LECTURE 8: REAL ESTATE DEVELOPMENT
The Development Process
• Can be defined as the act of brining an idea or concept to successful
completion in bricks and mortar. It is a complex process requiring the
coordinated expertise of many professionals.
1. The Developer: The developer is the entrepreneur who makes things happen,
the prime mover of the development process. The developer seeks the
maximum return with a minimum commitment of time and money. This return
consists of the development fee, profits on the sale to long-term investors,
and a long-term equity position.
2. Joint Venture Partner: Any individual or institution providing the developer with
development-period equity funding in return for participation in development
profits can be called a joint venture partner.
3. The Construction Lender: The construction lender has a short-term
commitment in land, and is assured of being repaid on completion date of the
4. The Permanent Lender: In addition to charging interest on the permanent
loan, long-term lenders frequently receive a form of contingent interest.
5. The Long-Term Equity Investor: Usually assumes the role of a passive
investor during the development period, which does not include the sharing of
development period risks.
6. The Architect: Design projects.
7. The Engineer: Utilizes the projects.
8. The Contractors: Execute a contract with the developer to build the project
according to the plans and specifications of the architect and engineer.
9. Final Users: Homeowners.
10. Regulators: The Government.
Primary Decisions To Make before the development:
• How should the site be acquired?
• How extensive should the feasibility study be?
• What types of financing should be obtained?
• How should the developer deal with the general contractors? • Should a major tenant be pre-signed?
• Should the developer take in a joint venture partner?
• Should the developer pre-sell the equity to passive investors?
• Should an outside leasing agent or sales firm be used?
• Should an outside management firm be employed?
• What government approvals will be required?
The Development Process
Stage 1: Idea Inception - In this stage, the developer generates an idea for a
particular type of project and considers what project size might be appropriate for
a particular urban area. Next, the developer will put together a cost-and-income
Stage 2: Idea Refinement - First the developer must find a specific location within
the given area. Second, the developer will seek to “tie up” the site. Thirdly the
developer will arrange for soil test to determine the lead-bearing capacity of the
Stage 3: Feasibility – Varying degrees of market research are possible. The
developer will use regional and urban economic data to look at the market
possibilities for the chosen product.
Stage 4: Contract Negotiations – Written agreements are entered into with all the
key participants in the project. On the financial side, a permanent loan
commitment will be obtained.
Stage 5: Commitment Point – Contracts that are negotiated in stage 4 are
signed, or conditions required to make them effective are satisfied.
Stage 6: Construction – During this period, the physical structure is built. All
members of the development team work closely together to complete the project
on time and in budget.
Stage 7: Initiation of