “Master Developer.” However, mixed-use developments require Master Developers to direct, control, balance, and referee the development of multiple users and sub-developers on a site, each with special needs and concerns. Product-specific developers (such as apartment developers) are important to mixed-use developers, but the success of the entire development must be considered when the needs of each product type are considered in the context of the overall development. In reality, the master developer in in mixed-use development must resolve and minimize the “parking wars” that inevitable occur in mixed-use developments.
Can you move between stages without a sale of the property?
Developers can move forward from one phase to another by deciding not to sell the property and to take on the critical tasks of the next stage of development. Each stage of development has specific tasks that must be achieved to increase the value in that stage. These specific tasks require special skills and additional capital. Thus, by moving into the next stage of development, the developer must understand what needs to be done and bring together a new team with special talents along with additional capital. Too often, developers casually move on the next stage of development as Land Packagers become Land Developers who morph into Building Developers who take on the role of Building Operators. The riskiness of this consolidation strategy becomes obvious when improving market conditions suddenly take a down turn, and the development no longer is profitable as property values decline, mortgage loans are in default, and capital investments are lost. On the other hand, developers can move backwards in the stages of development, but usually there is an acquisition of a new property for development. For example, Building Developers can become Land Developers only if they acquire a piece of land to develop. Likewise, a Land Developer can become a Land Packager only if they acquire additional land to “package.”
Questions Regarding the Development Task Groups
Aren’t the Acquisition Tasks and Disposition Tasks just two sides of the same coin?
Absolutely, the Acquisition and Disposition Tasks are two sides of the same coin, except that the perspective of the acquirer (buyer) is usually focused on a different stage of development from the perspective of the disposer (seller). Perspective is everything
Does the nature and importance of the Task Group depend on the stage of development?
Absolutely. The nature and importance of the Task Group are defined by the stage of development as well as the product type. Although all the Task Groups must be addressed in one way or another.
Are there real-life examples of these Tasks for each Stage of Development?
Examples for each stage/task cell in the Development Matrix are inserted as hyperlinks into the appropriate stage/task cell. These authors are asking interested readers to submit examples that they feel may be appropriate. Our goal is to eventually have examples for every product-type in every cell.
Why are there eight Tasks Groups, rather than seven or nine?
Each set of Tasks requires very different skill sets. However, there is nothing absolute about the number eight. While every Group of Tasks requires certain permits and/ approvals, we made the Approvals and Permits a separate Task Group because the critical nature of these Approval and Permits. If developers can’t get the required Permits and Approvals, they are out of business. It’s that simple, and each stage of development needs different permits and approvals. The Transportation and Accessibility Task Group may appear unusual except that the critical tasks required for on-site and off-site improvement analysis and construction require different designers, engineers, contractors, and permits than the those typically used for the Physical Improvements Task Group. Also, the integration of new infrastructure improvements with existing (and usually old) infrastructure improvements is a unique skill. The creation, construction and financing of transportation and accessibility improvements may require public-private partnerships. These private-public partnerships may be formally defined and documented or casual and informal working relationships. However, they are necessary for success.