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Introduction to the Development Process


Historical Perspective At one time, residential land development consisted merely of acquiring a tract, filing a plat of its division into blocks and lots, and then selling those lots to buyers. New subdivisions were usually extensions of already built-up areas. But a series of social, economic, and physical factors brought about significant changes: zoning ordinances and subdivision regulations were instituted as land use controls to protect public health, safety, and welfare; an economic depression brought construction to a halt; and World War II created a further shortage of housing. When conditions returned to normal after the war, building boomed. People had money to spend and the demand for housing was high. New households formed, and the high marriage rate and demand for separate households that had been postponed because of the depression and the war spurred the increase. Inexpensive land was available on the urban fringe, and public investment in infrastructure, such as sewer and water extensions and roads, was significant. The strong demand for housing shifted development to the open land outside cities, often bypassing land closer in with one or more perceived constraints on developmentvaried topography or higher land costs, for example. Before long, the creation of lots merged with the building of houses, and merchant builders provided a finished single-family house onan improved lotthe tract house. With rapid growth of the suburbs, the pattern of residential development changed forever. Since World War II residential development has tended to grow horizontally, outward from central cities. Private investment in the United States has generally supported and nurtured this pattern of growth. During the 1960s and 1970s, however, concern about the ill effects of urban sprawl began to take root, necessitating a new, more efficient pattern of development. What emerged was the principle of communitya commitment to the community, its long-term value, and its relationship with its surroundings. The concept includes not only living accommodationshouses and apartmentsbut also shopping centers, schools, open space, recreational and cultural facilities, and places of worship and employmentall In relation to the

circulation system that ties the elements into the community. The principle of community driven by a need to respond to every form of lifestyleis still a major factor influencing residential land development. - ULIs Community Builders Handbook, first published in 1947, sought to document the steps necessary for sound residential development. When the first edition of the handbook was published, this country had just begun to experience massive suburban development, and the principles of community planning were not well defined. The editiondof the 1-1 Single-family housing mass-produced by merchant builders satisfied the surge in housing demand after World War II. handbook published in the 1950s and 1960s sought to explore these and other issues to help postwar housing builders improve the quality of emerging residential neighborhoods. The first separate edition of the Residential Development Handbook, published in 1978, helped restdential developers cope with new problemsshortages of energy the environment, and rising costs of housing. As development has changed, so has the handbook. This edition follows the original Community Builders Handbook by over 40 years and the first edition of the Residential Development Handbook by a dozen. The basic philosophy expressed in the first edition remains the same, however, to provide a forum whereby the practices and knowledge of community builders can be exchanged, analyzed, and reevaluated in light of long and intimate experience and to make this knowledge and experience available to those in the field, whether newcomers or long-time practitioners. Developers cannot and should not employ the cookie-cutter approach to residential building, simply applying yesterdays products on new locations and to new markets. The circumstances facing residential developers in the 1990s present new challenges that will require fresh ideas and approaches: Housing costs. increasedcosts for land, development. and financing have driven the cost of market-priced housing beyond the reach of virtually all low- and many middle-income families.

Regulations, in response to concerns about the deteriorating environment, pressures from growth, and quality of design, federal, state, and local governments have vastly expanded the regulatory framework within which residential projects are considered. In many communities, increased regulations have resulted in two,three, or more years required for approvals from zoning to building permits, compounding the risks of development. Decreased public funding. The federal government has cut back sharply on its funding of housing and community development programs, leaving state and local governments and the private sector to try to fill the void. The decreased federal role has in part contributed to the national crisis of homelessness. The number of homeless Americans increased dramatically during the 1980s, bringing public attention to the need for housing. But without public subsidies, the residential development industry is hard-pressed to contribute substantially to a solution. Shortages of infrastructure. As a result of inadequate public resources, the nations basic infrastructuretransportation systems and public serviceshas not kept pace with new development. Residential developers are being required to fund major improvements to infrastructure through increased development fees and exactions, which historically were funded by the public sector through taxes. Indeed, costs associated with land and land improvements have increased more than any other component of the total cost of a house. Changing demographics. The baby boom continues to leave its mark on the housing industry as it ages. The generally aging population means fewer young families (the staple of many residential developers) entering the market. Changing household characteristicsdelayed marriages, two-worker families, single-parent households, decreased household sizeinfluence preferences for housing type. The effects of recent immigration and a soaring elderly population are still to be felt. Increased densities. Rising land costs and changing locational preferences and lifestyles are driving suburban residential densities higher than ever before in major metropolitan areas. The pressures to build at higher densities are bringing about new types of housing that are not familiar to either residential developers or homebuyers. Yet despite all obstacles, the overwhelming choice of maturing baby boomers todays primary market forceremains the traditional single-family house.

Growth management. Many municipalities and states have responded to the tremendous housing boom of the 1980s and the disproportionate funding of infrastructure and public services with ordinances designed to control growth, to slow or halt new residential construction. The attitude, which has come to be known as NIMBY (Not In My Back Yard), presents a new obstacle for developersone based on emotional rather than planning or financial considerations. Financing. The demise of a large segment of the nations savings and loan industry has further complicated residential development throughnew banking regulations and a more varied array of possible sources of funding developers must understand. Location short- and long-term funds is increasingly challenging. These new challenges require todays developers to find ways to stimulate interest in their development, t set them apart from the competition. The developers role is therefore more than just builder: residential development has become an educational process for municipalities, special interest groups. citizens, and consumers. This edition of the Residenhal Development Handbookaddresss the effects of these and other issues influencing residential development today. Elements of the Process ULI Fellow Shirley Weiss notes that the residential development process involves a complex set of decisions over time by a group of key and supporting participants or decision agntslandowners. developers, and consumers in key roles, realtors, financiers, and public officials in supporting ones. Once begun. the process continues only through positive decision making by one or more of the actors involved, The transition of a parcel of Land to residential use occurs In a series of discernible stages guided by decisions based on certain identifiable incentives:consumers, for example. by issues of everyday life and lifestyle; developers by profit and other motives; and professional planners by the public interest. The sequence of events usually follows a pattern: 1) In anticipation of urban use, speculation occurs on land at the urban fringe where ownership may change several times and where large parcels may be brokeninto smaller increments for development. 2) land then acquires a market-basednot speculation-based potential for urban use. 3) it is actively considered for purchase and subsequent development, 4) a developer has a

definite idea about the character of development and the specific timing involved based on market and feasibility studies, 5) formal plans are submitted to the municipality and appropriate agencies for review and approval, 6) active development begins, and 7) a consumer purchases or leases a housing unit. A rapid turnover in the ownership of land on the urban fringe does not always indicate that the land is being programmed for development. Speculation may occur in anticipation of the lands potential for conversion to urban use. The initial state of urban potential is achieved merely when one of the decision makers considers it so. It can occur when a landowner decides that the relative value he receives from land in its current state Is far outweighed by the value he can receive from selling the parcel, or It can occur when a planning agency considers a parcel to be a part of the future growth pattern of a metropolitan area. For land to pass from possible to actual urban use, the developer, as key decision maker, must make a judgment about the market. This step is crucial, because if the site and price do not meet the developers requirements. he decides not to purchase the site and the land returns to potential urban use. 1-5 The emergence of large commercial and employment centers in the suburbs (such as the City Post Oak area of Houston, pictured above) is indicate of strong growth pressure the faced the subirbs during the 1980s. nonresidental suburban growth fueled demand for housing in even more distant suburban location where house could build at more affordable prices. Developers might also decide to purchase land and hold (or warehouse) It until the market makes development feasible. When developers buy and hold land, they become real estate speculators, not necessarily developers. They are speculating that their carrying costs will be less than the increased value of the land at the time that development is feasible. During the 1980s, many developers made more money speculating in land than they did actually developing residential properties. But according to ULI council member Dale R. Walker, the risks can be high: Many developers are buying large parcels of land at high prices, relying on sustained price inflation, if land prices drop, they could be in financial trouble. These decisions early in the development processto wait, to buy, to developare not made in a vacuum. Developers must weigh all of the variables that relate to th context of

development, the property itself, and the decision makers. For example, developers must coisider the economic structure of the community and its climate for future growth, the local housing market, the level of current activity, what portion of the market they might be able to capture, the communitys past and future policies regarding capital improvements, services relating to transportation, education, and utility systems, the communitysannexation policies and tax structure, and its mechanisms for enacting ordinancesbuilding codes, oiing and subdivision regulations, and time frames for obtaining approvals. In short, developers mu evaluate the business opportunity produced by the interplay of supply and demand and the regulator environment. Developers often sense intuitively that a parcel land has the potential for development. By analyzing the market, developers can determine actual housing needs and the proper tuning of development, and the analysis either tempers or confirms their intuitive Asking What can I do with my land? is unwise, as question often results in unrealistic answers and ci trived development schemes. The better course is ask what kind of development the market will absorb whether the land can be developed to meet that ket or, If not, where the developer can find land I can. A site should fit the market, not vice versa. The analysis of a particular parcel under consiation for development includes physical. Location and institutional characteristics: a physical analyze to determine, among other things, topography, and water conditions, underlying geology, and environmental hazards; a study of the parcels location within surrounding land uses to determineaccessibility; and a survey of characteristics like zoning classifications and subdivision ordinances that are imposed upon the site rather than inherent to it. In addition, each decision makers individual characteristics play a vital role. For example, a local government that has adopted policies to limit or curtail growth will probably negatively affect the timeliness of development but could also lengthen the supply pipeline so that each development finds reduced competition. Further, a developers conception of the project will be tempered by the size and type of his firm. Conversely, a consumers decision to buy or rent is generally based on family status, stage in life, education, income, and the cost and availability of mortgage financing. Next, the developer should compare alternative sites, analyze the principal features of the selected site, and develop preliminary plans and sketches. Close behind site selection and

analysis are the method of acquiring the parcel. financing development, and seeking required public approvals. The developer must remain flexible in the approach to development to account for changes in the local market and methods of financing, however. Some developers, according to ULI council member Richard Michaux, seek to address these market risks by entering a joint venture with partners having a strong financial base. Developers might install streets, utilities, or other infrastructure and some or all of the amenities necessary for the development, and they must initiate a phasing schedule consistent with their cash flow. If the project involves land sales, developers sell parcels to merchant builders; otherwise, they can begin to construct the units themselves. As the first units near completion, sales and marketing and the establishment of some entity for maintaining the development (such as a community association) begin. And an evaluation uppn completion of development is vital if developers wish to learn from their mistakes. Questions developers ask themselves and residents of the project will help program future projects or subsequent phases of the same project. Each factorthe context of development, the property itself, and the decision makers can change over time, thus changing its relative weight as a variable. For example.a developer might decide to build a shopping center as well as the residential project to nullify the effect of being farther away from existing centers than preferred. Or based on an updated comprehensive plan, a community might change a parcels zoning and its resultant land use or permitted density. It is possible to begin describing the residential development process at any point, because, like aflow chart, all its actions are interrelated. Tfiis book attempts to proceed chronologically (and perhaps idealistically), beginning with the developers willingness to undertake some sort of residential project, and proceeds through feasibility evaluations (Chapter 2), financing (Chapter 3), design (Chapter 4), plans and regulatory approvals (Chapter 5), marketing and merchandising (Chapter 6), and postdevelopment community governance (Chapter 7) The final two chapters address issues concerning rehabilitation and adaptive use (Chapter 8) and emerging trends likely to affect the residential development industry into the next century (Chapter 9).

The Developers Role Developers are the central actors in the development process. because their actions determine the what, when, and for whom of residential development:what land will be considered for development, when improvements will begin, and for whom the project will be developed. To be sure, developers need the help of otherssite planners, architects, marketing specialists, the related technical and service specialistsbut it is developers who ultimately take the risks. They are also subject to the limits imposed by private decision makers (e.g., lenders) and public participants (e.g., zoning officials) in the process. But much of a projects success depends upon developers managerial ability and business sense. A basic consideration. always to be kept firmly in mind, is that private housing development for a private market is first, last, and all the time a business operation, conducted for profit, and the merit of decisions is always judged by their effect upon profit.1 The interrelationship of all the factors involved offers a challenge to developers, a challenge that is even more pronounced when the profit margin is small or the strength of the market questionable. Before beginning any residential project, developers must assess the need for various forms of housing in the particular location. It might be a highly sophisticated analysis involving various market elements, or it can be highly impressionistic and personal. Typically, developers consider demand for several years (depending on the size of the development and time frame for approvals) so as to anticipate continued future demand for the project.
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Marion Clawson, Suburban Land Conversion in the United States (Baltimore: Johns

Hopkins Press. 1971), p. 59. Those who develop land and houses are interested in providing a product that will attract potential buyers immediatelythat is, a short-term interest. Many allied professions, however, have a longer-term interest. Financial institutions and other investors almost always consider their interests to be long term, as borrowed funds are generally paid back over a long period of time. Comprehensive planning implemented by public officials envisions the long term. Developers of residential property must continue to lengthen their scope of concern, for subdividing land, building houses, and installing streets bear on the type of community that ultimately results. And how these subdivided properties serve the intended residents has a long-

term effect on developers financial success. As creators of residential neighborhoods or communities, developers must be sensitive to long- range needs and expectations, in a sense being responsible for the judicious long-term management of land. Raymond L. Watson, former president of Theirvine Company, observed in 1975, Regardless of ownership, land is looked at by a large portion of society as belonging to all of the people, with the owners role being that of caretaker.2 This belief is even more pronounced today According to ULI council member Frank A. Passadore, During the 1980s, the number of groups working to take land out of development increased tremendously. Issues like wetlands, endangered species. Traffic congestion and hazardous wastes stimulated an increase in the number of lawsuits and local growth management. As a result of these and other important issues, developers must invest more time and more money to obtain development approvals. In all likelihood, residential developers will witness the increasing involvement of municipalities and citizen groups in the development process in the 1990s. Developers must acknowledge that society has changedand will continue to change. Remaining flexible and responsive to community concerns will be essential for developers continued success. Council member Passadore notes, Successful developers in the 1990s will be those who understand how to structure a development organization and team to get past regulatory roadblocks. A cooperative spirit must exist between the private and public sectors. The Development Team In the past, thn development process was often viewed as a linear set of operations rather than as an ongoing process requiring constant analysis. Roles were narrowly defined, and development stages were segregated into neat chronological sections. This traditional method no longer works because none of the elements of todays development can be consideredapart from the others. The increased complexity and size of development plus the greater participation ol the public and government at all levels necessaril3 complicate the task of building. Consequently, each step has to be weighed and incorporated into tht framework of the entire process. 1-7 finding the design solution by combining the overlapping disciplines of the design team and the factors Influencing a sites development. Source: Adapted from Robert Engstrom and Marc

Putnam. Planning and Design of Townhouses and Condornini.urns (Washington. D.C.: ULI tho Urban Land Institute. 1979), p. 24. Thus, it is imperative for the experts in various disciplines to participate in all phases of decision making. Developers cannot assume they know everything themselves. They need a team. While economic political, financial, aesthetic environmental, an legal experts were once considered necessary only for large-scale projects. today they have become increaingly important for any development beyond simp splitting a lot. The team approach has been used one form or another in most development projet considered models of responsible land planning. The scope of such experts contributions to a c velopinent project is difficult to generalize. The teams extent and nature depend on the type of project, the characteristics of the site, and the local politiical climate. Nevertheless, the projects developer, by
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Raymond L Watson. The Private Developer et al).: Changing Roles, in Management and

Control of Growth. vol:3 (Washington D.C.: ULIthe Urban Land institute, 1975), p. 487. Reason of the position of risk, is the leader, first and al arbiter, and ultimate decision maker. The develir decides whether to proceed or not, based on the abilities of the marketplace. But the decisions are based on the qualified input of expertsthe develaient team. Timingwhen to assemble a development team changed. The frequent requirement for an environmental impact assessment for private development (whether legally mandated or merely as part of practice) has brought with it the necessity of curately measuring the environmental constraints at may dictate the ultimate land isoconstraints at must be recognized before the purchase of the site negotiated. This early environmental assessment will further require some preliminary definitions of o size of development, concepts of grading and ainage, alternative site uses, traffic to be generated, and mitigating circumstances. Much of the conceptualization that will be carried into project design must now be generated in this initial evaluation of the projects feasibility. The in creased front-end costs attributable to specialists in md planning, geology, civil and traffic engineering, and the social and biological sciences represent a rotective investmentor insurancefor the developer. The value of this investment is most evident then alternative land purchases are screened. Without

this early evaluation, a developer could purchase and with physical, social, or political constraints tal to residential development. More positively put, lowever, these expenses for physical, economic, and envirnmental evaluations can significantly shorten the projects design time. Depending on a particular projects complexity, the following team members might be involved: attorneys, planners, market researchers, engineers/geologists, environmental specialists, architects, landscape architects, financiers, contractors, and sales managers-or real estate agents. The preparation and execution of a business plan includes all these functional piecesthe expertise to determine demand, response, and profitability. The input is not necessarily provided by individual experts or specialists at each stage, however. Project analysisis a repetitive process of increasing refinement, each time weighing all the elements and passing the economic test. While developers could initially perform all or most of these functions themselves, depending on in-house expertise, eventually they will need expert help for most of the functions, because development is a multidiscipline business. The developers role is to identify and coordinate the disciplines rather than try to perform each of them. It is not necessaryin some cases not even possiblefor all of the technical talents to be on the developers staff throughout the entire process. Retaining a large, highly specialized staff substantially increases the developers financial risk. Council member David Sunderland concurs: A developer cannot afford to retain really good professionals on staff unless his company is big and diversified. What a developer needs is people who can manage these professional activities, not perform them. The developer should temper need with economic restraint. Individuals or multifaceted consulting firms offer consulting services pertaining to almost every issue relating to residential development. Competent experienced team members can help to maximize the sites potential for development, decrease construction and maintenance costs, and add tremendously to the projects appeal and marketability. Developers should not try to pinch pennies here: if they take the attitude that good planning makes money, not costs money, they will be more willing to call in the experts. Council member Gary Ryan agrees: Good planning does not add costs; it adds value.

In seeking consultants, developers should inspect other projects in which prospective consultants have participated and review their qualifications and experience with other developers. Developers must also be certain that the most competent individuals of the consultants staff are assigned to their projects. Council member James M. De Francia believes this point cannot be overstressed: A professional fi in is only as good as the individual assigned to ones project. Before retaining a firm, developers should meet with the proposed project manager to gauge the individuals as well as the firms qualifications. Each development team must be structured to meet the needs of a given project, but the following team players will be included on most project teams. Land Developers/Builders Land developers are investors who commit their equity, expertise, labor force, and management talent to the conversion of land from one use to another. Developers must be familiar with costs and procedures for estimating income and capitalization. Generally, development is a field for analytical people. Developers are risk bearers, income estimators, and, most of all, coordinators. They cannot abdicate responsibility in favor of decision making by committee. Developers have great social responsibility because land has tremendous value and because society must ultimately endure the results for many years. The bottom line is whether the development functions satisfactorily for the residents and for society as a whole: Historically, land developers have acquired their expertise from direct experience on projects but were educated in some related field: economics, business, planning. or engineering, for example. Only since the late 1970s have university graduate degree programs become available in real estate development. In 1989, four American universities offered graduate degrees in real estate development: Massachusetts Institute of Technology, Columbia University. University of Southern California, and New York University. About another 60 universities offer graduated-level courses in development as a major or minor concentration in a related graduate curriculumprimarily planning and MBA programs.3

A survey of builders conducted in 1988 reveals that over 58 percent of all builders buy and develop the sites on which they build houses. Only 27 percent indicated that they buy their sites from other developers. While land developers are concerned primarily with the conversion of land from non urban to urban uses, residential builders are concerned primarily with the actual construction of houses. Some land developers also function as builders. In high-growth markets where volume production is the norm, however, the trend has been for real estate firms to focus on one or the other. Typically, land developers are responsible for acquiring development permits. rough grading of the site, and bringing major components of infrastructure (roads, water and sewer, utilities) to the site. Builders purchase the site from a land developer, build the houses, complete on-site infrastructure (local streets and utilities, for example), and are responsible for marketing the completed product. The program for a particular development is usually limited to about 100 houses or fewer, which means that the job can be accomplished in one to three years, depending on the strength of the market. Land developers, on the other hand, might be involved in a project like a master- planned community, which could take 20 years or more to complete. Attorneys Good attorneys who are familiar with land development can save developers many times their ownfees. Attorneys can be responsible for preparing and reviewing the documents for the projects legal structure and the corresponding documents for project financing, consultants services, land purchase, leases, and rezoning. The extent of the attorneys role in zoning and processing permits tends to vary by region. For example, in the East, attorneys often play a major role in permitting and are directly involved in negotiations between developers and local governments. In most western states, however, attorneys have a less visible role in permitting and developers or professional consultants (the planner, for example) take the lead. Attorneys have two other important tasks: 1) to draft lease and sales contracts, especially those with subdevelopers and builders, and 2) to draft the declaration of covenants, conditions, and restrictions and other legal documents necessary to establish a community association. If developers operate within their own local market, attorneys are probably already a member of the team. Attorneys become identified with a developer, and if the developers track record is

clean, negotiating with local public officials and lending institutions becomes increasingly easier. Foreign developers, those working outside their own markets, however, must create a sympathetic climate for their actions. They therefore must acquire a local image, and wellrespected local attorneys can be key avenues of communication.

For a directory of university programs related to real estate, see ULI-the Urban Land Institute,

Directory of Real Estate Development and Related Education Programs (Washington, D.C.:Author, 1989).Updated periodically. Planners Like attorneys, professional land planners should have done the same type of work before. They should be familiar with local zoning policies and municipal regulations. If they are good, planners create not only better places for people to live but also value for the developer. Planners typically are generalists with a specialty; for example, most professional planning firms offer physical design with a subspecialty like architecture, engineering, or landscape architecture. Land planning involves site evaluation, determination, allocation, and location for specific uses of land. It includes topography, access and circulation, vehicular and pedestrian traffic, open spaces, and areas for residential, commercial, and industrial usesall coordinated to produce a unified development that can be built economically, operated efficiently, and maintained with normal expense. Land planning is really product planningmatching the right product to the land so as to produce profit. Land planners also have the primary role of relating the proposed project to the overall comprehensive plan for the area. Land planners should be allowed to work freely at first, within certain market parameters. Only after they have made some preliminary plans should an engineer be consulted; that is, an engineering plan should not put a land planner in a straitjacket. Engineers should be used to verify and refine the planners conceptnot to drive the concept. While planners have traditionally been associated with physical design, they often also play a key role in policy. In fact, services of professional planners not related to design have become very important in recent years with increases in regulations, environmental concerns,

and permitting requirements. Many professional planning firms now retain policy planners who are experts in such areas as writing development regulations, processing plans through the permitting maze, and negotiating with public agencies and citizens. Such planners work closely with physical designers to ensure that the physical plan responds to the municipalitys comprehensive plan and other relevant public and private planning programs. Professional planners have also taken on much of the responsibility for processing projects through local, stateand federal agencies and obtaining development permits. Professional planners often coordinate preparation of the environmental impact assessment and are therefore key players in developing mitigation programs to lessen impacts, many of which are eventually built into the physical land plan as open space or other adjustments to the conceptual plan. Overall, planner should be working with a variety of technical specialists. They must be able to communicate public concerns to the developer and must understand and convey the economic realities of development to government officials and citizens. In short, planners often serve as the developers lead coordinator, in effect often serving as the middle man for opposing concerns. Market Researcher Market researchers collect data and analyze them to determine several issues: the market audience and its demographic profile, the size of the potential market and what percentage of it can be attracted to a project (based in part on an evaluation of the competition), the optimum sale price or rent and rate of absorption, the type and size of units the developer should build, and what amenities should be included in the project to attract the intended target market. Through objective analyses of available data, market researchers help developersperform the market and financial feasibility studies that will lead to the initial decision about whether to proceed with a proposed project site and concept of development. The research findings help the developer to fine-tune the proposal in terms of product type, product mix, and phasing.

Engineers Engineers test the soil, establish the precise location of streets and lot and building lines, and furnish topographic maps, detailed data, and working drawings needed to establish grades, earthwork, street improvements, stormwater drainage systems, sanitary sewers, water supply mains, and other public utilities and the types of materials that can be used Engineers can be a resource for preparing cost estimates. They are also responsible for preparing find subdivision maps and sometimes tentative mapi Council member David Jensen notes, To ensure implementation of critical design concepts, planners a often asked to prepare tentative maps with the tecnical support of the engineers. Some projects require specialists in various fields of engineering. A project located in an area will earthquakes are likely, for example, might require seismic geologist to determine the precise location faults on the site and recommend appropriate backs or construction standards. Other times specialist soils, ecology, hydrology, or flood protection should be brought into the process. Not every engineering company has all of these technical cialists on its in-house staff, so it might be necessary to subcontract with a local expert. Normally, lead engineers can recommend qualified subcontractors. Environmental Specialists Most residential development projects now require some level of environmental assessment. Some states mandate this environmental review, while in other states, it is a municipal practice. Generally, the larger the project, the greater the degree of environmental analysis required: Specialists in various environmental sciences will likely be required if a full environmental impact report is necessary. Various environmental specialists might become part of the developers team of experts: historians. archaeologists, paleontologists. biologists, botanists, air quality experts, acoustical engineers, transportation engineers4 Project sites known to contain endangered species or habitats for endangered species could require several biologists. In recent years, projects containing wetlands have come under substantial scrutiny from federal agencies, and, as a result, new specialists in developing wetland mitigation programs and obtaining permits have emerged.

Residential developers need to understand which environmental issues are relevant (and potentially controversial) to the site and be prepared to bring in the appropriate experts. Architects Architecture involves planning. designing, and constructing buildings, and most developers find architects to be essential members of the team. In residential development, builders must offer purchasers more than just a well-built structure on a good lot. They must produce an architecturally pleasing house, well adapted to the topographic features of the lot and with a good relationship to other houses, and a good. livable floor plan. But developers are finding that talented architects also provide them with aids other than a floor plan and an elevation: site planning; selection of building materials; exterior color, styling, and coordination; interior design; professional supervision; and suggestions on merchandising the finished product. These extra services can pay for themselves by-helping to produce superior houses that sell faster. Council member Richard Michaux notes that architects can play another important role: Architects are especially important to neighborhood groups and municipal officials who are concerned about the quality and appearance of a project. Their ability to convey design concepts to these groups can be instrumental in obtaining approvals. Although architects should not usually be leaders of the development team, they should be involved in the process early because of the decisions that must be based on architectural and planning concepts. Decisions about programming and budgeting made during concept planning without architects participation can strip them of effective control over design. Excluding an architect at this early stage may lock the design into a preconceived solution, severely limiting the architects future options. This concern is especially important when the development program calls for a higher-density residential product, such as detached units on small lots, where the size, shape, and grade of development parcels can substantially determine which products will work and which will not.
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many residential developers make a transportation engineer part of the development team

regardless of the need to prepare environmental documents. transportation engineers can be independent consultants or associated with a diversified engineering or planning firm.

Landscape Architects Landscape architecture deals with the treatment and arrangement of ground forms: studying the detailed among buildings, circulation routes, physical features; creating open spaces round buildings; designing recreational spaces and other areas; and ultimately determining where and what type of plants should be installed. Thus, landscape architects do more than determine where trees and shrubs should be planted. Landscape architects are valuable because they think of the outdoors in three dimension. For example berms and similar topographic relief features can add much to a projects appearance and value. Landscape architects should be brought in early, before roads and buildings are built, for their trained eyes may perceive possibilities hat planners, architects, and civil engineers miss. Landscape architects play a large role in determing the Image a residential project will convey to rospective buyers or future residents. Landscape arrchitects design the projects entrances, and they are largely responsible for creating the streetscapethe features that often form ones first impression of a residential neighborhood. The landscape architects contributions can add both perceived and real value to a residential project, which ultimately translates into quicker sales and increased prices. Financiers Almost all good real estate developments rely to a large degree on the proper supply of equity and borrowed funds for the risks of development. Financing is one element in the process that is subject to a great amount of fluctuation, yet adequate financing can in large measure determine whether a project ultimately Is profitable. Developers must tap into this supply of funds at just the right time to secure the amount needed under the right terms. Developers should shop thoroughly and be prepared to wait until better tours can be secured if possible. A knowledge of source of money is indispensable to developers. In all cases, the source of money, whether an investor or a financial institution, must be convinced of the projects feasibility. That real estate developers must understand the techniques of financing cannot be overstressed, but if developers do not understand the techniques of financing, they should surround themselves with those who do.

Contractors Usually much of a developments quality rests with the actual builder of houses, the products eventually marketed to consumers. Contractors, licensed professionals who construct a project in accordance with plans and specifications, perform the task of building. Typically, general contractors assume the lead role in residential construction, and they may retain the services of numerous subcontractors for specialized aspects of construction: roofing, drywall, windows, masonry, cabinetry, and so forth. General contractors are often referred to as builders, but they may be just a contractor to the real builder as defined earlier. Most residential builders retain the full-time services of a general contractor within their organization, however. Residential developers also require the services of contractors for a variety of construction projects that occur before houses are builtgrading, installing utilities, paving streets. Most residential developers do not retain such contractors in-house, but larger organizations frequently employ an experienced individual to manage contractors. Contractors are skilled in assembling and organizing materials and labor, supervising construction in the field, and hiring and managing subcontractors. They are responsible for quality control, managing construction schedules, and controlling construction costs. Their input to a development plan during pro- construction helps developers generate reasonable estimates of construction costs and schedules5 Sales Managers Once the houses are built, developers need assistance to market them, selling or renting the units. Most moderately sized and larger development companies maintain an in-house sales or rental staff who are responsible for developing and implementing the marketing strategy. Smaller developers and developers of small projects often contract with a local real estate broker to market units. A contract agent or in-house sales manager is a vital member of the team, because the projects success ultimately is judged by how fast the units are sold or rented. Sales managers or agents should be brought into the project early to be most effectivebefore the units are designed. Experienced sales personnel are usually familiar with the local market and can suggest ways to improve the pace of sales or rentals.

For additional discussion of the contracting profession, see Men Millman, General Contracting:

Winning Techniques for Starting and Operating Successful Business (New York: McGraw-Hill. 1990). 2. Project Feasibility The first step in residential development is to determine a projects feasibility. Feasibility analysis is a generic term (that) groups a variety of predevelopment studies by generalists and specialists in a systematic philosophy of inquiry to determine facts that are reliable, assumptions about the future that are consistent with past experiences, and tactics (that] will minimize the variance between objectives and variations.1 Estimating a projects feasibility comprises several steps: assessing the physical characteristics and capabilities of the site, establishing the initial development concept, preparing a profile of the market and determining what it can afford to pay, delineating the market area in terms of location, and determining the effect of regulatory practices on the desired development program. The process also requires an estimate of development costs, an analysis of the financial package considering such elements as costs and terms of borrowing, equity position, and mortgage loan ratios, and an estimate of economic feasibility based on computations of income, expenses, and rate of return. For simplification, feasibility analysis can be broken. down into four primary components: 1) market analysis, 2) site considerations, 3) regulations, and 4) financing. This chapter addresses the first three. Because of the increased complexity of financing residential projectsbrought about in part by tax reform in 1986 and the demise of much of the nations sayings and loan industryfinancing is discussed separately in Chapter 3. Market Analysis Any well-conceived new housing project must begin with a thorough understanding of the marketplace where the property will be constructed. Market feasibility is fundamental to a developments financial feasibility and success. No matter how resourceful the financial structure, the numbers will not work without an appropriate market for the product.

Residential developers often marvel at the marketing instincts of well-publicized colleagues, but for every successful hunch player there might be many others who played one hunch too many, disrupting not only their own businesses but the marketplace as well. Developers use market analyses not only to validate their market instincts but also to identify new market opportunities. Todays most savvy and well- respected developers seldom make a move without thoroughly researching the market pertaining to the contemplated development. Understanding the market involves classic factors of demand and supply. Analysis of demand coversdemographic and economic characteristics of the households within the marketplace. Analysis of supply looks at activity and trends in the marketplace and most importantthe potentially competitive properties that are likely to be marketed during the same period. The developer collects and analyzes data to help answer several basic questions:
1

james A. Graaskamp, Fundamentals of Real Estate Development (Washington. D.C.: UUthe

Urban Land Institute, ig2), p. 13. 1. What are the opportunities or gaps where a need exists within the marketplace? 2. What is the appropriate target market and market orientation for this project? 3. What is the size of the future market and what percent of that market can be attracted to the subject site? 4. What is the price range in the market? 5. What type of unit is justified by demand? 6. How large should the units be? 7. What amenities should be provided? 8. What are the indirect economic constraints? Or, what are constraints to development not related to supply and demandregulatory issues, the physical site, community opposition? (This last question is dealt with more thoroughly later in this chapter.)2 Along with these classic questions about the market, another, more qualitative purpose for the market analysis is gaining importance among leading developers: a thorough research

report with rigorous methodology become an invaluable aid for gaining financing. Analytical lenders and equity sources scrutinize the data about the market in a good report. Those whomove on instinct see the report as adding to the defensibility of their decision. Well-documented market analysis can help to obtain the necessary municipal approvals; innovative projects in particular might need the political support that can be fostered by clearly presented market rationale. And market studies provide invaluable guidance to planners, architects, and engineers in their designs. A market analysis can address a broad spectrum of concerns. Developers use general market studies to survey local or regional markets when contemplating geographic expansion, gathering information about available land, determining where development is feasible from the standpoint of construction costs and regulatory constraints, and, most important. determining where the dynamics of supply and demand match the characteristics of the proposed housing development. This chapter concentrates on how market analysis is used to determine the nature and level of demand for residential development on a specific site. Context Market analysts begin by looking at the regional setting within which the proposed development will occur, including major shifts in regional population. recent or anticipated changes in the regional economic base, and patterns of employment. Then the focus narrows to the county, where more specific information is available about population, employment, housing needs, activity, the relative desirability of locations within the county, transportation patterns, and regulatory or development policy issues. From there, the focus narrows further to the subject property and the market areas that will more specifically affect its appropriate development program and ultimately its success in the market. The Market Area To conduct a proper market analysis, analysts must define the physical extent of the markets for the proposed productsthe demand market from which potential buyers will be drawn and the supply market of planned or existing developments that will compete for buyers.

Housing markets are largely local and generally do not have fixed geographic borders except those dictated by physical barriers, manmade features, or political considerations. Market analysis should be targeted to identifiable regions where the infrastructure creates sectors (individual housing markets) of geographic, demographic, and socioeconomic interdepandence. While no set guidelines define a marketplace, it is generally smaller than the entire metropolitan area but larger than a single community. The market area and its future performance depend upon the health of the metropolitan areas overall economy, however. ULI council member William E. Becker suggests, County boundaries are often good areas to use as control points for determiring market areas and for the collection of statistical data.
2

G. Vincent Barrett and John P. Blair, How to Conduct and Analyze Real Estate Market

Feasibility Studies (New Yprk: Van Nostrand Reinhold Co., 1982), pp. 2830; and Margaret Waite Robert Charles Lesser & Co., Los Angeles. California.

i-I Before selecting the product type and mix, the developer of California Meadows prepared a market analysis to determine teneral market trends and a specific target market for each housing type. The market study Indicated a strong demand for affordable single-family houses, which was accommodated with an Interlocking (or zipper) lot design that achieved 8.7 units per acre. Specific products were then designed for single parents with children, childless couples buying their first house, young move up families, and empty nesters. Consumers in the market for housing usually prefer certain geographic locales but not precise locations within those broad areas, reflecting the fact that within any given area a range of housing is usually available. Consumers select a geographic areabased on such factors as areawide prices, social amenities, quality of neighborhoods, reputation of schools, and ease of commutingand shop among a number of competitive offerings within that area. Within the selected geographic area, the decision to purchase or rent, however, is likely based upon the perceived present and future value of the dwelling unit and the consumers ability to pay rather than upon precise location. The market analysis for a proposed housing development involves two kinds of market areas: the demand side (the target market area) and the supply side (the competitive market area).

In most cases, a strong geographic correlation exists between supply and demand, but not always. In fact, in some instances, the two can be regions apart. For the second-home market in destination resorts, for example, the target market areas could extend to cities 500 or more miles away from the site-oriented competitive market area. Most market areas for primary shelter (first homes) are within a one-hour commute of employment centers or other key destinations, however. Target Market Area (Demand Based) Target market areas define the location where most logical demand for a contemplated housing project exists. Various factors are considered in delineating the target market area for a proposed development: 1. Travel time from major population and employment centers. With worsening traffic congestion in most metropolitan areas, decisions about the location of housing are increasingly based upon proximity to employment. By locating major employment centers (downtowns or emerging suburban activity centers) and making assu.mp- tions regarding acceptable commuting time, market analysts can approximate housing target market areas. Sites easily accessible to employment centers draw from wider target market areas. 2. Mass transportation facilities, and highway links. Commuting patterns and times are based largely on ease of access; thus, the target market area is based on the availability of mass transit, the location of transportation corridors, and the speed at which they operate during peak travel hours. Sites offering efficient mass transportation draw from wider target market areas. 3. Existing and anticipated patterns of development. Most urban settings exhibit areas of strong and weak growth. Growth areas might be distinguished by certain housing characteristics (large luxury houses, entry-level houses, apartments, for example), which in turn influence the boundaries of target market areas. Growth is likely to continue to be strong in pockets of hot markets, which have larger target market areas. Likewise, developments offering products geared toward underserved markets within a region draw from larger target market areas.

4. Socioeconomic corn position of the population. Income, age, household characteristics, and other socioeconomic characteristics of a given area influence the choice of housing and location and thus target market areas. Locations with a higher perceived status draw from wider areas. 5. Phisical barriers and time/distance zones. Natural features like rivers, bluffs, and parkland and manmade features like jurisdictional boundaries or intensive development can sometimes form a wall through which boundaries of the target market area do not penetrate. 6. Political subdivisions. Municipal boundaries can be especially important when adjoining jurisdictions differ markedly in political climate, tax policies, or snob appeal or when different attitudes about growth exist. Further, boundaries of school districts are important to market segments with school-age children. With these and potentially more localized considerations in mind, analysts should define target market areas with the objective of gathering meaningful indicators of the strengths and weaknesses of the market and the existence of a core of consumers able to purchase or rent the proposed housing product. That core is generally comprised not only of households already existing in the market but also of those that will relocate to the area. The existing location of this core group of consumers varies with the type and ocation of the proposed property; for example, a retirement community for active adults in a resort irea draws from an area much beyond mere local influences, while a market-rate rnta1 property inside he perimeter highway of a major city could draw nost of its residents from within a mile or two of the site. To better understand the potential market for a particular housing project, target market areas can be categorized in a hierarchy based on the different strength of demand anticipated iri these locations: The primary target market area is where the strongest potential demand is anticipated. Typically, 50 to 75 percent of the buyers or renters for a given project come from the primary target market area. Usually this area extends up to five miles from the subject property in urbanized areas and up to 10 miles in suburban areas farther away. Analysis of demand factors within the primary market area influences the design and pricing of the specific product. The intermediate target market area has a secondary influence on the primary areas population and economic expansion. Most of the remaining 25 to 50 percent of the prospects for the

proposed property come from the intermediate target market area. It usually extends five to 10 miles from the site but in larger metropolitan areas can extend 10 to 20 miles from the site. The regional target market area is often the combination of the primary and intermediate market areas; in very dynamic or populous locations, however, the regional target market area could draw from significantly beyond those defined boundaries. A property located in a specific urban neighborhood, for example, might have thousands of households within a primary target market area that encompasses only a section of the city, while the intermediate target market area would be the city itself. The regional target market area, however, would include the affluent suburbs in the recognition that a market would exist for mature families arid empty nesters moving back into the urban core. Typically, the regional target market area extends 20 to 40 miles from the site. Identifying the demand-based target market area brings the analyst only half way to fully understanding market potential. For many market studies, the more significant definition of market area is the on the supply side of the equationthe competitive market area. Competitive Market Area (Supply Based) Demand for new housing exists to some extent in most locations. What is important in market analysis, however, is residual demandthe demand for new housing that is not met within the marketplace. It can be determined only after the housing competition affecting the proposed property is thoroughly understood. Residual demand is determined by a deceptively simple equation: Total Demand minus Total Absorption by Competitive Products equals Residual Demand. This equation is simple in concept, but defining its components is often an uncertain exercise. Furthermore, data about the supply side can prove elusive, erroneous, and contradictory. The competitive market area encompasses the housing potential buyers or renters consider comparable to the proposed property. Competitive products include new and resale units existing in the area and units planned to enter the market during the marketing period of the proposed property. If the proposed marketing period is lengthy, the competitive analysis should also consider vacant and redevelopable properties zoned for residential use that may become active

during the marketing period. Delineating the competitive market area provides a boundary within which the analyst can measure the competition and ultimately estimate absorption and capture rates. Delineating Target and Competitive Market Areas Target and competitive market areas can be defined in many ways. To a certain extent, every site is special, as are its areas of influence for supply and demand; certain standard and acceptable methods or guidelines for delineating market areas can be used in most instances, howevet The primary target area is established by the location of and accessibility afforded by transportation routes, by what has been learned about the location of prospective consumers from surveys of competitive products, by the locations of current and future employment centers, by the general housing trends in the region, and by the spillover demand from unmet housing needs in surrounding jurisdictions. The location of competitive projects and physical barriers, such as rivers or large areas of open space.are less important determining factors. The boundaries of the primary target area are likely irregular and differ markedly for different types of projects and for different locations. Computer-modeled planning data services can carve demographic information out of data from census tracts in virtually any shape. The most accurate data.however, conform to municipal boundaries or census tracts. No matter how sophisticated the computer model, the margin for error increases when artificial boundaries are used. Caution should be used with computermodeled census data more than three or four years old, for computers are not aware of new housing developments, new highways, or recently imposed moratoriums. Most development occurs in areas with significant growth dynamics, It is therefore often more useful to look at corridors of growth or patterns of migration and development that follow those corridors. An analysis of corridors studies the direction of growth and the areas from which a general location draws new households. The Internal Revenue Service can provide information about relocation for all taxpaying households, which shows the directionof movement, often from closer-in locations to the suburban fringe (or, where substantial highway construction is occurring. to rural areas).

Assuming similarities in target markets, the primary target market area could complement municipalities surrounding the site that contain similar housing and market dynamics. In this case, the intermediate target market area would include those counties from which the proposed propertys county has historically drawn new households. The regional target market area for primary housing, then, would be the combination of the two. The competitive market area would likely coincide with the primary target market area, with some additional area accounting for transportation links and emerging employment centers. On the other hand, the target markets for the proposed site may be different from those in municipalities surrounding the site. For example, the proposed property might offer a product not being provided elsewhere in the region, such as affordable housing. In that case, a specific portion of housing demand will be almost forced to the proposed property even though surrounding jurisdictions may be growing. Delineation of the target market area thus must also consider the specific nature of supply and demand within the larger region.

Factors Affecting Demand Since the target market area is determined, analysts an study in detail demand factors that take into account a variety of socioeconomic and household characteristics. Because most market analyses are accomplished within limits of time and budget, however, it is not always possible to consider every factor that might influence demand. At a minimum, four factors are of primary importance: population, households, income, and employment. Appendix A provides a list of sources for much of these data, and Appendix B provides a list of housing-related associations and other organizations that may collect data useful to market researchers, Population Forecasting population and households as part of a market analysis is primarily to assess the number and nature of current and future households and thereby forecast the demand for new housing. An analysis of in-migration and out-migration also offers insight into present and future demand for housing in the market area.Increases in population are typically based on two factors: more births than deaths within the market area and more in-migrants than out-migrants withinthe

market area. Any analysis of trends in population should cover the period from the last decennial census. It may be necessary to study a shorter period if some other factor has significantly affected population in the target market areathe relocation of major industry in or out of a specific market, for example. Because housing markets are local, developers would be wise not to rely on national population trends. In-migration, for example, varies widely between regions as well as between communities within the same metropolitan area. It is therefore essential to examine historical population trends for the target market area and to forecast future changes in light of local influences. A thorough study of population includes an examination of trends and projections in the age of heads of households, information that gives an important indication of the nature of demand for housing in an area. Comparison of population age pyramids for the target market area and the nation directs the market analyst toward existing and future market opportunities; deviations from the national norm are the first avenues of investigation. For example, a proportionately high percentage of individuals aged 20 to 30 indicates a need for housing for first-time or first move-up buyers. Adults in their 40s, on the other hand, are usually approaching the peak of their earning power and a preponderance indicates a need for..