Dokumen - Pub - Real Estate Development Matrix A Handbook 9781138745049 9781315180779

‘The new text Real Estate Development Matrix is the first truly significant advancement on
the groundwork laid by James Graaskamp many years ago. Dan Kohlhepp has taken his own
years of actual development experience combined with the perspectives gained teaching
this material to students and professionals that range from the University of San Diego to
Johns Hopkins University, CCIM and NAIOP members and integrated it all into a systematic
method of development decision making. Not only are the fundamental areas covered as in
the Graaskamp model, but, here we have the players involved, the requirements of achieving
more sustainable and responsible development, and the time sequence of development
action items. Here, one can study development from the perspective of what the participants
in the process actually do, what information they need and when they need to make decisions
from idea conception through property value harvesting. Covering this subject matter for all
property types and markets, is not an easy task and many developers have told academics
you can’t teach this stuff, but Dan Kohlhepp, who uniquely combines his experience in both
the academic and private sector worlds, has provided a new comprehensive model that
sets a new standard. Great cases are provided, making the concepts within the matrix tangible
for the advanced student of real estate. Suitable for advanced students, capstone courses
and professionals alike, I give the Real Estate Development Matrix my strongest possible
endorsement.’
– Norm Miller, PhD, Ernest Hahn Chair and Professor of
Real Estate Finance, University of San Diego
‘The matrix covers the entire development process and breaks it down into the key stages
that require critical tasks to be completed successfully to mitigate the development risk. The
book blends years of development experience with the academic background of the authors.
This is critical for a real estate development text because missing any of the key steps
can jeopardize the success of the entire development project. It takes someone who has
learned through years of development experience to know what the sources of risk are as you
navigate the development matix.’
– Jeffrey D. Fisher, Ph.D., President, Homer Hoyt Institute,
Professor Emeritus, Indiana University
‘The Real Estate Development Matrix masterfully blends the complex topics and concepts
of the real estate development process into a navigable road map for any real estate profes-
sional. Daniel and Kimberly have creatively used real world “case studies” to reaffirm
concepts, provoke critical thinking and illustrate discussed topics in a way that brings clarity
of the real estate development process to all readers. This book is a must read for the aspiring
real estate professional, a seasoned developer and any of the multidisciplinary professionals
that plays a critical role in the real estate development process.’
– Bobby Zeiller, Managing Director-Development,
Silverstone Healthcare Company
‘Real Estate Development is usually taught as the cap-stone/final class in most real estate
programs. Development brings together all the aspects of real estate including: market feasi-
bility studies, market strategy, environmental studies, transportation/accessibility, legal
issues, acquisition, financing, approvals and permits, construction of physical improvements,
leasing, operations, sales and finally disposition. As a professor teaching real estate develop-
ment over the past 30+ years, the complex development process is challenging for students
to grasp and master. Finding good textbooks that cover areas that a professor deems most
important in their course can be challenging.
Real Estate Development Matrix takes a unique “modular” approach to the process, putting
each step into a compartment that can be understood and accomplished independently.
This allows each of the individual contributors to the development process to be able to
understand their role in the process and the value that it creates. A developer is like an orches-
tra leader who knows what the music should sound like and must lead each instrumentalist
to function in a harmonious fashion to produce a good result. Just as an orchestra leader may
not be able to play every instrument, a developer does not have to be able to produce alone
each task of the land planners, architects, engineers, bankers, contractors, sub-contractors,
lawyers, brokers and users they lead; who all have special expertise. The developer must be
able visualize and communicate the end goal to all players and then oversee and coordinate
all those players to achieve the final result.
The book breaks the development process into seven stages: land banking, land packaging,
land development, building development, building operation, building renovation and prop-
erty redevelopment. It then uses the eight tasks needed in each stage: acquisition, financing,
market studies and market strategy, environmental studies, approvals and permits, physical
improvements, transportation/accessibility, and sales/disposition. Therefore, each player can
see their own task and how it fits into the big picture, and the developer can more easily
manage the entire project and coordinate the tasks.
Each topic is handled in an industry standard fashion that is already being used by the
NAIOP (commercial developers) and CCIM (commercial brokers) organizations in their
professional courses, providing good consistency, terminology and approach. The Kohlhepps
have been developers, operators, and instructors – thus the applied nature of their approach.
I recommend that anyone teaching real estate and/or development courses consider this
book, as all or parts of it may be useful in many different courses.’
– Glenn R. Mueller, PhD, Professor – University of Denver,
FL Burns School of Real Estate & Construction Management,
Real Estate Investment Strategist – Black Creek Group, Denver, CO
‘Forever academics have attempted to describe and explain property development in the
context of specific property types. Dr. Kohlhepp breaks this paradigm rut by focusing on
the 7 different stages of property development and the 8 specific tasks associated with
each stage. The brilliance of this framework is that it transcends any property-type specifics
and squarely outlines the whole of property development, regardless of property type.
Dr. Kohlhepp artfully explains property development as a series of complex and interrelated
activities, and demonstrates how the Development Matrix can help bring order to the thought
process. The Matrix encourages the reader to think logically and systematically, but not
linearly about property development.’
– Jeff Engelstad, Ph.D., FRICS, CCIM, Professor, Burns School of
Real Estate & Construction Management, University of Denver
‘The Real Estate Development Matrix is simple, clear, and insightful. The authors breakdown
a confusing process into seven understandable stages. This readable and non-technical book
is a must read for every participant in real estate development. The companion website
nicely compliments the text with in-depth discussions and analysis.
The real-world examples clearly demonstrate the authors’ points. Having worked with the
senior author for over 30 years, I have participated in most of the projects discussed in
the text. They were always learning experiences and illustrate the stages and tasks in the
Matrix.
I particularly enjoyed the discussion of “project feasibility” and the Three Commandments
of real estate development.’
– Art Fields, Retired President and CEO of Crescent Resources, LLC
‘I have had the pleasure of working alongside Dan Kohlhepp in the presentation of his
Development Matrix throughout various US markets. This material has been well received,
as it outlines a very logical series of development stages, each containing well defined tasks.
The total matrix clears what is typically the ‘fog’ of the development process, and no matter
what level of development one is involved in, they can clearly see both their entry into the
process, as well as various exits.
I highly recommend Dr. Kohlhepp’s material no matter the level of experience, or in what
sort of development one is involved.’
– Mark Van Ark, CCIM, SIOR, Sr. Instructor – CCIM Institute, Director – KW
Commercial, Denver/Boulder, CO
‘This is the book that real estate/urban development educators in professional organizations
and academic institutions have needed for a long time . . . Real Estate Development Matrix
shows that one does not have to be a master developer taking a project from start (undeveloped
land) to finish (operating building) to be successful. One can be successful by mastering
some tasks at some stage of the overall process. . . . real estate developers will empathize
with the presentation and discussion of the real world experiences encountered; task
experts in a part of the development process – lawyers, bankers, urban planners – will better
understand what the developer needs from them; and students new to development will have
an overview of what they can expect in their future careers. It is an essential book for anyone
dealing with the built environment.’
– Michael A. Anikeeff, PhD, Professor (retired), Johns Hopkins University,
Carey Business School, Edward St. John Real Estate Program
Real Estate Development Matrix
This book presents a new way of thinking about, teaching, learning, and practicing real
estate development.
Real Estate Development Matrix describes the process in a two-dimensional model
and presents seven Development Stages which form the horizontal axis, and eight sets of
Development Tasks which form the vertical axis to define a 56-cell matrix. In each cell,
money is spent and risks are taken to achieve certain tasks and thereby create (or destroy)
value. This holistic process considers the entire life cycle of real estate from its “green field”
inception to its “brown field” state.
The book is written by a real estate developer and academic, and the presented material is
conceptual, practical, and non-technical. Jargon has been minimized as much as possible
as the authors introduce an entirely new model for real estate development that is both
academically authoritative and developed in practice.
It is aimed at a general professional audience participating in the development process,
but equally the book is ideal for use as a textbook in undergraduate and graduate courses in
real estate development, and an excellent supplemental text for business courses discussing
real estate finance and investment. It may also be used as a textbook for professional courses,
workshops, or seminars in real estate development. The book is supported by an interactive
website at http://realestatedevelopmentmatrix.com/
Daniel B. Kohlhepp is the president of Granite Road LLC. He is a former senior lecturer
and academic program director of the Master of Science in Real Estate and Infrastructure
Program at the Johns Hopkins Carey Business School. He began his career in real estate as
a college professor at the University of Oklahoma and Penn State University and then spent
30 years as a real estate investor and developer before returning to academia. In 2007 the
Homer Hoyt Institute recognized Kohlhepp as a Hoyt Fellow, and in 2012, he was elected to
the board of directors of the Homer Hoyt Institute. He is an equity principal of the Real
Estate Counselors Group of America, and he is also a member of the Appraisal institute and
currently serves on the editorial board of the Journal of Sustainable Real Estate. Kohlhepp
holds a PhD in Real Estate and Urban Planning Analysis from The Ohio State University,
and an MBA and BS degree from The Pennsylvania State University.
Kimberly J. Kohlhepp, MSREI, LEED AP BD+C is currently the Associate Director of

Development for Kimco Realty’s Mid-Atlantic Region in Baltimore, MD. Before joining
Kimco, she was a principal at Nestwood, LLC, a consulting firm focused on producing
financial proformas, market research, and educational courses for real estate development
teams and organizations. Kimberly has also worked with Brookfield Office Properties and
Federal Realty Investment Trust in both property management and asset management roles.
Kimberly holds a Master of Science in Real Estate and Infrastructure from Johns Hopkins
University and a Bachelor of Arts in Anthropology from Ohio University.
Real Estate
Development Matrix
Daniel B. Kohlhepp
Kimberly J. Kohlhepp
First published 2018
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2018 Daniel B. Kohlhepp and Kimberly J. Kohlhepp
The right of Daniel B. Kohlhepp and Kimberly J. Kohlhepp to be identified
as authors of this work has been asserted by them in accordance with
sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Kohlhepp, Daniel B., author. | Kohlhepp, Kimberly J., author.
Title: Real estate development matrix : a handbook / Daniel B. Kohlhepp,
Kimberly J. Kohlhepp.
Description: New York : Routledge, 2018. | Includes bibliographical
references and index.
Identifiers: LCCN 2017031435| ISBN 9781138745049 (hardback : alk.
paper) | ISBN 9781315180779 (ebook)
Subjects: LCSH: Real estate development.
Classification: LCC HD1390 .K64 2018 | DDC 333.73/15—dc23
LC record available at https://lccn.loc.gov/2017031435
ISBN: 978-1-138-74504-9 (hbk)

ISBN: 978-1-315-18077-9 (ebk)
Typeset in Times New Roman

by Keystroke, Neville Lodge, Tettenhall, Wolverhampton
Visit the companion website: http://realestatedevelopmentmatrix.com/

Contents
Prefacexi
About the authors xv
Acknowledgements xvii
Table of exhibitsxxi
PART I 1
1 Introduction 3
2 Real estate development defined 8
3 The Real Estate Development Matrix 12
4 The third dimension 17
PART II 21
5 Introduction to the Stages of real estate development 23
6 Land Banking 30
7 Land Packaging 47
8 Land Development 76
9 Building Development 103
10 Building Operations 127
11 Building Renovation 147
12 Property Redevelopment 167
PART III 189

13 Real Estate Development Tasks: an overview 191
14 I. Acquisition Tasks 195
x Contents
15 II. Financing Tasks 212
16 III. Market Analysis and Marketing Strategies Tasks 228
17 IV. Environmental Issues 244
18 V. Approvals and Permits Tasks 255
19 VI. Physical Improvements Tasks 269
20 VII. Transportation and Accessibility Tasks 281
21 VIII. Sales and Disposition Tasks 294
22 Summary 311
Afterword 313
Index 315
Preface
Purpose
The purpose of this book is to define the Real Estate Development Process in terms of a two-
dimensional model called the Real Estate Development Matrix. The Real Estate Development
Process has been discussed and debated for many decades, centuries perhaps. While everyone
thinks they know what it is, nobody seems to agree. This is particularly troublesome if one
is trying to obtain community support for a proposed project, to raise funds from prospective
investors, or to teach real estate development to students with multidisciplinary backgrounds.
This Real Estate Development Process has been poorly defined and, consequently, the per-
ceived risks in development can appear overwhelming or be easily ignored. The book aims to
define the Real Estate Development Process with a consistent terminology that can be used
to clarify participants’ roles and expectations, as well as to specify and describe the societal
costs and benefits of real estate development. The risks involved in real estate development are
described as the failure to successfully complete specific tasks in the process.
Overview
The book describes real estate development very broadly and includes any and all efforts to
add economic value to a parcel of real estate. This holistic process considers the entire life
cycle of real estate, from its “green field” state to its “brown field” state. This process may
take decades or centuries, and the process is repeated over and over again. The book’s general
theme is that, at every Stage of the Real Estate Development Process, economic value is
added by successfully completing certain Tasks that require special skills. Failure to accom-
plish those Tasks would result in a loss of economic value. These failures are the risks that real
estate developers incur in the process.
Target audience
This book is written by real estate developers, and it is aimed at a professional audience
of those participating in the development process. This group includes development team
members from multiple disciplines and professional backgrounds, as well as civic leaders
and public officials who guide the future of their communities. The book is also aimed at
students studying real estate development in professional seminars and workshops, and
in undergraduate and graduate classrooms. Real estate development is a multidisciplinary
process that is formally taught in business, architectural, engineering, and political policy
schools. This book is appropriate reading for undergraduate, graduate, and professional stu-
dents interested in the Real Estate Development Process. The book’s material is conceptual,
xii Preface
practical, and non-technical. Jargon has been minimized as much as possible. A companion
website, http://realestatedevelopmentmatrix.com/, contains technical discussions and explains
special skills that are used in real estate development.
Authors’ perspectives
The co-authors bring very different generational perspectives to the Real Estate Development
Matrix. Dan and Kimberly view the Stages and Tasks of development through their different
lenses of history, culture, experiences, and political movements. Dan tries to explain the real
estate development process that he has experienced over the last 40 years, while Kimberly
tries to understand the real estate development process that she has experienced over the last
eight years, and that shapes her future expectations.
This work is based on James Graaskamp’s “Land Investment Seminar” that he presented
in 1973 at The Ohio State University where Dan was a graduate student at that time.
Graaskamp described the first four stages of the Real Estate Development Process in the
context of residential land development. Graaskamp spoke to Dan’s heart. Dan added the last
three Stages to the Process and expanded the context of the Process to other real estate
property types. Any misapplication of Graaskamp’s work or intentions is solely Dan’s
responsibility.
Kimberly has been responsible for keeping the case studies and examples focused and
relevant to the issues and concepts being discussed. She has protected the readers from Dan’s
tendency to get lost in the details by saying, “Good story; bad example!”
Both authors have had multiple roles and responsibilities in numerous projects in various
stages of real estate development.
Companion website: http://realestatedevelopmentmatrix.com
The companion website is more detailed and more expansive than the book. The case
studies and examples that are presented in the book are linked to additional information on
the website. Each reference to a case study or example is indicated by the notation @REDM.
This notation is accompanied with an endnote that provides a URL address for the material.
There is also a tab on the website, Book URLs, that provides a list of the URL addresses
referred to in each chapter, and in the order of their appearance in the book. There is also a
tab on the website, Examples, that lists the URL address for each case study and example
by Stage and Task. The website material can be accessed using a filtering process that
specifies Stage, Task, and Title.
The companion website has another tab, Special Skills, that lists various technical skills
that are presented on the website. The Special Skills involve value measurement methodolo-
gies, as well as decision-making techniques required to successfully complete the Real
Estate Development Process.
NAIOP and CCIM Institute

This book reflects a series of online courses that were written by the authors for two major
professional organizations: NAIOP: A Commercial Real Estate Development Organization,
and the CCIM Institute. The NAIOP courses were introductory in nature and used case
studies while the CCIM courses were more detailed and focused on technical examples.
These different approaches are reflected in the organization of the book. Part I uses graphic
illustrations to explain the Real Estate Development Process and the Real Estate Development
Matrix. Part II describes the seven Stages in the Real Estate Development Process using case
Preface xiii
studies, and Part III focuses on the eight sets of Development Tasks using specific examples
to better illustrate each Task.
The material presented in this book has been presented to professional students in online
courses, as well as to students in live, in-person workshops. The students’ input has signifi-
cantly improved the presentation of this material and helped to clarify many of the ambigui-
ties in the Real Estate Development Process. There is a website tab, FAQs, that answers
many of the questions raised by these professional students.
How to use this book

Readers looking for non-technical information can use the book in print or eBook form.
However, readers looking for more detailed discussions, case studies, or examples are
encouraged to explore the links on the companion website. For more detailed information,
the print version of the book should be read in conjunction with the website, so the readers
have ready access to the Book URLs tab, which will provide the links to the case studies and
examples right at their fingertips.
Instructors using this book in a classroom setting are encouraged to use the case studies
and examples as topics for discussion. Since all of this material is from real-life deals,
projects, and developments, the relevant discussion questions could be, “What were the
developers trying to accomplish?”; “Did they do the analysis correctly?”; “How could this
development task or problem be better addressed?” Curious readers could easily determine
how the deal, development, or problem actually turned out!
Takeaways
Hopefully, readers will take away some of the following ideas about the Real Estate
Development Process:
• Real estate development is a multidisciplinary endeavor. Because there are so many

different talents, specialties, and skills, no single profession owns this process.
• Real estate development is intrinsically simple, but incredibly complex. The interaction
of public entities and private enterprises, the art and science of building construction,
and the competition between tenants and landlords in the real estate marketplace make
the Real Estate Development Process infinitely complicated.
• Real estate development is intellectually stimulating and incredibly interesting. The
dynamic, poorly specified, and uncertain constraints present a complexity that can’t be
solved, but rather must be embraced.
• Real estate development is a local activity, except when it is not. The globalization of
economic markets and the propensity for federal land use regulations force real estate
developers to have a much broader worldview.
• Real estate development is a public process where the public good and the private
interests are evaluated in terms of our society’s values, visions, and fears. Real estate
belongs clearly to both the public and private sectors, so its development needs to be
debated and discussed in a very open and transparent manner.
• Finally, real estate development is very humbling because of the long-term consequences
of all decisions and actions. Real estate development determines land use patterns, fiscal
requirements, and social interactions for several generations. It takes a cautious and
respectful voice to predict the future in this complicated process.
xiv Preface
The Real Estate Development Matrix is a foundation for understanding the Real Estate
Development Process. This discussion should be expanded: to be more global and less
U.S.-centric, to embrace sustainability as more than an environmental Task, to explain and
demonstrate more technical tools for analysis, and to discuss the effects that the electronic
communication revolution has had on our built-environment. The companion website will
be used as a platform to encourage these discussions.
Daniel B. Kohlhepp
Kimberly K. Kohlhepp
About the authors
Daniel B. Kohlhepp, PhD, MAI

Daniel B. Kohlhepp is a senior lecturer at the Johns Hopkins Carey Business School and
president of Granite Road LLC, a real estate development company. He began his career in
real estate as a college professor at the University of Oklahoma and Penn State University,
and he then spent 30 years as a real estate investor and developer before returning to academia
eight years ago after he retired from Crescent Resources LLC, as the president of its
Commercial Division.
At the Johns Hopkins Carey Business School, Dr. Kohlhepp has served as the academic
program director of the Master of Science in Real Estate and Infrastructure Program and has
been responsible for the real estate development, investment, and financial modeling courses.
He has just completed two online courses in real estate development for the NAIOP and
eight online courses for the CCIM Institute.
At Crescent Resources, Dr. Kohlhepp was responsible for 18 major commercial develop-
ments in seven states that included mixed-use, office, warehouse/distribution, and retail
projects, as well as 28 master-planned community developments in Florida and southern
Georgia.
After teaching at the University of Oklahoma and The Pennsylvania State University,
Dr. Kohlhepp left academia in 1979 to become a developer in Oklahoma City. In 1984,
he moved to Washington, DC, to enter the real estate investment advisory business, and in
1991, he sold his company to Baltimore-based USF&G Corporation. His company was
responsible for all development and investment activities for a $1.5 billion real estate
portfolio. In 1992, Dr. Kohlhepp started Kohlhepp Realty Advisors, which specialized in
real estate portfolio valuation and management for institutional and governmental regulatory
clients.
In 2001, he joined Crescent Resources to develop Potomac Yard, a 300-acre, mixed-use,
urban in-fill project in Northern Virginia. During the development of Potomac Yard,
Dr. Kohlhepp and his team were awarded the Northern Virginia NAIOP Best Transaction of
the Year (2001), Trenchless Technology’s Project of the Year (2003), Arlington Chamber
of Commerce Chairman’s Award (2003), Washington Business Journal’s Best GSA Lease
Award (2004), and the Arlington Chamber of Commerce ABBIES “Green” Award (2005). In
2007, One and Two Potomac Yard, a 654,000 square-foot, twin-tower, office project within
Potomac Yard, was awarded the “Best Commercial Project” and the “Best Building High-rise”
by the Virginia Sustainable Building Network and the Northern Virginia NAIOP, respectively.
In 2007 the Homer Hoyt Institute recognized Dr. Kohlhepp as a Hoyt Fellow, and in 2012
he was elected to the board of directors of the Homer Hoyt Institute. He is a principal of the
xvi About the authors
Real Estate Counselors Group of America, and he is also a member of the Appraisal Institute
and currently serves on the editorial board of the Journal of Sustainable Real Estate.
In 2017, The American Real Estate Society recognized Dr. Kohlhepp with the Practitioner
Scholar Award as a real estate practitioner who has significantly contributed to the body of
real estate knowledge and who is highly regarded by academic scholars and whose work has
been adopted and used by practitioners.
Dr. Kohlhepp earned his PhD at The Ohio State University and his BA and MBA at The
Pennsylvania State University.
Kimberly Kohlhepp, MSREI, LEED AP BD+C

Kimberly Kohlhepp is the Associate Director of Development for Kimco Realty’s Mid-
Atlantic Region. Kimco Realty is one of North America’s largest publicly traded owners
and operators of open air shopping centers, traded on the NYSE as KIM. She has also
worked on Kimco’s Asset Management & Acquisitions and Dispositions Team in Baltimore,
MD. Before joining Kimco, Ms. Kohlhepp was principal at Nestwood LLC, a consulting
firm focused on producing financial proformas, market research, and development courses
for real estate development teams and organizations. Ms. Kohlhepp has also worked with
Brookfield Properties and Federal Realty Investment Trust in both property management and
asset management roles. Ms. Kohlhepp is an accredited professional member of the United
States Green Building Council and earned LEED AP BD+C in 2014.
Ms. Kohlhepp holds a Master of Science in Real Estate and Infrastructure from the Johns
Hopkins University and a Bachelor of Arts in Anthropology from Ohio University.
Acknowledgements
The authors would like to recognize and thank numerous persons who helped make this
book possible.
Historical
While this concept of the Real Estate Development Process was initially formulated by
University of Wisconsin Professor James Graaskamp in a land development seminar in
1973, his ideas were expanded to include the concept of value creation by Professor Ronald
L. Racster at The Ohio State University. Their legacy is the foundation of this work.
Professional
Two professional developers had significant effects on the author, Dan: Art Fields and Bobby
Zeiller. For 40 years, Arthur W. Fields has successfully demonstrated a disciplined and
dogmatic approach to real estate development by determining where and when property
value increases in the process. Throughout his professional career, he has participated in
all Stages of the Real Estate Development Process and his accomplishments are historic.
Art and Dan did their first deal together over 30 years ago in Nashville and have done dozens
of developments together since.
Robert H. “Bobby” Zeiller was Dan’s right-hand man in numerous mixed-use develop-
ments. Accomplished in engineering and construction management, Bobby became an
expert in political and community affairs. His deft hand in the Land Packaging Stage made
him incredibly effective in obtaining permits and approvals for Land Developers.
Art, Bobby, and Dan have debated market trends, strategies, tactics, and general world
events ad nauseum. However, they always agreed on the importance of determining how and
when economic value is created in the Real Estate Development Process. Art and Bobby
were models of responsible real estate developers. They demonstrated not only what needed
to be done, but also how it should be done.
Academic
Professor Michael Anikeeff (Johns Hopkins University) was an early supporter of the Real
Estate Development Matrix, and he has been extremely supportive and encouraging during
this writing effort.
Professors Jeff Fisher and Norm Miller (Indiana University and the University of San
Diego respectively) have been helpful and gentle as they encouraged us to push this book
xviii Acknowledgements
forward. Jeff first encouraged the website development, and Norm insisted that green building
and sustainable development are essential parts of the development process.
Professors Wayne Archer and Josh Harris (University of Florida and the University of
Central Florida respectively) were instrumental in extolling the benefits of writing this book.
NAIOP and the CCIM Institute

As the Educational Director of NAIOP, James Tolliver made this book a reality. Jim
convinced the authors to write two online courses, Essentials of the Development Process
and Advanced Development Practices, and then set up goals, dates, and financial incentives
to ensure their completion. When Jim retired, Barb David Parnarouskis became the Director
of Education, and she helped the authors complete the courses and arranged for the authors
to personally teach the online courses as well.
Walt Clements, the Executive Director of the CCIM Institute, wanted to create a
Development Track in the CCIM designation program and asked the authors to work
with his team, headed by Andrea Change, to create a series of online courses focused on the
Development Tasks, as well as two live workshops that focused on the Stages in the Real
Estate Development Process.
While the courses were built around the Real Estate Development Matrix, the inspiration
of the courses came from Jeff Engelsted, PhD, CCIM, and Mark VanArk, CCIM. Jeff and
Mark helped construct the courses and taught them as well.
This involvement with NAIOP and the CCIM Institutes helped the authors fine tune the
Real Estate Development Matrix and sharpen the case studies and examples. The authors are
convinced that online courses are the future of professional education, especially if done in
conjunction with live workshops.
Routledge
As the authors were completing the NAIOP and CCIM courses, Ed Needle, Editor of
Construction and Real Estate for Routledge Publishing, engaged the authors in a discussion
about writing this book. While the authors had focused on a narrow professional audience,
Ed contended that a textbook should be aimed at a broader audience to include undergraduate
and graduate students, as well as real estate professionals in all areas of development. Ed was
persuasive. Ed guided the authors through the Routledge review process and established
milestones for the completion of the text and its eventual publication. Catherine Holdsworth,
Assistant Editor at Routledge, has also been very helpful in preparing the manuscript for
publication. Ed and Catherine have been invaluable resources.
The writing team

Thirty years ago, Jayne M. Magee, PhD, wrote her dissertation on the writing process in a
business setting. Her research concluded that writing was a social activity, especially when
done in a business setting. After a career as a Professor of English at Lakeland Community
College, retired Professor Magee joined the authors in their effort to produce the book. Jayne
has held us to a high editorial standard as she has reviewed numerous drafts of each chapter.
Miller Hopkins, MSREI, has worked with the authors as a student intern as well as an
administrative research assistant. Fortunately, Miller has continued to work with the authors
even after she began her career in real estate development. Miller’s understanding of the
Acknowledgements xix
intricacies of Word and her graphic skills on PowerPoint have enabled the Real Estate
Development Matrix to become a quality publishable electronic product.
The authors have struggled with the development of an interactive website to present the
Real Estate Development Matrix both simply and completely. Thus, when Shane and Lauren
Burroughs joined the writing team as website consultants, the development of a simple and
complete companion website became a reality. They have continued to refine and expand the
website as the authors better understood what they wanted to convey to the users. Also,
Shane and Lauren have striven to make the website user-friendly and easily accessible to
non-technical readers. When presented with a technological challenge, the authors thought,
“Better call Shane.” They will continue to work with the authors to expand the depth and
breadth of the Real Estate Development Matrix.
Finally, both Dan and Kimberly owe a great deal of gratitude to an unofficial member of
the writing team, Donna Sell Kohlhepp, PhD, the wife and mother of the authors respectively.
For years Donna has hosted and endured numerous dinners where the authors exhaustively
discussed the Real Estate Development Matrix. Donna’s tolerance and culinary skills made
these dinners productive and enjoyable. To her credit, she never took sides in the arguments,
but her comments and questions sharpened and clarified our issues. Dr. Kohlhepp has also
joined the authors on countless site visits.
Our students
Special thanks are extended to the undergraduate and graduate students at Johns Hopkins
University, the University of San Diego, and the University of Central Florida, who have
worked through early drafts of this book in their courses. Also, the professional students in
the NAIOP and CCIM courses must be recognized and thanked for their comments and
insights on the material presented in this book.
Final thoughts
Over the years, our colleagues have shared insights, comments, and criticisms that the
authors have readily accepted and incorporated into the real estate development story.
The voices of these larger-than-life characters are always in our minds. We owe them a debt
of gratitude and heartfelt appreciation.
Table of exhibits
3.1 Real Estate Development Matrix 12

3.2 Stages of development 13
3.3 Developers work down the Matrix 15
3.4 Professionals work across the Matrix 15
4.1 Third dimension: product type 17
4.2 Real Estate Development Cube 18
5.2 Schematic diagram 26
5.3 Box diagram 27
5.4 Venn diagram 27
5.5 Circle diagram 28
6.2 Land Banking Schematic diagram 31
6.3 Land Banking Box diagram 32
6.4 Land Banking Venn diagram 33
6.5 Land Banking Circle diagram 33
6.6 The Land Banking equation 34
6.7 Historic outbuildings 40
6.8 Aerial photo: Metro area 40
6.9 Aerial photo: Crown Farm site 41
6.10 Aerial photo: Armed Forces Retirement Home 42
6.11 AFRH sources of annual income 43
6.12 Vanderbilt aerial photograph 44
6.13 Kiwanis Trail area photo 45
7.2 Land Packaging Schematic diagram 48
7.3 Land Packaging Box diagram 49
7.4 Land Packaging Venn diagram 49
7.5 Land Packaging Circle diagram 50
7.6 Land Packaging equation 50
7.7 Crown Farm site photo 59
7.8 Revised master plan 61
7.9 AFRH vicinity map 63
7.10 AFRH site photo 64
7.11 AFRH original master plan 65
7.12 Final master plan 67
xxii Table of exhibits
7.13 Potomac Yard conceptual master plan 69
7.14 Summary of the master plan of the Alexandria portion of Potomac Yard 69
7.15 Alexandria land bays 70
7.16 Challenging issues in Alexandria 71
7.17 Summary of the Arlington master plan for Potomac Yard 71
7.18 Arlington land bays in Potomac Yard 72
7.19 North Tract portion of Potomac Yard 73
8.2 Land Development Schematic diagram 77
8.3 Land Development Box diagram 78
8.4 Land Development Venn diagram 78
8.5 Land Development Circle diagram 79
8.6 Land Development equation 80
8.7 Crown Farm aerial photo 88
8.8 Revised overall master plan 88
8.9 Phase I of revised master plan 89
8.10 Major infrastructure improvements 90
8.11 Overall road system 91
8.12 Phase I road construction 92
8.13 Potomac Yard conceptual master plan 93
8.14 Trunk sewer shaft preparation 94
8.15 Trunk sewer shaft installation 94
8.16 Trunk sewer construction 95
8.17 Alexandria land sales 96
8.18 Mass Grading in Arlington 97
8.19 Arlington infrastructure challenges 98
8.20 Perched water problems in Arlington 99
8.21 Land bay sales in Arlington Potomac Yard 100
9.2 Building Development Schematic diagram 104
9.3 Building Development Box diagram 105
9.4 Building Development Venn diagram 105
9.5 Building Development Circle diagram 106
9.6 Building Development Equation 107
9.7 Crown Farm Land Banking Stage 115
9.8 Crown Farm revised conceptual master plan 115
9.9 Crown Farm Phase I infrastructure 116
9.10 Crown Farm Phase I building development 116
9.11 Rendering of the approved Town Center Plaza 117
9.12 Actual Town Center Plaza 117
9.13 Completed streetscape of Downtown Crown 118
9.14 Approved design of One and Two Potomac Yard 119
9.15 Photo montage of One and Two Potomac Yard on Land Bay A 121
9.16 Top view construction crane swings 121
9.17 Side view of the construction crane placement 122
9.18 Site plan 123
9.19 Rendering of International Plaza and the parking garage 124
Table of exhibits xxiii
10.2 Building Operations Schematic diagram 128
10.3 Building Operations Box diagram 129
10.4 Building Operations Venn diagram 130
10.5 Building Operations Circle diagram 131
10.6 Building Operations equation 131
10.7 Potomac Yard master plan 139
10.8 One and Two Potomac Yard 140
10.9 Investment Grade Value Index vs One and Two Potomac Yard 141
10.10 1400 K Street 142
10.11 650 Massachusetts Avenue 144
10.12 Renderings of 650 Massachusetts Avenue 144
11.2 Building Renovation Schematic diagram 148
11.3 Building Renovation Box diagram 149
11.4 Building Renovation Venn diagram 149
11.5 Building Renovation Circle diagram 150
11.6 Building Renovation equation 151
11.7 Tysons Corner regional map 158
11.8 Tysons Corner Center in 1969 158
11.9 Tysons Corner Center in 1987 159
11.10 Preliminary land plan for renovation (1987) 160
11.11 Tysons Corner Center new wing in 2005 161
11.12 Tysons Corner Center interior renovations in 2005 161
11.13 Tysons Corner Center future phased development 162
11.14 Interior boutique shops 163
11.15 Interior boutique shops 163
11.16 New front entrance 164
11.17 Original 2001 M Street 164
11.18 Renovated 2001 M Street 165
12.2 Property Redevelopment Schematic diagram 168
12.3 Property Redevelopment Box diagram 169
12.4 Property Redevelopment Venn diagram 170
12.5 Property Redevelopment Circle diagram 171
12.6 Property Redevelopment equation 172
12.7 Historic St. Elizabeth’s Hospital 178
12.8 Redbrick LMD’s Phase I Concept Plan (2.5 million GSF) 180
12.9 Edmonton regional map 181
12.10 Aerial photo of the ECCA 182
12.11 Winning master plan proposal 183
12.12 Potomac Yard circa 1980 184
12.13 Decommissioned Arlington North Tract 185
12.14 Decommissioned Arlington South Tract with flood control bridges 186
12.15 Decommissioned Alexandria Tract 186
14.2 Greensboro Grove massing study 199
xxiv Table of exhibits
14.3 One and Two Potomac Yard Back of the Envelope feasibility 200
14.4 International Plaza IV Back of the Envelope feasibility 202
14.5 Phipps Back of the Envelope feasibility 203
14.6 Phipps tower site plan, entrance, and tower renderings 204
14.7 Feasibility schematic 210
15.2 Typical cashflow patterns in real estate development 214
15.3 Belgate Land Development 215
15.4 Belgate preliminary projections 216
15.5 Construction loan vs. permanent loan 219
16.2 Arlington residential land bays 231
16.3 NGA site plan 233
16.4 Mueller’s Market Cycle Forecast 234
16.5 Existing market cycle conditions 235
16.6 Future market analysis, industrial 236
16.7 Start big and work into smaller submarkets 237
16.8 Estimating market absorption and rental rates 238
16.9 Market forecast 238
16.10 Competitive property analysis 239
17.2 Triple bottom line 245
17.3 Environmental site assessments 246
18.2 Simple township subdivision process 262
18.3 Complex county subdivision process 263
19.2 Traditional Design-Bid-Build model 275
19.3 Design-Build model 276
Part I
1 Introduction
The purpose of this book is to examine the Real Estate Development Matrix. @REDM1
The Real Estate Development Matrix combines the seven Stages of the Real Estate
Development Process with the eight Tasks that must be completed during each Stage. This
56-cell Matrix captures the real estate development activities in a comprehensive and holistic
manner. This broad view of the Real Estate Development Process considers the entire
lifespan of a property:
1 Land Banking Stage.

2 Land Packaging Stage.
3 Land Development Stage.
4 Building Development Stage.
5 Building Operations Stage.
6 Building Renovation Stage.
7 Property Redevelopment Stage.
This process may take several decades to complete, and then the cycle starts again as property
in the Redevelopment Stage goes back to the Land Packaging Stage and the process begins
anew. The development Tasks are also considered in a very broad sense as they are grouped
into eight categories:
I. Acquisition.
II Financing.
III Market Analysis and Marketing Strategies.
IV Environmental Issues.
V Approvals and Permits.
VI Physical Improvements.
VII Transportation and Accessibility.
VIII Sales and Disposition.
Part I provides the context for the Real Estate Development Matrix while Part II and Part III
discuss the Stages and Tasks of development, respectively. Each chapter in Part II will discuss
the essential elements of each Stage in terms of how economic value is created in that Stage,
and then review the following aspects:
• key players;
• critical Tasks;
4 Part I
• controllable costs;
• major risks.
In Part III, each chapter discusses a set of real estate development Tasks and explains how
those Tasks are accomplished during the various Stages of development.
The aim of this book is to present the readers with a conceptual framework in which to
discuss, question, and analyze the Real Estate Development Process in the context of their
own skills and experiences. The discussion is non-technical and almost free of jargon.
THE REAL ESTATE DEVELOPMENT MATRIX COMPANION

WEBSITE @REDM 2
This textbook is supported by a website that is based on the Real Estate Development Matrix.
The website has an interactive Matrix that allows the user to move from one cell to another
to better understand the interactions between the Stages of development and the development
Tasks. The website also has an archive of numerous case studies and examples of the topics
discussed in this book. The website notation of @REDM indicates that more information
is available in the website. There will also be a URL in the endnotes for each website
notation. The website has a tab labelled Textbook URLs that lists the URL addresses by
chapter in the order that they appear in the text. Finally, these case studies and examples can
also be accessed under the Examples Tab by designating the Stage, Task, and Title filters.
The website also has a Special Skills tab where numerous analytical skills are presented,
discussed, and demonstrated. Readers are encouraged to use the website to supplement the
material as they read this book.
Unique characteristics of real estate and real estate markets

Real estate has several unique characteristics which affect its physical development, as well
as the economic markets in which it is traded.3
Fixed in space
The physical immobility of real estate has many consequences for its development. Real
estate as a physical asset and tangible asset is readily observable, so the general public recog-
nizes its existence. Therefore, it is easily taxed and regulated. Also, because of its physical
immobility, it affects and is affected by its neighbors and adjacent land uses.4 The fixed physi-
cal mobility of real estate tends to make its market local in nature; that is, real estate values
are determined more by local economic conditions than by regional or national conditions.
Complex ownership
Ownership of the tangible real estate is defined as a “bundle of rights,” which are intangible
rights or assets. Real estate ownership is defined as real property and inherent in this
definition are personal property rights that can be owned by private individuals, public
corporations, or governmental jurisdictions. These rights are limited by public land use
controls, as well as private land use restrictions. Consequently, the market place for these
rights is very technical and characterized by high transaction costs.
Introduction 5
Large capital investment
Real estate can be defined as a financial asset in terms of debt capital, equity capital, or a
combination of both. The large amount of capital to develop or to buy real estate usually
requires both debt and equity. Consequently, ability to buy real estate depends on access to
both the equity and debt markets.
Long economic lives

Most permanently constructed real estate projects have expected economic lives of 20 to
30 years, and physical lives of 40 to 50 years. The consequence of this durable asset is that
the real estate property will experience several business cycles as well as multiple users and
multiple investors.
Real estate obsolesces, both economic and physical, result from the properties’ long
economic lives in the context of changing construction and operational technologies, as well
as the users’ changing tastes and preferences.
Lengthy and complex production functions

As we will discuss in the following chapters, it takes a long time, numerous players, multiple
skills, and lots of capital to change real estate from cornfields to a shopping mall. Consequently,
the supply of real estate cannot respond quickly to changes in demand. If demand falls, the
supply of real estate stays fairly stable in the short run, so the property will experience higher
vacancy rates and a loss of value. On the other hand, if there is an increase in the demand
for real estate, developers will take several years to respond to, and increase, the supply and
the demand may decline while the real estate is being produced. In the long run, real estate
markets can respond to changing market conditions, but in the short run they are fairly unre-
sponsive. This market feature tends to cause real estate to be over-supplied at times or owners
to charge monopolistic rents at other times.
General themes
Throughout this book, several themes continuously emerge although they may not be
addressed directly in the material. Developers create value by accomplishing Tasks in the
various Stages of the Real Estate Development Process. The creation of economic value
is the heart of the process. As we work through each Stage, the most important takeaway will
be the answer to the question, “How is value created during this step?” This question will be
answered in each Stage overview. Successfully creating value means that the finished product
has more economic value than the sum of the costs incurred to create it. The challenge is not
to create value equal to the costs, but rather to create value that exceeds the costs. This increase
in marginal value is what the Real Estate Development Process is all about.
Sustainable development and green building technologies

Sustainability and green building technologies are no longer a choice, but they are now the
market standard in real estate development. These are not articles of faith, but rather they
provide us with the language that we use to discuss and convey the impact of the development
process. In today’s world, no one brags about developing a new “brown” building.
6 Part I
Globalization
Globalization is also part of our professional world (financing, materials, trade agreements,
communications, and technology). While real estate development is considered a “localized”
phenomenon, we are working in a global environment that affects all aspects of development.
National and world events impact lenders, investors, materials, and occupants; therefore, it
is important to keep a global perspective when reviewing all possible opportunities or
solutions to each challenge.
Entrepreneurship
A continued theme in real estate development throughout the ages is entrepreneurship; it
is in the developer’s DNA. Adam Smith, the father of economics, defined the factors of
production as land, labor, and capital. Therefore, entrepreneurs are the people who combine
these factors of production, so the value of the product is worth more than the total cost of
production. This is what real estate developers do. Each real estate development is an entre-
preneurial endeavor that involves risk taking with the expected commensurate rewards. It is
not uncommon for a successful real estate development company to spawn several new real
estate development companies as successful employees aspire to become players and run
their own businesses.
The three commandments of real estate development

There are three commandments for real estate developers; to break these commandments is
a mortal sin and perhaps economically fatal.
Know thy markets

Keeping a keen eye on real estate trends, both locally and globally, is essential for making
better assumptions about future returns. The more information that developers have about
current markets, even beyond the real estate sector, the better they can predict and satisfy
future demands and anticipate future competition. Developers must understand their local
product market in terms of rental rates, occupancy rates, absorption rates, and submarket
interactions. This market information must include details of related transactions, as well as
the status of future planned developments.
Know thy costs

Developers must know historic costs, current costs, and future costs. In real estate develop-
ment, everything that can go wrong, will go wrong, and that can get expensive very quickly.
Developers cannot control the market, but they can control their costs. Having a solid cost
estimating and recording process and keeping realistic, up-to-date budgets are critical to
mitigating cost over-runs and unforeseen contingencies. Since the final product will be sold
in a future, unknown market, developers cannot control the sale price or demand. Therefore,
developers must control their project costs, whenever possible. Developers must know their
local product market in terms of land, building, financing, and operating costs.
Introduction 7
Know thy self
Brutal self-honesty is critical to survive the Real Estate Development Process. Self-delusion
is unacceptable. Developers must know their strengths, weaknesses, biases, special skills,
and resources. Before embarking on a project, they must ask themselves, “Can I do this? Do
I have the resources or knowledge to solve this problem? Do I know whom to ask if I
encounter a challenge that I cannot handle personally?” To quote William Shakespeare,
“This above all, to thine own self be true; it must follow as the night the day, and then thou
can be false to no man” (Hamlet, Act I, Scene 3: 78–82).
Above all, remember that arrogance kills! Over reaching or inflating their abilities will be
the developers’ downfall. Developers must be gentle with themselves, but they must know
their limits. Sometimes the best deals are the ones they didn’t take. On that same note,
developers must always have a viable exit strategy and be cognizant of deteriorating project
conditions before it’s too late.
Notes
1 http://realestatedevelopmentmatrix.com
2 http://realestatedevelopmentmatrix.com
3 For a good discussion of the nature of real estate and real estate markets see David C. Ling and
Wayne R. Archer’s book, Real Estate Principles: A Value Approach, 4th Edition, McGraw-Hill
Irwin, Chapters 1 and 2.
4 In economic terms, this is referred to as an externality which is characterized by “spill-over” effects
when an unrelated third-party is affected by the actions of others. These external effects can be
positive or negative.
2 Real estate development defined
The analysis of the Real Estate Development Process begins with a working definition of
real estate development. In chapter 1, real estate was defined as an immobile and physically
tangible product. Real estate was also defined as having intangible ownership rights to
the tangible product that could be either real or personal property. Finally, it was defined as
a financial asset that could be either debt or equity, or a combination of both. Clearly, real
estate can be defined in many different ways.
Development is also defined in many ways as the act or process of developing, where the
active verb “to develop” can be defined as:
• To cause to grow or get larger

• To expand as in a business
• To bring into being as an idea
• To unfold gradually as a bud.1
Ironically, all of these definitions can be applied to real estate since the development of real
estate involves all of them.
Of course, there is great debate over the “true” or best definition of real estate develop-
ment among educators, professionals, and government agencies. In this book, real estate
development is generally defined as the process of adding economic value to the real estate
enterprise through various stages of development.
JAMES A. GRAASKAMP
James Graaskamp can provide a more comprehensive and nuanced discussion of the
question, “What is real estate development?”
Graaskamp was a professor of real estate at the University of Wisconsin–Madison from
1964 until his death in 1988. In 1988, he was named a trustee of the Urban Land Institute
(ULI) and was profiled in the 2004 ULI book, Leadership Legacies. Of the ten people
profiled, Graaskamp was the sole academic. He was often accused by the academic commu-
nity of being too practical and by the professional community of being too theoretical. He
was an iconoclastic thinker who crossed academic boundaries and coined new terms and
concepts. His early work provides the framework of the Real Estate Development Process.2
The following quotes are taken from Graaskamps’s monograph, Fundamentals of Real
Estate Development, published by Urban Land Institute.3 The first real estate development
occurred when:
Real estate development defined 9
“Someone rolled a rock to the entrance of a cave and created an enclosed space for his
family, a warmer, more defensible shelter distinct from the surroundings.”
Graaskamp would say that this is the classic example of real estate development where a
man-made artifact interacts with a natural resource, thereby creating a product that improves
the human condition. He continued:
The real estate development process involves three major groups—a consumer group, a
production group, and a public infrastructure group . . . Each group benefits from coop-
eration and a full understanding of the values, short- and long-term objectives, and
major limitations controlling the other two groups . . .
Unlike many mass-production industries, each real estate project is unique and the
new development process is so much a creature of the political process that society
has a new opportunity with each major project to negotiate, debate, and reconsider the
basic issues of an enterprise economy, i.e. who pays, who benefits, who risks, and who
has standing to participate in the decision process . . .
Thus, the development process remains a high silhouette topic for an articulate and
politically sophisticated society.
Graaskamp’s comments and insight help real estate developers appreciate the role they play
in society and lift our pragmatic thinking to a higher conceptual level. Graaskamp further
explained:
The creation and management of space-time units is termed real estate development.
Real estate developments range from a simple cave to the complex technology of the
Park Avenue skyscraper. Like a manufactured product, a real estate project is part of
a larger physical system programmed to achieve long-term objectives, but each real
estate project is also a small business enterprise of its own. Thus, the development
process is a continuum of construction technology, financing, marketing skills, admin-
istrative controls, and rehabilitation required to operate the real estate enterprise over
many years.
The Real Estate Development Process is a challenging manufacturing process because its
subsystems are so complex and because it is the instrument of change which affects all of a
community and a society—not only for today—but also for future generations.
Real estate developers defined

Real estate developers can be defined in many ways, from different perspectives. Here are
three points of view.
As entrepreneurs
Economists may define real estate developers as entrepreneurs because real estate developers
combine land, labor, and capital hoping to make a profit by creating a finished product whose
value is greater than the costs of the component inputs. Real estate developers take the risks
of the business enterprise with expectations of achieving an economic return that adequately
rewards this risk-taking behavior.
10 Part I
As prominent citizens
Successful real estate developers sometimes are considered prominent citizens as they are
building cities or enhancing communities’ built-environments. Real estate developers also
are active in community charities, events, and programs.
As disappointments
However, many citizens have unrealistic expectations that developers should continue to
own their projects for their entire economic lives and are disappointed when that doesn’t
happen. Often, citizens are disillusioned and complain that developers just “flip” their
projects and abandon the community after the projects are built.
Real estate developer activities

Another way to understand the Real Estate Development Process is to define what real
estate developers do. Here are several activities that are performed by all successful
real estate developers.
Obtain public approvals and permits

Developers must obtain the required governmental approvals and permits, as well as meet
the restrictions and limitations which are the prerequisite conditions for these approvals
and permits.
Predict the future

Developers attempt to create future economic value by predicting or forecasting future
market conditions, future governmental regulations, and future investment environments.
Form multiple teams

Developers must form teams that combine multiple professional disciplines: architects,
engineers, contractors, building suppliers, and municipal inspectors all view the Real Estate
Development Process differently. In addition, lawyers, accountants, lenders, and marketing
experts have incredibly different expectations of the development process.
Define roles
Developers must define the roles, objectives, and compensation schemes for each professional
on the team. These team members must be managed, so the finished development has a value
greater than the costs it takes to create.
Developers’ self-descriptions
Clay Emery
Clay Emery is an active octogenarian real estate developer who started his career with
James Rouse in the Columbia, Maryland, new town project in the 1960s. He then formed his
Real estate development defined 11
own company, which has built over one million square feet of offices and warehouses in
the Mid-Atlantic Region. Addressing a graduate real estate class in 2011 at Johns Hopkins
University, Emery explained the Real Estate Development Process as follows:
The real estate development process is really a very simple business. You find the
opportunity, evaluate the risks and returns, and then arrange the financing.
At that point he straightened his six foot seven frame and, looking upward, shaking his head,
he continued, “Real estate development is a very simple business,” then looking down, he
continued, “but a very difficult one!”
R.W. “Wes” Finley

Wes Finley was one of the most successful real estate developers in Oklahoma in the 1970s
and 1980s. He built the first regional mall in Oklahoma and assembled the largest real
estate transaction in the history of Oklahoma—at that time. He literally worked out his deal
on the back of used envelopes that he carried in his vest pocket. Addressing a graduate real
estate class at the University of Oklahoma in 1975, Wes explained what it takes to be a
real estate developer:
It takes three things to be a real estate developer. First, you’ve got to be dumb. If you
think too much about a deal or a project, you’ll just drive yourself crazy. Secondly,
you have to be able to swallow dry. When that banker looks at you across the desk and
says, “Do you want the loan or not?” your mouth and throat get real dry, so you have to
swallow hard, look him in the eye, and say, “Yes sir, I’ll take it.” Finally, and this is
really important, you need plenty of sour mash whiskey!
Summary
In this chapter, several definitions of real estate development have been proffered and
discussed. Clearly there is not a single or simple definition. For the purposes of this book, the
Real Estate Development Process will be defined as the process of adding value to the real
estate property by achieving certain tasks that require special skills and additional capital.
Persons who form and lead these teams will be called real estate developers.
Notes
1 Webster’s New Universal Unabridged Dictionary, New York: Barnes & Noble Books, 1996, p. 543.
2 James A. Graaskamp Collection of Teaching Materials. V. Industry Seminars and Speeches
Sponsored by Other Universities. 10. “Land Investment Seminar,” sponsored by R.E. Educational
Services, Inc., Columbus, OH, December 1, 1973 at the Christopher Inn.
3 Graaskamp, James A. Fundamentals of Real Estate Development. Washington, DC: ULI–The Urban
Land Institute, 1981.
3 The Real Estate Development Matrix
CREATING THE REAL ESTATE DEVELOPMENT MATRIX
The Real Estate Development Matrix is created by combining the seven Stages of the Real
Estate Development Process across the horizontal axis with the eight Task categories of
development on the vertical axis, thus creating the 56-cell matrix that is shown above as the
Real Estate Development Matrix (Exhibit 3.1), which lays out a comprehensive workspace
for the real estate development activities.
Exhibit 3.2 illustrates how the Real Estate Development Matrix can be identified using
Arabic Numbers for the development Stages and Roman numerals for the development
Tasks as identifiers. For example, Cell I.1. would be the Acquisition Tasks in the Land
Banking Stage. Cell III.4. would be the Marketing Tasks in the Building Development Stage,
and so on.
Overview of the seven Stages of real estate development

James Graaskamp originally identified the first four stages of real estate development, but
the development process was expanded by three more stages to include the operation,
renovation, and redevelopment of properties in the Real Estate Development Process. These
Exhibit 3.1 The Real Estate Development Matrix.

Real Estate Development Matrix 13
Exhibit 3.2 Stages of development: Stages across; Tasks down.
stages will be discussed at length in Part II of this book, but for this introduction, the seven
Stages in the Real Estate Development Process can be summarized as follows:
1 Land Banking – Acquiring unimproved land.

2 Land Packaging – Obtaining zoning, approvals, and permits for possible development.
3 Land Development – Constructing “horizontal” infrastructure and public area
improvements.
4 Building Development – Constructing buildings (making “vertical” improvements).
5 Building Operations – Operating a completed building, managing revenues, and
expenses.
6 Building Renovation – Making improvements on an existing building; use remains the
same.
7 Property Redevelopment –Acquiring and holding improved properties that need new
land uses.
In each Stage of development moving forward, the following conditions generally occur:
• risk and uncertainty diminish;

• additional capital is required (bad news);
• additional capital has a lower cost (good news);
• value is created by producing a new product;
• value is created by incurring additional risks and increasing capital exposure.
In each Stage, developers must answer these questions:
• Can we do what’s got to be done? Do we have the get up and go, to get up and do what’s
got to be done?
• Do we have the skills, resources, time, team, and support? Do we know our markets, our
costs, and ourselves?
• Can we handle the risk of failure? Can we recover if we’re wrong, or are we out of
business?
14 Part I
• Can we create real value? At the end of each Stage, will the value created be greater than
the costs incurred to create the value?
Overview of the eight development Task categories

The various Tasks in each Stage of the Real Estate Development Process are divided into
eight groups that require special skills to accomplish them. The development Task groups
will be discussed in great detail in Part III of this book. Briefly, here are the major questions
that must be addressed for each Task:
I Acquisition: Should the project be acquired, and if so, how?

II Financing: Who should finance the project, and how can it be done?
III Market Analysis and Marketing Strategies: What are the expected market
conditions, and how can the market opportunities be captured?
IV Environmental Issues: What are the environmental concerns, and how should they be
addressed?
V Approvals and Permits: What approvals and permits are needed, and how should
they be obtained?
VI Physical Improvements: What are the required physical improvements, and how and
when should they be designed, engineered, constructed, and operated?
VII Transportation and Accessibility: What are the transportation and accessibility
issues both within and outside of the site, and how should they be addressed?
VIII Sales and Disposition: How should the value created in this Stage of development be
captured, sold, or rolled forward?
Task/Stage cells in the Development Matrix

Not all Task/Stage cells have the same importance, but all of the cells must be addressed in
one way or the other. Ignoring or overlooking cells can lead to mistakes, errors, and ultimately
an unsuccessful real estate development project.
It is important to note that in each cell three things happen:
1 Expenditures are made.

2 Risks are taken.
3 Value is created or destroyed.
Developer behavior in the Development Matrix

Developers create value in each Stage of development by completing the Tasks for that
Stage. Each Stage requires different skills to complete the Tasks, and no one person can do
everything. Hence, different development teams are formed for each Stage of development.
The developers work down the columns of the Matrix. They can’t or shouldn’t go to
the next Stage of development until all the development Tasks of the current stage are com-
pleted. Each Stage begins with the Acquisition Tasks, and ends with the Disposition Tasks
(see Exhibit 3.3). In between, Tasks are done in various orders, usually simultaneously, as
the Tasks are all related to each other. For example, developers can’t get a building permit
until the Environmental Tasks have been done and the plans and specifications have been
completed. Real estate development is a great example of multi-tasking.
Real Estate Development Matrix 15
Exhibit 3.3 Developers work down the Matrix.
The completion of the Disposition Tasks may lead developers to the decision not to sell
and instead continue on to the next Stage of development. Through the Disposition Tasks,
developers become well aware of the value that they have created, as well as the Tasks that
are required for the next Stage of development. Even if developers decide to continue to the
next Stage of development and put the created economic value at risk, they must assemble a
new team of professionals to accomplish the Tasks for the next Stage and hopefully create
additional value. Sometimes this works; sometimes it doesn’t.
Professionals and service providers in the Development Matrix

Many times, real estate service providers and professionals ask, “Where do we belong in the
Real Estate Development Matrix?” The answer is simple: everywhere! Professionals gener-
ally specialize in one Task category and work across the various Stages of the Development
Process (see Exhibit 3.4).
However, it should be noted that different types of professionals are used in the various
Stages of development. For example, the best land broker used in the Land Banking Stage
would not be used in the Building Development Stage, where the best leasing agents and
building brokers would be used by the developer. Also, the building contractor in the
Exhibit 3.4 Professionals work across the Matrix.

16 Part I
Building Development Stage would probably not have the necessary skills for the construction
required in the Building Renovation Stage.
The Development Matrix as a model

The Real Estate Development Matrix is a descriptive, predictive, and normative model
which attempts to describe the complex, multidisciplinary nature of the Real Estate
Development Process. The Development Matrix lays out what happens and who does it.
Along those lines, the Development Matrix predicts what happens when in the develop-
ment process, and finally the Development Matrix indicates what should happen, who should
do it, and when it should be done. Thus, the development model is descriptive, predictive,
and normative.
Summary
In this chapter, the Real Estate Development Matrix is a 56-cell, Stage/Task matrix, which
describes the entire Real Estate Development Process in seven Stages, from the Land Banking
Stage to the Redevelopment Stage. In each Stage, there are eight categories of Tasks that need
to be addressed. The main thesis of this interdisciplinary model is that there are discrete
Stages in the Real Estate Development Process where value is created. To create value in
each Stage, real estate developers must complete different Tasks using specialized skills.
The aim of this book and the Real Estate Development Matrix website is to provide
complementary tools and the knowledge to navigate the Real Estate Development Process.
4 The third dimension
THE THIRD DIMENSION: PRODUCT TYPES
In the previous chapter, the Real Estate Development Matrix was presented in a two-
dimensional space; seven Stages of development and eight groups of development Tasks.
This 56-cell matrix may seem complicated enough, but there is another dimension—a third
dimension—that is critically important. This third dimension is the type of real estate product
that is being developed, as illustrated in Exhibit 4.1. Product types can be described very
broadly, such as multi-family developments or office developments, or they can be defined
more granularly as student housing or senior housing.
The Real Estate Development Matrix emphasized that no single developer can do all
of the Stages of development, nor achieve all of the required Tasks. Along the same lines, no
single developer can be an expert in all types of real estate products. Each product type
requires special construction, marketing strategies, and political knowledge and skills.
Paraphrasing former U.S. Secretary of Defense Donald Rumsfeld, “we know what we
know, we know what we don’t know, and we don’t know what we don’t know.”1 When real
Exhibit 4.1 Third dimension: product type.

18 Part I
Exhibit 4.2 Real Estate Development Cube.
estate developers attempt to be experts in two different product types, they quickly learn
what they don’t know.
The third dimension can be visualized as a cube (see Exhibit 4.2) in which the Stages,
Tasks, and product types are all related. This Real Estate Development Cube should contain
all of the real estate development opportunities.
William Brueggeman and Jeffrey Fisher had the following list of product types:2
Single-family residential
• detached;
• cluster developments;
• zero lot line developments.
Multi-family residential
• high rise;
• low rise;
• garden apartments.
Office
• major or multi-tenant—central business district;
• single or multi-tenant—suburban;
• single tenant—build to suit;
• office/showroom;
• medical office;
• other specialized office uses.
Retail
• regional shopping centers/malls;
• neighborhood centers;
The third dimension 19
• strip mall centers;
• specialty centers;
• discount centers.
Industrial/warehouse
• heavy industrial warehouse;
• light industrial warehouse;
• office/warehouse;
• distribution warehouse;
• research and development;
• flex space.
Hotel/motel
• business/convention;
• full service;
• tourist/resort;
• limited service;
• extended stay;
• all suites.
Recreational
• country clubs;
• marinas/resorts;
• sports complexes.
Institutional
• hospitals/convalescence homes;
• university buildings;
• government buildings;
• other.
Mixed use
• Some combination of the above.
Product type examples on the website @REDM3

The product type examples presented on the companion website under the Third Dimension
tab are categorized broadly as offices, retail centers, warehouses, apartments, residential,
and hotels. As the real estate development sector continues to expand and evolve, product
types are constantly shifting in the real estate marketplace. Readers who have additional
product type examples are asked to send these examples to the authors (through the Contact
Information link on the website), who will add them to the list.
20 Part I
Part I: summary
Chapter 1 began with a description of general themes and the unique economic characteristics
of real estate and was followed by a declaration of the three commandments of real estate
development. In Chapter 2, the definition of real estate development was discussed through
the words of the legendary James Graaskamp, who laid out the foundation of this book. The
real estate developer was defined from several points of view, and the major activities of real
estate developers were described.
Chapter 3 described the Real Estate Development Matrix in terms of the seven Stages of
development and the eight development Task groups, which will be the thrust of this book.
This chapter explained that product type was a third dimension that could be added to the
Real Estate Development Matrix, so that a Real Estate Development Cube could be defined.
Readers are directed to the companion website4 to find product type examples for every
Stage and Task group on the Matrix.
The eight chapters in Part II will discuss in depth each Stage of the Real Estate Development
Process, and the nine chapters in Part III will discuss the development Tasks that are required
in each Stage of development.
Notes
1 Defense.gov News Transcript: DoD News Briefing – Secretary Rumsfeld and Gen. Myers, United
States Department of Defense. Reports that say that something hasn’t happened are always interest-
ing to me, because as we know, there are known knowns; there are things we know we know. We
also know there are known unknowns; that is to say we know there are some things we do not know.
But there are also unknown unknowns – the ones we don’t know we don’t know. And if one looks
throughout the history of our country and other free countries, it is those in the latter category that
tend to be the difficult ones.
2 William Brueggeman and Jeffrey Fisher, Real Estate Finance and Investments, 14th Edition,
McGraw-Hill, p. 255. This list was abbreviated in their 15th Edition on p. 257.
3 http://realestatedevelopmentmatrix.com/pages/third-dimension.html
4 http://realestatedevelopmentmatrix.com/
Part II
5 Introduction to the Stages of
real estate development
Part II—Chapters 5 through 13—reviews the Real Estate Development Process as the
horizontal axis of the Real Estate Development Matrix that is shown in Exhibit 5.1. This
chapter describes the seven Stages of the Real Estate Development Process from several
perspectives. Detailed explanations of the seven Stages of development are presented in the
following chapters:
Chapter 6: Land Banking

Chapter 7: Land Packaging
Chapter 8: Land Development
Chapter 9: Building Development
Chapter 10: Building Operations
Chapter 11: Building Renovations
Chapter 12: Property Redevelopment
Exhibit 5.1 Real Estate Development Matrix.

24 Part II
THE REAL ESTATE DEVELOPMENT PROCESS
William Shakespeare described the world as a Stage and life with seven acts:
All the world’s a Stage,

And all the men and women merely players;
They have their exits and their entrances,
And one man in his time plays many parts,
His acts being seven ages.1
Similarly, this text presents the real estate development world in seven Stages where, “all the
men and women are merely players,” and where no one person, man or woman, can play all
of the roles in all of the Stages.
Without additional strained literary metaphors, Part II of this textbook gives an overview
of each Stage of the Real Estate Development Process using diagrams, and then the Stage is
described in terms of its key players, critical Tasks, controllable costs, and major risks.
In this chapter, the Real Estate Development Process is described holistically from the
time a property is a “green field” (Land Banking) through the various Stages until it becomes
a “brown field” and is ready to be redeveloped.
The Process is described verbally and then with a schematic diagram, a box diagram, a
Venn diagram, and a circle diagram. While each description is of the same process, each of
these Exhibits may provide the reader with a slightly different perspective or nuance.
Verbal descriptions
The seven Stages of the Real Estate Development Process are listed and defined as follows:
1. Land Banking Stage

Land Bankers acquire or hold undeveloped or “raw” land that becomes increasingly attractive
for future development because of general and broad market trends.
2. Land Packaging Stage

Land Packagers buy either the raw land from the passive Land Bankers, or the deteriorated
property from Property Redevelopers and then improve the value of the property through
conceptual land planning, zoning changes, financing schemes, or other “paper enhancements”
like title insurance, accurate surveys, or environmental studies.
3. Land Development Stage

Land developers buy the land with the paper enhancements from the land packager and then
construct the horizontal improvements like roads, utilities, and sanitary sewer systems, so
finished building sites can be sold to building developers.
4. Building Development Stage

Building developers buy the finished pad from the land developer and then produce the
vertical development by constructing the buildings.
Real Estate Development Matrix: Stages 25
5. Building Operations Stage
Building operators lease the property, manage the property, and develop a building operating
history, so it can either be sold to other building operators during its economic life, or to a
building renovator at the end of its economic life.
6. Building Renovation Stage

Building renovators buy the property with substantial economic and/or physical depreciation
and create value by curing these deficiencies and then remarketing and operating the building
until the property is ready for redevelopment.
7. Property Redevelopment Stage

Property Redevelopers buy the property with such serious, incurable physical or functional
deficiencies that the improvements must be torn down and/or redeveloped for another use.
Schematic diagram description

The schematic diagram in Exhibit 5.2 illustrates that each Stage in the Real Estate
Development Process is separate and distinct in the creation of value. Developers should
make a deliberate decision whether or not to sell to a third-party or to continue to the next
Stage of development. In effect, the developers decide whether to cash in their chips and
leave the table, or let their money ride and move on to the next Stage of development.
Exhibit 5.2 shows the order of the Stages of development over the life of the real estate
project as it moves from “green fields” in the Land Banking Stage, to the “brown fields” in
the Project Redevelopment Stage. Both of these Stages move to the Land Packaging Stage,
where the project is redefined in terms of public approvals, market studies, and physical
characteristics.
Usually developers are good at one Stage of development, but keep reaching back (up)
or forward (down) in the process until their inadequacies catch up with them. The critical
thing to note is that in each Stage, certain Tasks have to be completed to create value, and
the accomplishment of these Tasks requires special skills and talents. No one is good at
everything, no matter what their mother told them growing up.
Box diagram description

The box diagram in Exhibit 5.3 illustrates the seven-Stage model and emphasizes that in
each Stage, the developers “buy one thing and sell another.” The colloquial expression of
“flipping real estate” suggests that developers just buy and sell the same property without
“adding value” by completing Tasks. Rather the “flippers” just cash in and out of market
anomalies.
In this diagram, developers buy an “opportunity” and capture that opportunity by success-
fully accomplishing the requisite Tasks in that Stage. In doing so, developers create an
“opportunity” for other developers in the next Stage of development. If developers are
unsuccessful in creating value by accomplishing the required Tasks, then the development
stops until it can be restarted by another developer with the necessary vision, skills, and
capital.
26 Part II
Exhibit 5.2 Schematic diagram.
Venn diagram description

The Venn diagram in Exhibit 5.4 presents the seven-Stage Real Estate Development Process
and illustrates that the Stages in the Real Estate Development Process are not as neatly sepa-
rated as shown in the Development Matrix, the schematic diagram, or the box diagram.
Rather, they overlap to some extent in the overall development process. Effectively, devel-
opers may capture some of the value in the next Stage of development by incurring some
costs and risks associated with each Stage. In doing so, developers reduce the risks in the
next Stage and hopefully enhance the value of the project for the next Stage developer.
For example, a building developer may pre-lease part of a building during construction and
Exhibit 5.3 Box diagram.
Exhibit 5.4 Venn diagram.
is then able to sell the pre-leased building at a premium to a building operator because of the
reduced leasing risk.
Circle diagram description

The circle diagram in Exhibit 5.5 shows the relationship between each Stage of development
and demonstrates how the renovated building in the Renovation Stage may recycle back to
the Building Operations Stage, rather than just being held, operated, and eventually sold
to property redevelopers. This diagram also illustrates how the Redevelopment Stage
continues on to the Land Packaging Stage, and the cycle begins all over again. This circle
28 Part II
Exhibit 5.5 Circle diagram.
diagram clearly illustrates the holistic nature of the Real Estate Development Process. The
complete circle may take several decades or even longer, depending on the real estate market
conditions and the maintenance and repair of the improvements.
Summary
This chapter has described the Real Estate Development Process from several different per-
spectives. Each diagram emphasizes a different aspect of the overall development process;
however, the theme remains the same in each diagram. In each Stage of development, eco-
nomic value is created by accomplishing certain tasks that require special skills and talents.
Successful developers match their skills and talents to the Tasks that they can achieve in the
Stage of development that they understand.
Note
1 William Shakespeare, As You Like It, Act II Scene 4, Lines 139–166. Below is the full verse with
the real estate Stages of development inserted appropriately:
All the world’s a Stage,
And all the men and women merely players;
They have their exits and their entrances,
And one man in his time plays many parts,
His acts being seven ages. At first, the infant (LAND BANKER),
Mewling and puking in the nurse’s arms.
Then the whining schoolboy (LAND PACKAGER), with his satchel
And shining morning face, creeping like snail
Unwillingly to school. And then the lover (LAND DEVELOPER),
Sighing like furnace, with a woeful ballad
Made to his mistress’ eyebrow. Then a soldier (BUILIDNG DEVELOPER),
Full of strange oaths and bearded like the bard,
Jealous in honor, sudden and quick in quarrel,
Seeking the bubble reputation
Even in the cannon’s mouth. And then the justice (BUILDING OPERATOR),
In fair round belly with good capon lined,
With eyes severe and beard of formal cut,
Full of wise saws and modern instances;
And so he plays his part. The sixth age (BUILIDNG RENOVATOR) shifts
Into the lean and slippered pantaloon,
With spectacles on nose and pouch on side;
His youthful hose, well saved, a world too wide
For his shrunk shank, and his big manly voice,
Turning again toward childish treble, pipes
And whistles in his sound. Last scene of all (PROPERTY REDEVELOPER),
That ends this strange eventful history,
Is second childishness and mere oblivion,
Sans teeth, sans eyes, sans taste, sans everything.
6 Land Banking
INTRODUCTION
Land Banking is the first stage of the seven-stage Real Estate Development Process
(Exhibit 6.1). It is often overlooked as a way to create value in the Real Estate Development
Process, but it plays an important role in the overall process. The Land Banking Stage
occurs when the highest and best use of the site is not the current use. Also, Land Banking
may occur when the current use is expected to change in the “investible future.1” In this
sense, some farmers are also Land Bankers, and some farmers are just farmers. The Land
Bankers acquire and hold undeveloped or raw land that they believe will become attractive
for future development because of general and broad market trends. Land Bankers can
be active in the pursuit of the acquisition of opportunistic land buys. Although some land
owners—such as family estates, government agencies, or public utilities—can inadvertently
become Land Bankers. This is a relatively passive investment position. When Land Bankers
believe that the market conditions are right, they sell the land to Land Packagers.

Land Banking 31
Schematic diagram
The schematic diagram in Exhibit 6.2 illustrates the decision process of the Land Banking
stage. Land Bankers hold the undeveloped land for an indeterminate amount of time, until
they believe that the market conditions are right, and they decide to sell the property to Land
Packagers. Alternatively, Land Bankers may decide not to sell and to continue into the
Land Packaging stage.
Exhibit 6.2 Land Banking Schematic diagram.

32 Part II
Exhibit 6.3 Land Banking Box diagram.
Box diagram
As illustrated in Exhibit 6.3, Land Bankers buy land with some potential and sell land with
great potential. For example, Land Bankers may buy land on the edge of the urban area, in
anticipation of the extension of the road systems and utilities. In this scenario, the most
critical Tasks are correctly predicting the direction and timing of the population growth and
the extension of the transportation system and necessary utilities (sewer, water, electric,
and gas), and identifying land parcels that will be positively affected by these trends.
Venn diagram
Land Bankers are relatively passive participants in the development process as they wait for
the predicted positive market trends to occur. However, sometimes Land Bankers may advo-
cate for the inclusion of their land into a regional land use plan or a regional transportation
study. Land Bankers may also apply to have their land annexed into an adjacent municipality
in order to make it more attractive to Land Packagers. Land Bankers performing some Land
Packaging Tasks before selling to a Land Packager is an example of the overlapping nature
of the stages, as shown in Exhibit 6.4.
Land Bankers may also create opportunities for the Land Packagers by providing financing
in the form of purchase money mortgages.
Circle diagram
The circle diagram in Exhibit 6.5 illustrates how both the Land Bankers and property
redevelopers sell their land to Land Packagers. Land Bankers are often considered the
beginning of the Real Estate Development Process, but as the circle diagram shows, Property
Redevelopers essentially represent a new beginning for the property’s development.
Exhibit 6.4 Land Banking Venn diagram.
Exhibit 6.5 Land Banking Circle diagram.

34 Part II
Exhibit 6.6 The Land Banking equation.
Land Banking: what happens

Once the land increases in value, Land Bankers sell the property to a Land Packager, or they
can continue onto the Land Packaging Stage themselves if they have the requisite skills to
complete the Land Packaging Tasks. By providing financing or favorable contract terms
to Land Packagers, Land Bankers can share in some of the additional value created in the
Land Packaging Stage.
Land Bankers need patient money, interim land uses, and the ability to assemble additional
land parcels to make the eventual development more feasible.
The Land Banking Equation (Exhibit 6.6) requires that the eventual sales price is
sufficiently greater than the sum of the acquisition price and net holding costs2 to provide
Land Bankers with acceptable financial returns. This required “spread,” or minimum profit,
may occur quickly or over several years.
The expected size of the spread reflects the property’s appreciation during the holding
period. For example, Land Bankers may expect the property to double in value in the future,
which is often referred to as a “multiple of two or 2X.” This is not a time-adjusted annual
return, but rather this is a gross measure of return. If the property doubled in value over ten
years, the time-adjusted annual return would be 7.1%. This is also called an internal rate
of return. However, if the property doubled in value over five or seven years, the time-weighted
returns would be 10.4% or 19.3% respectively. These returns are on the entire real estate asset,
rather than just the equity investment. However, developers must focus on the performance of
the real estate enterprise, in this case passive land holding, so that the appropriate capital struc-
ture can be determined. Financing Land Banking activities with debt can be tricky because of
the indeterminate nature of the holding period and the annual net holding costs.
Land Banking: key players

Some key players in the Land Banking Stage include the following.
Existing land owners who are motivated sellers

These are the people or organizations who currently own the land and are motivated (for
many different reasons) to sell the land to Land Bankers. For example, these may be farmers
Land Banking 35
who are going out of business, or businesses with surplus land because of changing market
conditions or facility relocations. Motivated sellers may also be families with estates who
are selling land holdings to make other investments.
Real estate brokers

Real estate brokers who specialize in agricultural or rural land transactions have
important and valuable market information about recent sales, transaction terms, and poten-
tial sellers. They know what land is available for sale and how motivated the current land
owners are.
Surveyors and civil engineers

Surveyors need to determine and verify the accuracy of boundary lines, easements, and
rights of way. Civil engineers can opine on the suitability of the property’s future development
potential.
Environmental engineers and professionals

Environmental engineers and professionals need to identify the absence or existence of the
site’s environmental issues by performing a Phase I Environmental Survey. They can also
help identify environmental conditions that may influence future development or raise issues
regarding future land uses.
Attorneys and title insurance companies

Title insurance is imperative in any land acquisition; not just because of the insurance aspect
in case of a financial loss, but also because the title insurance companies will identify all
of the “exceptions” to the insurance coverage. These exceptions are where the title problems
are. Attorneys need to help define and evaluate the title exceptions, as well as understand
deed restrictions, easements, and rights of way. Attorneys are also valuable in drafting
purchase and sale contracts with the appropriate conditions for a sale.
Local and regional public authorities and politicians

Undeveloped land is governed by several governmental authorities at the municipal, county,
state, and federal levels. It is important for Land Bankers to understand which authorities
control the subject land and what their future expectations are for that property. Politicians,
elected or appointed, usually have opinions about the future development of their jurisdictions.
Land Bankers need to know their opinions and place their bets accordingly.
Local and regional economists and market analysts

Most areas have both public and private market analysts who predict the future economic
development and corresponding populations of an area. Most national real estate service
companies with regional offices also provide current and projected statistics of real estate
market conditions.
36 Part II
Potential Land Packagers
Land Bankers’ best friends are the potential Land Packagers who are looking for opportunities
to increase a property’s value by obtaining the required public approvals for future land
development. Land Packagers may also look for opportunities to fix or correct existing
problems on the property such as title issues, survey disputes, or environmental conditions.
Land Bankers want to work with Land Packagers so that each side has a winning situation,
and so the Land Packagers can acquire the property and get the required public approvals for
development.
Land Banking: critical Tasks
Predicate accurate forecasts

Accurate forecasts of economic trends, market conditions, and public improvement con-
struction are paramount for success. Land Bankers’ predications are critical to determine
“when to buy” and “when to sell” a property, as well as to promote the value of the property
in the light of future economic events.
Identify and control attractive land

Land Bankers need to be visionaries who evaluate land in terms of its value; both today and
in the future. They must identify characteristics of attractive land holdings and figure out
ways to control that land during the holding period. There are many ways to control land
without purchasing the land outright. The use of purchase options, installment sales, and
land leases need to be considered as ways to “control” the attractive land.
Negotiate land acquisition

Land Bankers need to negotiate the acquisition of the land by meeting the seller’s investment
expectations, while still providing the Land Bankers with a low enough price to hold and
carry the land until it has appreciated and the market conditions are right for a sale.
Arrange financing of acquisition and carrying costs

Land Bankers must pay the carrying cost of the land while they are waiting for the market
conditions to improve and increase the value of the property. The taxes, insurance, and
maintenance expenses must be paid, as well as the financing costs if the property is acquired
with a mortgage loan. It is usually very difficult to finance raw land acquisition through
normal lending sources, so Land Bankers must be imaginative in arranging financing from
the seller (a purchase money mortgage) or through private investors. This is why Land
Bankers must consider interim land uses to help defray the carrying costs.
Control legal and consulting expenses

Land Bankers must be careful not to over-commit to legal studies, market studies, or
land use studies—even though it is tempting to commission these studies to help the Land
Packagers conceptualize the potential of the property. Land Bankers need the discipline of
good accounting, budgets, and periodic reports to ensure that the costs remain under control.
Land Banking 37
Limit maximum losses
Land Bankers must be careful to limit their financial and legal liabilities. Non-recourse loans
are imperative, as well as limiting any responsibility for existing environmental conditions.
Pre-arranged default provisions with the lenders, as well as indemnifications from former
land owners are essential. All developers need a “back door” out of the process if everything
goes wrong (Murphy’s Law).
Acquire adjacent land parcels (assemblage3)

Land Bankers may be able to substantially increase the value of their land by acquiring
adjacent land parcels that enhance the value of the entire land holding. The acquired land
may provide improved access, visibility, or development potential.
Land Banking: controllable costs

Controllable costs are costs or expenses that Land Bankers can and must control or limit to
the best of their abilities. These costs must be identified and quantified prior to acquisition,
and then carefully monitored and managed during the holding period.
Interest on borrowed capital

Because of the potentially long-term nature of the Land Banking Stage, interest on borrowed
capital should be at a fixed rate, rather than a variable one. Some loans may have “pay and
accrue provisions” that allow the borrowers to pay interest at a rate below the “contract rate”
and accrue the difference between the “pay rate” and the “contract rate,” but adding it to the
outstanding loan balance. This may be appropriate if there are unexpected changes in market
conditions or expenses, but it is a risky practice to engage in long term.
Cumulative preferred returns on equity capital

Cumulative4 preferred returns give some equity owners a priority for capital distributions
based on a predetermined rate. These provisions should be avoided by developers if
possible. However, if they are used, they should be capped at some level and calculated
annually, so developers know where they stand relative to capital distributions when the
property is sold.
Option payments
If there are option payments related to the purchase contract, the timing and amount of the
option payments should be clearly defined. There should be provisions to extend the option
agreement if necessary.
Liability insurance
Liability insurance is a must for land ownership, and the policy provisions, limits, and
premium should be arranged prior to acquiring the property. If necessary, there should be a
cash reserve to make these payments.
38 Part II
Real estate taxes
Real estate taxes, sometimes called property taxes or ad valorem taxes, must be paid to
municipal authorities, school districts, and other special taxation districts. These taxes need
to be promptly paid and closely monitored. Whenever possible, the discounts for early
payments should be taken. Often, taxing authorities attempt to increase tax revenues by
aggressively increasing the property’s assessed value. These re-assessments should be
challenged and appealed. However, Land Bankers may view the increased assessments as
verification of the increasing market value of the property, and use the new, higher assessment
to market the property.
Road and drainage channel maintenance

While roads and drainage channels need to be maintained at some level, a strict budget must
be enforced. However, failure to maintain drainage systems may inadvertently create wetlands
and cause another set of development restrictions.
Adjacent land acquisitions

Bigger is not necessarily better. Additional land purchases should be critically evaluated;
not only in terms of overall value creation (plottage value5), but also in terms of additional
financing and carrying costs. This is both a critical Task and a controllable cost.
Improvements for interim land uses

Gates, fences, outbuildings, and security systems that are required for interim land uses need
to be budgeted for and carefully matched to the rental income associated with their leases.
The costs should be anticipated and included in the leases of the interim land users.
Land Banking: major risks
External factors that don’t materialize

Expected public improvements are not approved or funded as anticipated: interstate highway
by-passes are cancelled; transit-way construction is indefinitely delayed; or public sewer
lines extensions are not approved. Also, the new employer may not move to the area, or the
expansion of the existing manufacturing plant is cancelled.
Pre-purchase market analysis was inaccurate

The expected population growth and household formation may not occur because of slow or
negative job growth. The economic base of the area may have eroded because of changes in
the broader national and international market conditions.
Site conditions and characteristics never become valuable

The general public may have perceived the steep slopes that provide beautiful views as
too dangerous upon which to build. Also, the general public may not have appreciated the
solitude of the remote area, and preferred to be in more accessible neighborhoods. Finally, the
Land Banking 39
adjacent land users may not be perceived as attractive neighbors. For example, an exclusive
hunting club may be considered “killing fields,” rather than a rich rural tradition.
Financing costs and other holding costs become overwhelming

Variable interest rate loans may increase financing costs, or loan extension fees are too high.
Also, insurance premiums or property taxes may increase above budget levels. Finally, the
income expected from interim land uses may not materialize.
Force majeure
Terrorist attacks, wind, fire, rain, earthquakes, and other acts of God, diminish the attractive-
ness of the property. If it’s not one thing, it’s another! Even if insurance proceeds and
government loans are available, the delayed recovery may never increase land values as
expected.
No “backdoor” to get out of the deal

Every real estate development should have a back door, so the developer can get out of the
deal. However, life happens and personal guarantees or indemnifications force Land Bankers
to continue to hold the property and incur ruinous financial losses.
Partnership issues emerge

Because of the indeterminate nature of the Land Banking Stage, some partners may want to
sell the property, while other partners want to continue to hold onto it. Partnership conflict
resolution provisions, like buy-sell arrangements, could force a potential sale of the property.
Another partnership issue that may emerge could be that financial partners suffer economic
losses, and they can no longer meet promised capital contributions. Because inherited land
holdings involve so many relatives, so many generations, and so many economic agendas,
the partnership issues can be very personal and non-economic.
Land Banking: case studies

Following are some Land Banking case study scenarios of a family farm, a government
facility, regulation change, an institutional merger, and a corporate acquisition—all of which
illustrate many of the discussion points in this chapter.
Crown Farm: a family farm scenario @REDM6

The Crown Farm is a good example of how farmers can become Land Bankers when
agricultural is no longer the highest earning and best use of the property. The 182-acre
agricultural land area had been owned and operated the Crown Family for over 100 years.7 An
historic house and a few outbuildings built in the 1880s remained on the property (Exhibit 6.7).
In the early 2000s, the Crown family decided that farming was no longer the highest earning
and best use of the land and it would best suit the family to sell the property.
Crown Farm is located to the northwest of Washington, DC (as outlined in white in
Exhibit 6.8) and just outside of Interstate 495 (outlined in black) which serves as the beltway
connecting the DC, Maryland, Virginia metropolitan area. The site now sits at the intersection
Exhibit 6.7 Historic outbuildings.
Exhibit 6.8 Aerial photo: Metro area.

Land Banking 41
Exhibit 6.9 Aerial photo: Crown Farm site.
of two interstate highways—I-270 and I-370—and is in the health and science corridor along
I-270 in Montgomery County. As you can see in Exhibit 6.9, urban development is trending
outward and upward and Crown Farm is among that wave of urban sprawl. The fields in the
middle of Exhibit 6.9 are the Crown Farm site and, as you can see, the farm is now surrounded
on all sides by dense residential developments and research parks. Strong demographics
and the demand for density made Crown Farm the hole in the donut for development
opportunity. The Land Bankers (the Crown family) decided to capitalize on the market shift
and began to market the site for sale to a Land Packager.
Consequently, the property was marketed and the Crown family negotiated a purchase and
sale agreement with a partnership composed of two major home builders: KB Homes
and Centex (the Partnership), for over $180 million. However, the closing was contingent
upon the Crown Farm site being annexed into the City of Gaithersburg. In other words, the
Partnership would not have full control of the property until the annexation was approved.
The Partnership began entitling the property for redevelopment and pursued the annex-
ation. The Partnership was successful in their efforts and the annexation and closing
occurred in 2006. By delaying closing until several entitlement hurdles were met, this is an
example of how the Land Banker can facilitate a sale to a Land Packager by sharing part of
the entitlement risk.
To put this in terms of the Development Matrix, the Land Banker (the Crown family) sold
their family farm to a Land Packager (the Partnership) by sharing entitlement risk. The Land
Banker would not receive the proceeds from the sale until the Land Packager could meet
certain approvals, thereby mitigating the Land Packager’s risk by not paying the total cost of
the land unless their development plans were approved.
42 Part II
Armed Forces Retirement Home: a government facility scenario @REDM8
The Armed Forces Retirement Home (AFRH) is an example of a federal government
sponsored facility with excess land available for redevelopment, and the opportunity to
collect additional revenue from that sale. This example is one account of the decision-making
process for a Land Banker to move the property from the Land Banking stage into the Land
Packaging Stage. The Armed Forces retirement home is a federal government sponsored
senior housing facility for 1,100 service veterans, which sits on 272 acres in Washington,
DC. In Exhibit 6.10, the white border shows the total site of the 272-acre campus and the
shaded area shows the excess land that is proposed for development by the private sector.
A brief history
In 1851, General Winfield Scott received a bounty from Mexico City during the Mexican-
American War. Returning to Washington with the bounty, Scott worked with US Representative
Jefferson Davis to convince Congress to use the bounty to purchase the Riggs family farm as
a retirement home for old soldiers.
The site has served as the Presidential retreat of Chester Arthur, Rutherford B. Hayes,
James Buchanan, and most prominently Abraham Lincoln. “Anderson Cottage” was built
by the U.S. Army and was nominally leased to the President of the United States to use as a
summer retreat. The cottage was recently (2000) restored as a national monument and
renamed the “Lincoln Cottage.”
Exhibit 6.10 Aerial photo: Armed Forces Retirement Home.

Land Banking 43
The golf course to the west of the proposed development area continues to be a retreat for
members of the U.S. Congress, as well as the Presidents of the United States. It is unique
for two reasons: 1) it has no sand traps, and 2) it has Level V Security.
Understanding the decision to develop

The AFRH currently serves as a senior housing facility for 1,100 service veterans. In 1991,
an independent agency of the Executive Branch and trust fund were created to operate and
finance the retirement community for non-commissioned veterans from all service branches
(Army, Navy, Air Force, Marines).
AFRH is funded entirely from the Armed Forces Retirement Home Trust Fund and
receives no annual appropriations from Congress. The Trust Fund is financed with a 50 cent
payroll deduction from active duty military and by fines and forfeitures from military
disciplinary actions (see Exhibit 6.11).
AFRH is restricted by law to investments in low-yield Treasury bonds. Federal law prohib-
its AFRH from soliciting contributions, applying for grants, or running capital fundraising
campaigns.
The AFRH is set up to be funded from those designated funds, which are now dwindling
as the all-volunteer (not-drafted) Army, Navy, Air Force, and Marines are better behaved
with lower funds available from disciplinary fines. Also, restrictions imposed by Congress
to protect the AFRH’s capital endowment are now limiting the income available from the
endowment.
In addition to the limitations of funding sources discussed above, there has been an
increased demand of funding due to increased operational costs. As time goes on, there are
simply more service veterans and longer-living service veterans, which creates a larger popu-
lation that requires greater services throughout their extended lifespans. To maintain and
improve services for senior housing, operational costs for the facilities and grounds continue
to rise. Funding sources and uses were two major reasons for the federal government to make
the decision to move forward with the development process for this parcel of the excess land.
The Trust decided to issue a Request for Proposals to investigate development options
for the Armed Forces Retirement Home. In 2007, the AFRH selected Crescent Resources
Exhibit 6.11 AFRH sources of annual income.

44 Part II
Ltd as the “designated developer” (Land Packager) to obtain the necessary approvals to
develop the excess land.
Duke Energy: a regulation change scenario @REDM9

This case study illustrates how a key player, government authorities, can create Land
Banking opportunities. The state utility commission changed the regulation that eliminated
the value of the property by disqualifying it from the “rate making base.” This forced the
Land Banker to move property through the development process, to Land Packaging.
Duke Energy’s historic development of hydro-electric dams throughout North and South
Carolina caused this regulated utility company to acquire large amounts of land in the process
of the development and construction of these infrastructure projects. To purchase the land,
Duke Energy had to buy the mountain land, along with the bottom land for the dam construc-
tion. However, in 1980, changing state utility regulations limited the ability of the company
to include the “excess mountain land” in the “rate making base”10 for determining utility rates.
In the mid-1980s, Duke Energy formed Crescent Resources LLC to develop the timber
land by selling it for commercially developable land in metropolitan areas using 1031 Tax-
Deferred Exchanges. Crescent Resources developed the commercial land into warehouse/
industrial parks, office parks, master planned communities, and apartments.
Vanderbilt University and Peabody College: An organizational merger

scenario @REDM11
The merger of Vanderbilt University and Peabody College is a good example of excess land
becoming available because of organizational mergers.
Founded in 1785, Peabody College’s 50-acre campus was adjacent to Vanderbilt University
and contained 15 acres of athletic fields across from the historic retail area, Hillsborough
Village. See Exhibit 6.12.
Exhibit 6.12 Vanderbilt aerial photograph.

Land Banking 45
When Peabody College merged with Vanderbilt University in 1979, Peabody’s athletic
fields were no longer necessary for student recreational activities. Thus, Vanderbilt became
a Land Banker with 15 acres of excess land. Vanderbilt partnered with the Mathews Company
to develop the excess land in 1988. This land eventually was developed into a mixed-use
development, The Village at Vanderbilt.
Kiwanis Trail: a corporate acquisition scenario @REDM12

The Kiwanis Trail case study is a good example of how a Land Banker purchased the prop-
erty based on its current land use—timber—and was able to hold it as the timber continued
to mature, and the land increased in value because of nearby economic development and
municipal infrastructure improvements. See Exhibit 6.13.
In Exhibit 6.13, the white oval is a rough estimate of the Kiwanis Trail property
border. The new developments of the Catholic school and medical center have reached
the edge of the Kiwanis Trail property, creating a development opportunity for the adjacent
land.
In 1995, K-corp bought Clearco Corporation, whose sole asset was 400 acres of timberland
called Kiwanis Trail. The sellers were motivated to sell the stock of Clearco, rather than the
asset to avoid double taxation by the federal government.
The stockholders of Clearco provided the buyer, K-corp, with a 90-day loan to acquire the
stock. During the 90-day loan period, K-corp harvested the timber, set up operating reserves,
and paid off the acquisition loan. This enabled K-corp to be a Land Banker and to hold the
Exhibit 6.13 Kiwanis Trail area photo.

46 Part II
property as it increased in value. Over the last 20 years, the following events increased
the property’s value:
• township extended domestic water lines to property line;

• township extended sanitary sewer lines to one-half mile from property line;
• regional Medical Center expanded to one mile from site;
• Catholic school system built new campus half a mile from site;
• township received grant to undertake a land use and infrastructure master plan.
The Land Banker, K-Corp, is now looking for a Land Packager and has contacted local
public officials about including this land in the comprehensive land use study that will
include the four other municipalities.
Summary
While there are numerous ways to become a Land Banker, they are relatively passive as they
wait for general market conditions to improve, or for certain public infrastructures to be
completed; both of which will increase the value of the property. Land Bankers need a keen
understanding of the positive effects on their property of future market forces, and their
biggest risk is paying the holding costs during the indeterminate waiting period, especially
when the market forces are delayed. Land Bankers often facilitate the sale of their property
to Land Packagers by providing financing or by agreeing to favorable terms of sale.
Notes
1 The term “investible future” is determined by the investment horizon of the Land Banker. This term
may be simply a period of time, say ten years, or an indefinite time period like the “next generation.”
2 Net Holding Costs refer to the annual out-of-pocket costs incurred that are not offset by the income
from interim land uses such as hunting leases, parking income, or agricultural income.
3 Assemblage is “The combining of two or more parcels, usually but not necessarily contiguous,
into one ownership or use; the process that creates plottage value.” The Appraisal of Real Estate.
Chicago, IL:Appraisal Institute, 2008, p. 213.
4 Cumulative returns increase at a specified compound rate each year if they are not paid currently.
This cumulative return rate is similar to compound interest on accruing loans.
5 Plottage value is “The increment of value created when two or more sites are combined to produce
greater utility.” The Appraisal of Real Estate. Chicago, IL: Appraisal Institute, 2008, p. 213.
6 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage1/Crown+Farm.pdf
7 www.gaithersburghistory.com/crown-farm.html
8 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage1/Armed+Forces+Retirement+
Home.pdf
9 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage1/Duke+Energy.pdf
10 Electric utility companies are regulated by state commissions, who set the rates that utilities can
charge to customers by determining a rate that provides the utility with a minimum return on the
assets that it uses to generate the electricity, “the rate making base.” When the “mountain land” was
eliminated from the rate making base, Duke Energy could no longer earn a return on this land. Thus,
Duke decided to dispose of this excess land by trading it for more commercially developable land.
11 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage1/Vanderbilt+University+and+Pe
abody+College.pdf
12 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage1/Kiwanis+Trail.pdf
7 Land Packaging
INTRODUCTION
Land Packaging is the second stage of the seven-Stage Real Estate Development Process
(see Exhibit 7.1). Land Packaging involves obtaining the major public approvals like zoning,
master plans, and environmental impact studies, along with market studies, engineering
analyses, financial proposals, surveys and title insurance that make the property a compelling
opportunity for Land Developers. While these paper enhancements are routinely done by
developers, they are often not considered a separate Stage of development. However, this
Stage has unique Tasks that require specialized skills that are very different from the skill-
sets associated with Land Bankers, Property Redevelopers, and Land Developers.
Schematic diagram
Land Packagers can acquire sites from Land Bankers, as well as from Property Redevelopers.
Land Packaging is the process of taking an acquired property or parcels from Land Bankers
or Property Redevelopers and proceeding through the necessary planning and approval
processes to create an opportunity for land development. This often includes municipal

48 Part II
Exhibit 7.2 Land Packaging Schematic diagram.
annexation, zoning changes or modifications, and the creation of a conceptual master plan.
Land Packagers acquire the attractive “green fields” from Land Banker or “brown fields”
from Property Redevelopers and then obtain the appropriate “paper enhancements” (like
title insurance, accurate surveys, or environmental studies) or paper infrastructure. Land
Packagers then sell the enhanced property to the Land Developer as illustrated in
Exhibit 7.2. Of course, Land Packagers can continue on and assume the role of Land
Developer, but they must realize that the skills of successful Land Packagers are very
different from the requisite skills of successful Land Developers. Examples of Land
Packagers are land planning firms, politically skilled lawyers, and governmental agencies
who attempt to obtain government approvals for land they own. This packaged land or “land
with a plan,” is then sold to Land Developers.
Box diagram
The box diagram in Exhibit 7.3 demonstrates the adage that at every stage of development,
“the developer acquires one thing, adds value, and sells another.” In this case, Land Packagers
Land Packaging 49
Exhibit 7.3 Land Packaging Box diagram.
acquire land with great potential from the Land Bankers or Property Redevelopers, and sell
“land with an approved plan” to Land Developers.
Venn diagram
The Venn diagram in Exhibit 7.4 demonstrates that the stages of the Real Estate Development
Process are not as neatly separated as the schematic diagram and the box diagram suggest.
Land Packaging may overlap with Land Banking or Property Redevelopment as Land
Packagers attempt to encourage a municipal annexation, modified zoning provisions, or a
new master plan, even though the Land Packager has not taken title to the property.
Exhibit 7.4 Land Packaging Venn diagram.

50 Part II
Exhibit 7.5 Land Packaging Circle diagram.
When adverse environmental conditions are discovered or exposed during the packaging
process, Land Packagers may need to remediate the environmental problems before Land
Developers take over the development process. Since environmental remediation is not a
neatly defined process, Land Developers usually avoid these situations.
Circle diagram
The circle diagram in Exhibit 7.5 demonstrates how the development process moves
from Land Banking to Land Packaging, as well as from Property Redevelopment to Land
Exhibit 7.6 Land Packaging equation.

Land Packaging 51
Packaging, as the circle of development continues on. Of course, the Land Packaging Stage
moves to the Land Development Stage if and when the Land Packager is successful.
Land Packaging: what happens

The diagram in Exhibit 7.6 shows an illustration of the Land Packaging equation. The
purchase price and holding costs, cost of approvals, design costs, and consulting costs must
be less than the sales price to Land Developer.
The difference between those two values is known as the “spread.” The spread is the value
difference that is created in this Stage of development. Economists call this the “profit”
earned in this stage while accountants may call this net income, or capital gain. Nevertheless,
this spread may occur quickly over several months or over many years. Land Packaging is
sometimes viewed as the riskiest Stage of the development process since so many public
authorities and approvals are involved and the holding period is very indeterminate. In some
cases, an Act of Congress may be necessary for the Land Packaging Stage to be complete.
Land Packagers are well connected with local governmental authorities and have exten-
sive contacts and experience with land use regulations. It is important for Land Packagers
to correctly assess the political hurdles, environment obstacles, and title and survey issues.
Land Packagers can have a multitude of backgrounds; they are often retired politicians or
civic leaders, real estate attorneys, real estate brokers, environmental and engineering firms,
land planning or architectural firms, or market research firms.
The Land Packagers know that it is more important to control attractive land parcels,
rather than to own them outright. Therefore, Land Packagers are familiar with land contracts,
installment sales, purchase money mortgages, and option agreements. Sometimes Land
Packagers acquire control of the land using a lease with purchase options or a sales contract
with multiple extensions. The cost of holding the land throughout the packaging process is
very dependent upon the terms and conditions under which the property was acquired—
especially since the timing of the approval processes are so uncertain.
Land Packaging: key players

There are numerous key players in the Land Packaging Stage because of the very public
nature of the Real Estate Development Process. Land Packagers need to present their vision
for the property to a public audience—both private citizens and government officials—and
ask for their support for the land use approvals that are necessary. Land Packagers attend
meetings, make presentations, and educate stakeholders. Because numerous authorities
have overlapping responsibilities, this process can seem circular, but Land Packagers must
persevere. The goal of Land Packagers is to prepare the property for land development, to be
“shovel ready” in the government vernacular.
Federal authorities
Federal agencies have an incredible amount of control over local land uses. Probably the
most notorious are the U.S. Environmental Protection Agency and the Army Corps of
Engineers. The Clean Water Act gave them control over “the waters of the United States,”
and the definition of this term has caused numerous lawsuits and court rulings. The U.S.
Department of Transportation must approve any land development that impacts the Interstate
Highway System of Federal Highways. Also, the U.S. Department of Interior, through the
52 Part II
National Parks Service, must approve any land use that impacts federal parks, monuments,
trails, or wildlife sanctuaries. The Department of Interior, through the Bureau of Indian
Affairs, controls development on and around the tribal lands of Native Americans. The
National Environmental Policy Act also requires an Environment Impact Study for land
development projects that use federal funds, and the Davis Bacon Act requires the payment
of “prevailing wages” (union wages) on any project that uses federal funds. The National
Historic Preservation Act also gives the Federal Government control of historic sites and
buildings through the National Register of Historic Places and the Section 106 review
process. The U.S. Department of Defense and the Department of Homeland Security may
control local land uses, as well as the other federal departments and agencies. Of course, the
Internal Revenue Service controls how the proposed improvements will be treated for federal
income tax purposes. Land Packagers must identify these regulations or restrictions and
determine whether only notification is required, or if actual approvals or permits are needed.
The notification and approval processes are technical and time consuming.
State authorities
States usually have agencies that support the federal agencies, and these agencies enforce
federal regulations and restrictions, as well as state regulations and restrictions of land use. For
example, the State Department of Environmental Protection will enforce federal regulations,
as well as state regulations; the State Historic Preservation Office will also enforce both the
federal and state regulations; the State Department of Highways will focus on state highways
and transportation systems; and the state Department of Natural Resources will also have
authority if land uses impact state parks or recreation areas. Similarly, the state’s Fish and
Game Commission has authority if the local wildlife is affected. Again, Land Packagers must
determine which agencies and authorities need to approve the proposed land use changes.
Regional economic and development authorities

Regional authorities or commissions are very important overlays on local land uses. Below
is a sample of some of these regional authorities:
• Regional water authorities can determine how drinking water is distributed and used
over several municipalities.
• Regional sanitation sewer authorities can determine the availability and costs of
sanitation sewer services over several municipalities.
• Regional transit authorities determine how the commuter trains and buses are operated,
and how the transit systems are maintained and expanded over several states and
municipalities.
• Regional airport authorities also regulate and maintain airports that impact land uses in
several municipalities and states.
• Regional master plans are designed and enforced by a regional planning commission or
a regional council of governments.
• County governments also may restrict and regulate land use in their unincorporated
areas, as well as townships, boroughs, and cities within the county.
Land Packagers must understand the role and functions of these regional authorities in order
to determine the appropriate strategies they can use to gain their support for the proposed
land uses.
Land Packaging 53
Local authorities
Local municipalities control land use through their planning commissions and zoning
boards, which usually have well-defined procedures for applying for changes to the existing
land use regulations. These procedures often include a review of the proposed changes
by various municipal departments, such as public works, fire and police, parks and recrea-
tion, and transportation, as well as established neighborhood associations. Land Packagers
must understand that while, “You can’t fight City Hall; City Hall won’t fight neighborhood
associations.”
Annexations to increase the size of a municipality are initiated by the municipality, are
governed by state laws, and are subject to state approvals.
Adjacent land owners

Adjacent land owners are vital key players, and their support is critical to obtaining the
various approvals and permits—especially at the municipal level. Adjacent land owners may
be private individuals, multinational corporations, or government organizations. Each one
needs to be approached and informed of the proposed changes, and convinced that these are
beneficial and will not negatively affect them.
Neighborhood activists
Neighborhood activists often operate outside the defined regulatory land use approval process,
but their support is critical for land use changes. Activists usually have a special issue that
they are advocating, such as affordable housing, sustainable development, or improved
recreational opportunities. Therefore, proposed land uses need to be respectfully discussed
with them even though their issue may be, “no growth, no change,” or Not On Planet Earth
(NOPE).
Former politicians
Former or retired politicians may be especially helpful in lobbying for government approvals
or providing insight into the local planning process. They know how the system works and
who works it.
Land owners/sellers
The entity or person selling the land must be motivated to sell at an attractive price and with
terms that are agreeable to the Land Packager. The sellers may agree to make the sale’s
closing contingent upon receiving certain approvals, or they may be willing to provide some
sort of seller financing. Their support may also be invaluable in obtaining approvals. Property
Redevelopers are often government agencies who are willing to help in the approval pro-
cesses. The agencies may also have access to grants or low-interest loans that the Land
Packager can access.
Title attorney and title insurers

Title attorneys and title insurance companies help the Land Packagers identify problems or
clouds on the title. Sometimes these problems can be fixed by the seller prior to closing, but
54 Part II
sometimes the resolution of these problems is an important way for Land Packagers to create
value. In either case, knowledge is power, and Land Packagers must determine what risks or
problems to accept and which ones to avoid.
Surveyors and engineers

Surveyors are key players who determine where the physical boundaries, easements, and
rights-of-way of the property are and what kinds of boundary issues must be addressed.
Again, Land Packagers must determine which issues to accept and solve after closing and
which issues to avoid by making the seller solve them before closing. Engineers, especially
geotechnical engineers, are key players who determine the geological conditions that must
be addressed in the new land plan. They can the conduct necessary testing and report on the
geotechnical conditions that impact the physical feasibility of various land uses.
Land planners
Land planners create and design a conceptual master plan that shows proposed land uses.
This plan must represent the Land Packagers’ vision for the property and be flexible, too.
Land planners must prepare maps, pictures, and layouts that help the Land Packagers tell the
story of the proposed land use changes.
Traffic consultants and engineers

Traffic consultants and engineers are able to show the future effects of the proposed land
uses on the existing and proposed transportation systems. Identifying the potential traffic
requirements or restraints of the new concept master plan is critical for its acceptance.
Traffic consultants and engineers can make the traffic systems come to life using animated
videos to describe the effect of traffic controls or highway improvement on the local
neighborhoods.
Environmental and sustainability experts

Environmental experts conduct necessary surveys and testing to estimate the existence
(and extent) of environmental issues on the property. They may also determine if remediation
is required and propose procedures to deal with these conditions. Public concern for
“sustainable development” manifests itself at all levels of government. Sustainability experts
help Land Packagers explain and articulate the sustainable nature of the proposed land
uses and determine what sustainable practices will be employed in the development. These
are sometimes vague and broad discussions, but Land Packagers must address sustainability
issues.
Land Packaging: critical Tasks

Land Packagers must develop the “paper infrastructure” for the newly proposed land
uses. Consequently, Land Packagers must produce understandable reports and proposals to
share with all of the stakeholders who will decide or influence the decisions for the required
approvals and permits. Land Packagers must carry out “conceptual selling” to skeptical
audiences.
Land Packaging 55
Conduct feasibility studies
Land Packagers must evaluate the current (and predict the future) physical, political, and
market conditions that will affect the future use of the site and the proposed land uses. Land
Packagers may commission third-party reports or they may do it themselves. In any event,
these reports must be understandable and readily communicated to the various stakeholders
in the process. These reports include the following:
• existing physical conditions: surface, underground, and atmospheric conditions;

• required regulatory or political approval or permits;
• current and existing market conditions;
• historic or cultural consideration for the development of the site.
Commission conceptual land plan

Land planners must be reputable and experienced, and prepare a conceptual master plan for
the site. The conceptual plan should be flexible and correspond to the various feasibility studies
that have been undertaken, as well as the major concerns of the stakeholders. Initially, this
plan is for “comment and discussion,” but eventually it may become part of the “Entitlement
Documents Package.” Urban Design Guidelines, prepared by the land planners, are often
included as part of the master plan authorization legislation.
Cure title and survey problems

Land Packagers can create tremendous value by curing title or survey problems that have
prohibited or limited the development of the site property. A clear title and accurate survey
are requisite conditions for a sale to Land Developers.
Obtain basic public approvals

Each local municipality has its own vocabulary for the approval process. The Land Packager
must have a keen understanding of the municipality’s land use approval policy, as well as the
correct terms and vocabulary for each approval. The timing of the approval process is very
important. Government boards or commissions can casually delay or postpone review of
approvals without recognizing the deleterious effect of these delays on the Land Packager.
The trick is to work the system effectively without alienating the public-sector people. At the
end of the day, the basic public approvals must be obtained with reasonable and doable
conditions attached to them.
Obtain required private sector approvals, permits, and agreements

Often, obtaining the approval and permission from adjacent land owners is very difficult and
contentious. Land Packagers may temporarily need access agreements like easements or
rights-of way during the property’s construction period. In urban areas, staging areas for
construction are usually on private property. Some easements and rights-of-way may need to
be permanent for the successful operation of the building and facilities. Sometimes property
trades, such as neighbors’ abandonment of an unused right-of-way or outright purchases are
necessary. Public utility companies like electric, gas, or water also require permits that may
be difficult to obtain.
56 Part II
Arrange financing
Because of the uncertain nature of the timing of the approval process, the Land Packagers
need to control the property for an indeterminate time, so the payment of regular debt
payments is problematic. Consequently, Land Packagers should finance the required expen-
ditures with equity, or perhaps partnership loans from the equity partners; of course, this is
where seller financing can be so important. Also, option agreements or sales contracts
are ways to control the property without putting too much cash into the property. Extension
provisions in these agreements are essential.
Determine marketing strategies and costs

Land Packagers must promote the conceptual land plan to the general public, concerned
stakeholders, and government officials. However, it is also important to market the
project to potential and specific Land Developers. A marketing strategy should include
general and specific materials that can be presented in person or online, both publicly and
privately. Controlling these costs is paramount. Staging major on-site events is tempting,
but not advised because of Murphy’s Law1 and the possibility of actually increasing public
anxiety.
Create opportunities for Land Developers

The opportunity for Land Developers is to acquire land with an approved land plan that
includes the necessary permits, so that it can be immediately improved with utilities, roads,
and other infrastructure. The Land Developers’ opportunities also include improving market
conditions and favorable financing alternatives.
Land Packaging: controllable costs

Controllable costs are those costs and expenses that Land Packagers can and must control,
or limit to the best of their abilities. Because so many parts of Land Packagers’ environments
are beyond their control, these controllable costs must be identified and quantified prior to
acquisition and then carefully monitored and managed during the packaging process.
Acquisition price and financing expenses

Land Packagers must determine what the investment value of the unimproved and
unpermitted property is, and how it can be acquired and financed. The purchase agreement
should specifically and accurately define the Land Packager’s financial obligations, when
they occur, and how they can be extended if necessary.
Permit and approval fees

While it is difficult to estimate these fees since local authorities can change them, Land
Packagers must make a best guess about what permits and fees are required and how much
they will cost—directly and indirectly. Understanding the historic costs of the required
approvals and permits is important because government agencies seem prone to uniform fee
structures.
Land Packaging 57
Land planner and engineering fees
The land planner and engineering fees can increase quickly if these consultants are not used
efficiently and closely monitored. Fee schedules and the scope of work should be determined
prior to their engagement and invoiced monthly. It is important for the public officials to
recognize that these professionals are expensive and thus cannot be used arbitrarily.
Surveying and title expenses

The surveying and title expenses should be considered in conjunction with the land purchase
agreement. Specifically, the cost of the survey and title expenses could be paid by the seller
or by the buyer, or shared in some equitable manner. These fees can easily get out of control
unless they are closely monitored on a monthly basis. ALTA Surveys2 may not be needed for
the acquisition of the property, but they are probably required for the sale of the property to
Land Developers.
Marketing costs and advertising expenses

The budget for marketing and advertising expenses must be established upfront and closely
monitored. Land Packagers may be tempted to promote and advertise their vision, but the
cash costs or expenditures can easily mount up. This is especially true when developing
videos/virtual tours of the proposed development. This technology is amazing, but expensive.
Land Packaging: major risks

The major risk in the Land Packaging Stage is that Land Developers are not able to
successfully complete the critical Tasks described above in a timely manner. Below is a brief
discussion of these major risks.
Feasibility studies are unfavorable

The costs of undertaking feasibility analysis are great, and the outcomes and conclusions
may be unfavorable. Various feasibility studies were undertaken with the hope of increasing
the property’s value by proving the viability of the future value and changing its current use.
Sometimes the feasibility studies confirm the Land Packager’s worst fears:
• the site is physically unsuitable for development;

• the regulatory environment will not even consider the changes;
• the market for the proposed use does not exist.
Land Packagers need to be realistic and begin their exit strategy.
Expected development costs increase

While there are a myriad of “development costs” (both hard and soft), usually the direct
construction costs of the proposed land development improvements, or the direct cost of the
proposed building development improvements, are the most important. These cost increases
usually occur because of material shortages in the world-wide commodity market, such as
58 Part II
oil, cement, or steel. It is not uncommon for Land Packagers to engage in value engineering
at this preliminary design effort if there are major changes in development costs.
Expected market conditions deteriorate

Unfavorable changes may occur in market conditions. The unfavorable market changes can
be due to national or international conditions—such as a major banking collapse, or from
a dramatic change in the local and regional markets like a major employer leaving town or
shutting down.
Regulatory standards change

While legislative bodies pass laws, every government agency can pass regulations which
have the same effect as laws. Regulations can stop activities like a building moratorium
or redefine the conditions for use changes, such as major infrastructure improvements or
contributions to various governmental programs. Land Packagers must have a keen sense
of the regulatory environments and what new regulations are likely to occur in the future.
Sometimes the good intentions of the regulators are met with strong negative consequences
for developers, and the regulators rescind or modify the regulations. Storm water manage-
ment regulations have changed dramatically over the last 15 years as technologies have
changed, and the public perception of water management ponds have changed as well.
Sometimes, public notions of sustainable development change, which can then result in
regulatory changes.
Capital markets deteriorate

Interest rates may increase, and the availability of capital may decrease. Land Packagers must
look forward to the financial markets that directly affect Land Developers, the Building
Developers, and Building Operators. If Building Operators cannot access the funds to pur-
chase the finished building, then Building Developers cannot borrow the funds to construct
the building, and then Land Developers cannot obtain the financing to construct the horizontal
infrastructure. As a result, the Land Packagers’ plans are put on hold.
Control of the land is lost

Land Packagers can lose control of the land in many ways. They may default on the purchase
agreement or the mortgage loan agreement, or fail to pay an option fee when it is due. If
the Land Packaging process is going well, this is very unfortunate. However, if the Land
Packaging process is going poorly, this may be a way for Land Packagers to get out of their
deal. In any event, pre-arranged agreements should articulate how Land Packagers get out of
the deal without lingering liability exposures.
Obtaining public approvals is denied or delayed

Of course, this is the most devastating end to the Land Packaging process. There are many
reasons for the denial or delay of approvals, so Land Packagers must decide whether to hold
on or get out. Also, the approval may be granted, but with adverse restrictions or onerous
conditions.
Land Packaging 59
Land Packaging is a very long process, during which the market will continue to cycle,
resulting in higher (or lower) development costs. The longer the Land Packaging Stage
takes, the greater the risk of shifts in the market, regulations, and financing options (favorable
or unfavorable).
Case studies of the Land Packaging Stage of development

Several case studies of the Land Packaging Stage of development are presented here
to demonstrate and illustrate many of the discussion points in this chapter. Below are
Land Packaging examples of the Crown Farm in Montgomery County, MD; the Armed
Forces Retirement Home in Northwest Washington, DC.; and Potomac Yard in Northern
Virginia.
Crown Farm @REDM3

Crown Farm is a 182-acre site located in the I-270 Health Sciences Corridor, ten miles
northwest of Washington, DC.4 After owning and operating the land for over 100 years, the
Crown family (Land Banker) decided to sell the property to a partnership of two national
homeowners, KB Homes and Centex (the Partnership) (Land Packager). Exhibit 7.7 shows
the condition of the property when the Crown family and KB/Centex signed the purchase
and sale agreement in 2004.
The purchase and sales agreement provided that the closing was contingent upon the City
of Gaithersburg approving the annexation of the property, as well as approving the master
plan of development, known as the “sketch plan.” The annexation and the sketch plan were
approved by the Gaithersburg City Council in 2006. At that time, closing occurred and the
Partnership financed the acquisition with a loan from Bank of America.
Exhibit 7.7 Crown Farm site photo.

60 Part II
Unfortunately, the economic downturn in 2008, also known as the Great Recession,
delayed the development of the site, and the Partnership declared bankruptcy and lost the
property to a lender consortium led by Bank of America.
More unfortunately, the changing economic conditions and inherent design flaws made
the approved annexation agreement, sketch plan, and schematic development plan unwork-
able in the new market environment. Sunbrook Partners (Land Packager 2, or Repackager)
acquired the property through bankruptcy for $77 million in December 2009. On May 5,
2010, Sunbrook obtained all of the final approvals for the original master plan, and on May
6, 2005, Sunbrook began the Land Packaging process all over again.
Sunbrook obtained the final approvals for the original master plan in case the Repackaging
effort was unsuccessful. There were five major problems that had to be addressed in the
Repackaging process:
1 Changing market conditions and mixed-use complications: The original plan specified
vertically mixed uses whereas multiple-use plans were more efficient and more accept-
able to end users in the market.
2 Multi-builder program and product segmentation: The original plan anticipated KB
Homes and Centex building everything. No outside building developers were consid-
ered, so only KB Homes and Centex products were considered. Utilizing other builders
and products could provide greater specialized expertise and increased variety of
marketable products to adjust to changing market trends.
3 County right-of-way taking: During the KB/Centex ownership and bankruptcy proceed-
ings, Montgomery County re-routed a major highway which would cause a substantial
reduction in the size of the main entrance to Crown Farm. Consequently, the entrance
would need to be re-designed and re-engineered.
4 Design inefficiencies of infrastructure and usable density: The original infrastructure
design used more private and public roads than were necessary to access the building
pads, which unnecessarily increased the cost. Also, the original residential density was
concentrated in one 20-storey tower, which reduced the variety of possible residential
offerings.
5 Preservation of storm water approvals: During the original approval process, the State
of Maryland revised its storm water regulations. Compliance with these new regulations
would ruin the anticipated land plan revision, so Sunbrook vested the approvals under
the previous requirements.
The Repackaging process for Sunbrook was the same as the original approval process, so
Sunbrook faced a very daunting challenge. Briefly, the following steps and approvals were
required before Land Development could begin:
• amend annexation agreement;

• revise sketch plan;
• develop schematic development plan;
• develop infrastructure and final site plans;
• develop final engineering plans;
• finalize development agreements;
• post surety (performance) and financial (payment) bonds;
• construction permits (shovel-ready).
Land Packaging 61
The revised master plan shown in Exhibit 7.8 had the following features that responded to
the new market conditions, as well as the needs of the Land Developers and the eventual
Building Developers:
• Wider range of uses which expanded the types of residential units permitted.
• Consolidation of the neighborhood amenities that allowed for the creation of a
community indoor/outdoor recreational center.
• Relocation of major open spaces to create a town square for better place making.
• Broader range of heights that allowed for buildings of varied heights and lower skyline.
• Commercial core and transit-oriented development that improved infrastructure
efficiencies and accommodated a dedicated transit way.
• Redesigned infrastructure plan that reduced the number of streets and created alleyways.
• Increase in usable density but overall density remained the same by eliminating a
20-storey multi-family tower, thereby allowing four, five-storey buildings.
• Flexibility to reallocate density that allowed for better responsiveness to market
conditions (e.g. two-over-two townhouses, rather than traditional townhouse units).
Repackaging must address the municipality’s pre-conceived idea of what the eventual
development will be. Crown Farm demonstrates the complexities of Land Packaging that are
caused by changing market conditions and inefficient and over-specified master plans. Land
Packaging can be a very long process covering multiple real estate cycles. The Land Packager
must be able to remain flexible in the plan and adjust to the ever-changing market conditions.
This is one example where multiple Land Packagers were required to successfully entitle the
property to move into the Land Development stage. The Crown Farm case is not unique;
master plans are often re-packaged to correct initial design issues or to meet new demands
of the Land and Building Developers and Building Operators.
Exhibit 7.8 Revised master plan.

62 Part II
Armed Forces Retirement Home: multiple jurisdictions and historic
restrictions @REDM5
The Armed Forces Retirement Home (AFRH) case study demonstrates the potentially
exhaustive list of key players and authorities that may regulate a property for development.
It is critical that the Land Packager understands the roles of each, their regulatory authority,
and decipher the powers of control. While some may not have distinct legal authority, they
may have powerful influence, so it is important to invite all potential stakeholders into the
conversation, while balancing the objectives of the Land Packager and development plan.
The Armed Forces Retirement Home is located on 272 acres in northwest Washington
DC, just two miles north of the U.S. Capitol Building, as shown in Exhibits 7.9 and 7.10.
AFRH’s plan was to find a qualified developer to act as the “master developer” for Zones
3 and 4. AFRH expected the master developer to carry the project through the Land Packaging
Stage, Land Development Stage, Building Development Stage, Building Operations Stage,
and Renovation Stage for 60 years, which was the expected term of the land lease given to
the developer. These AFRH assumptions were convenient but wholly unrealistic.
In 2005, the AFRH published a Request for Qualifications (RFQ)6 for interested developers.
In 2006, the AFRH chose three developers to respond to its Request for Proposals (RFP).7
The deadline for submission was June 6, 2006.
The RFP required potential developers to prepare a more detailed development plan that
included the framework infrastructure, a sustainable development that would meet the
USGBC LEED-ND Pilot Program, and a financial offer.
On May 26, 2007, AFRH chose Crescent Resources LLC to be the “preferred developer.”8
The proposed development plan provided for the following uses on the 77-acre site (see
Exhibit 7.11):
• Residential: 2.9 million ft2

• Commercial office space: 1.4 million ft2
• Hotel and meeting facility: 126,000 ft2
• Future hotel expansion: 150,000 ft2
• Neighborhood retail: 214,000 ft2
• Future assisted living: 214,000 ft2
• Open space: 23.4 acres
• Flex space: 500,000 ft2
Crescent Resources quickly learned that both the District of Columbia and the United States
of America claimed authority over the development of the site.
The Federal Government said that it had “total control” of the site’s approval process
because it owned the site, which it purchased from the Riggs family over 100 years ago. The
District of Columbia claimed that it had “total control” of the site because the proposed
development was for use by private citizens and not the U.S. Government. Both the Federal
Government and the District of Columbia had very lengthy and complicated approval
processes.
For example, the Federal Government required input and approvals from the following
stakeholders before a building permit could be issued:
• CFA – Commission of Fine Arts

• NPS – National Park Service
Exhibit 7.9 AFRH vicinity map.
Exhibit 7.10 AFRH site photo.
Exhibit 7.11 AFRH original master plan.
66 Part II
• ACHP – Advisory Council on Historic Preservation
• NCPC – National Capital Planning Commission
• EPA – Environmental Protection Agency
• DOD – Department of Defense
• FEMA – Federal Emergency Management Agency
• US Army Corps of Engineers
• FHA – Federal Highway Administration
Finally, the United States Congress, the House of Representatives and Senate, would vote on
the project.
Similarly, the District of Columbia required input and approvals from the following “local
stakeholders” before final development approval would be granted:
• DCOP – District of Columbia Office of Planning

• SHPO – District of Columbia State Historic Preservation Officer
• DDOT – District of Columbia Depart of Transportation
• District of Columbia of Parks and Recreation
• District of Columbia Council Members
• District of Columbia Deputy Mayor for Planning/Economic Development
• District of Columbia Department of Consumer and Regulatory Affairs
• LSDBE – Local, Small, Disadvantaged Business Enterprises
• HPRB – District of Columbia Historic Preservation Review Board
• WMTA – Washington Metro Transportation Authority
• Community Stakeholders who included the following:
○ ANC – Advisory Neighborhood Commissions
○ AFRH residents
○ Institutional – Washington Hospital Center/Medstar, CNMC, VA Hospital, National
Rehabilitation Center
○ Educational – Howard University, Catholic University, Trinity College
○ Surrounding Community Neighbors
○ UNIC – United Neighborhood Coalition
○ NTHP – National Trust for Historic Places.
Clearly, there were a colossal number of stakeholders involved in the packaging process of
the Armed Forces Retirement Home. Each stakeholder’s input and satisfaction was critical
in order to achieve the necessary approvals. On August 2, 2007, Crescent Resources was
able to negotiate a Memorandum of Understanding (MOU) between the District and Federal
Government that provided that the two governments and their agencies would cooperate so
that the final development plan would be acceptable to the District’s Office of Planning and
the Federal Government’s National Capitol Planning Commission.9
As shown in Exhibits 7.11 and 7.12, the original master plan was systematically modified
throughout the packaging process to gain the approval of all of the various stakeholders. The
uses and density stayed the same, but the roads and lot configurations were modified.
The most significant accomplishments for the master plan approval were the following:
• National Historic Preservation Act (NHPA) Programmatic Agreement

• National Environmental Protection Act (NEPA) Record of Decision
• Stakeholder negotiations involving:
Land Packaging 67
○ adding Irving Street Retail for the DC Office of Planning (DCOP);
○ committing to a shuttle service for the DC Department of Transportation (DDOT);
○ agreeing to a parking compromise with National Capital Planning Commission
(NCPC), the DC Office of Planning (DCOP), and the District Department of
Transportation (DDOT).
Exhibit 7.12 Final master plan.

68 Part II
The final master plan was approved by the National Capital Planning Commission (NCPC)
on July 10, 2008. Because of the Memorandum of Understanding, the DC Office of Planning
agreed to approve the NCPC’s plan if all of the local stakeholders’ approvals were obtained.
This approval process took the Land Packager three years to accomplish, at a cost of over
$3.5 million. The most remarkable part of this packaging process was that just two weeks
after the final approval, the Federal Government unilaterally declared an “impasse” without
any explanation and stopped all communications with the Land Packager.
The moral of the story for Land Packagers is to acquire and maintain clear, legal control
over the site before the packaging process begins. Regardless of the creditworthiness of the
seller, the Land Packager must mitigate against the major risk of losing control of the land.
Potomac Yard: a tale of two municipalities @REDM

In 1996, an international investment banking firm, Lazard Freres (now Lazard, Ltd), acquired
a portfolio of assets from the railroad company, CSX Corporation. One asset was a 369-acre
strip of land in Arlington and Alexandria, Virginia, that was a decommissioned rail yard with
a 600,000 ft2 big-box retail center in the middle of it.10
A Lazard subsidiary, Commonwealth Atlantic Properties (CAP) was tasked with the
overall objective to rezone and master plan the decommissioned rail yard, so it could be sold
to a Land Developer. Unfortunately, Potomac Yard stretched across Arlington County and
the City of Alexandria. Each municipality had a distinct self-image and expectations for the
future development, which were reflected in unique requirements and challenges.
Arlington County envisioned a high-density, mixed-used development (primarily office)
on the 48-acre South Tract and a County Park on the 40-acre North Tract. “New urbanism”
was the term used to describe this transit-oriented development that would be served by a
light rail system.
The City of Alexandria envisioned a low-density, mixed-use development (primarily
residential) on its 212 acres where “neo–traditional neighborhoods” would be served by a
new metro station on the existing heavy rail line.
Each municipality expected about five million square feet of new development in its
portion of Potomac Yard, so the total 300-acre Potomac Yard Project would represent ten
million square feet of new development. Exhibit 7.13 is the overall master plan for the entire
Potomac Yard which shows both the Arlington and Alexandria approved master plans.
Alexandria Potomac Yard

Alexandria City approved the master plan of their portion of Potomac Yard in a Coordinated
Development District (CDD) and accompanying Urban Design Guidelines in October
1999.
Arlington County approved the master plan of their portion of Potomac Yard in a Phased
Development Site Plan (PDSP) and accompanying Urban Design Guidelines in October
2000.
Both municipalities had very complicated master plans because some development
conditions in the Alexandria CDD were tied to the future development of Arlington, and
some development conditions in the Arlington PDSP were tied to the future development in
Alexandria.
The terms and conditions of the approved Alexandria CDD are summarized in
Exhibit 7.14.
Exhibit 7.13 Potomac Yard conceptual master plan.
Exhibit 7.14 Summary of the master plan of the Alexandria portion of Potomac Yard.
70 Part II
Exhibit 7.15 Alexandria land bays.
The Alexandria Potomac Yard was divided into land bays, each with specific land uses
and densities, as shown in Exhibit 7.15. Detailed descriptions and specifications for
each land bay were in the Urban Design Guidelines that were approved with the zoning
ordinance.
The Alexandria portion of the Potomac Yard included four challenging areas, that are
shown on Exhibit 7.16.
First, the Central Operations Facilities and Refueling area was so heavily contaminated
with diesel fuel that a major remediation effort was undertaken to remove all of the contami-
nated soil from the site. Second, the Monroe Avenue bridge, a four-lane, dog-leg structure
carrying US Route 1 and crossing over CSX rail tracks and the WMATA metro lines, needed
to be repaired and expanded or replaced with a new, straightened bridge. Third, interim uses
on this area included a GSA warehouse, a rental car facility, and some temporary soccer
fields, which needed to be relocated. Fourth, the biggest hurdle was the construction of a
two-mile trunk sewer line from Potomac Yard through Old Town Alexandria to the water
treatment plant. This sewer would have a capacity of 12 million gallons per day that would
be allocated as follows.
• one third of the sewer capacity was for Potomac Yard;

• one third was for existing sewage users;
• one third was for future development outside of Potomac Yard.
The final site plan would not be approved until the required trunk sewer line was complete.
Land Packaging 71
Exhibit 7.16 Challenging issues in Alexandria.
Arlington Potomac Yard

The Arlington master plan for Potomac Yard is summarized in Exhibit 7.17.
Arlington’s zoning strategy was that the existing or “by-right” zoning density in the
40-acre North Tract would be transferred to the 48-acre South Tract when the North Tract
ownership was transferred, free and clear of all encumbrances, to Arlington County.
Exhibit 7.17 Summary of the Arlington master plan for Potomac Yard.

72 Part II
Exhibit 7.18 Arlington land bays in Potomac Yard.
Similar to the Alexandria portion, the Arlington portion of Potomac Yard was divided into
land bays, each with specific land uses and densities, as shown in Exhibit 7.18. Also, detailed
descriptions and specifications for each land bay were in the Urban Design Guidelines that
were approved with the zoning ordinance.
The North Tract, as shown in Exhibit 7.19, is a 40-acre tract of ground, separated from the
South Tract by Crystal City, a ten million square foot office development constructed in
the 1970s by the Charles E. Smith Company. The North Tract was part of the early rail yard,
but for the last 75 years, it has been used for outside storage and industrial activities, causing
a serious land contamination issue. The railroad tracks were removed as part of the decom-
missioning, but several one-storey industrial buildings were left intact and rented for interim
income. This valuable piece of ground was bordered by the Potomac River, the Interstate
Highway 395, the Pentagon, and Crystal City. The Washington Monument can be seen in the
background. Arlington County planned to convert this area to recreational park area when it
obtained the free and clear ownership.
Arlington’s precondition for development that the North Tract be transferred to Arlington
County free of all encumbrances, included the National Environmental Policy Act (NEPA)
litigation that was initiated by the Charles E. Smith Company. This lawsuit was baseless, but
it could delay the development of Potomac Yard. Delaying the development of Potomac
Yard office projects was critically important to the Charles E. Smith Company, who had just
lost three million ft2 of US Government tenants, who had moved their offices to Alexandria
Land Packaging 73
Exhibit 7.19 North Tract portion of Potomac Yard.
and Washington, DC. The vacancy rate at Crystal City was 30%. The Smith Company hoped
to delay Potomac Yard so it had more time to re-lease its vacant space before getting new
competition.
This is a great example of the importance of community stakeholders in the real estate
packaging process. By convincing Arlington to include the “free and clear” language, the
Smith Company was able to postpone and delay the transfer of North Tract Development
Rights to the South Tract and thereby restrict future competition; at least temporarily.
This lawsuit was eventually dropped, and Crescent Resources (Land Developer) trans-
ferred the North Tract (free and clear) and consequently had the development rights
transferred to the South Tract.
From Land Packaging to Land Development

In late 1999, the Land Packager (CAP) began marketing the Potomac Yard property, along
with multiple other assets, to qualified Land Developers that it screened through a series of
interviews. CAP solicited bids on the entire portfolio from 28 qualified Land Development
teams. After receiving the first round of bids, it was obvious that the valuation of the non-real
estate assets was very problematic. CAP then requested a second round of bids for the
acquisition of only the real estate assets. Again, after reviewing these bids, CAP felt that
74 Part II
the existing retail shopping center and the vacant land outside of Potomac Yard confused the
prospective Land Developers. Finally, a third round of bids was solicited for only the vacant
land that was part of the Potomac Yard master plan for Arlington and Alexandria.
Cabin Mountain Land @REDM11

In this case, the Land Packager has submitted a Letter of Intent to purchase 1,348 acres
in Tucker County, West Virginia, for the potential development of a resort and residential
community. The LOI outlines a payment of $50,000 to the seller to allow for a 180-day due
diligence period, in which the Land Packager may perform site and market feasibility studies
and review any potential title issues. If the Land Packager decides that the development is
not feasible during that time they may walk away from the deal without any further financial
obligations or losses.
However, if the Land Packager then decides to proceed after this option period, they have
also included other conditions to close, to mitigate potential risk. One of three conditions
to close is the successful rezoning of the property to allow for the desired uses of the Land
Packager. If the Land Packager is unable to complete this critical Task, then the condition
to close is not met and they will not be obligated to purchase the property; i.e. pay the total
purchase price.
Finally, the purchase price includes a base purchase price of $20,000 per acre plus an earn
out provision of 10% of annual net profit from lot sales. This is an example of a mechanism
the Land Packager may use to control the acquisition cost, as well as the Land Banker
sharing in some of the entitlement risk for the potential of increased revenues from the sale
of the land.
Summary
The Land Packaging stage of the Real Estate Development Process interacts directly with
three other stages of development—Land Banking, Property Redevelopment, and Land
Development—and indirectly and dramatically affects the other three stages of develop-
ment. Land Packagers should be the visionaries that can see a development plan before it
exists. Land Packagers should also be skilled political operatives who understand the
approval and permitting process, and they also should be brilliant market forecasters.
Often, Land Packaging is overlooked as a separate Stage of development, but it has the
greatest chance of creating incredible increases in the financial value of the property.
Unfortunately, Land Packaging also has the greatest risk of failure. This is a very challenging
Stage of development and requires an experienced, skilled, and multidisciplinary team.
The case studies demonstrate some the significant risks of the Land Packaging Stage.
Crown Farm shows how the Land Packager can lose the property when the market dramati-
cally changes, while the Armed Forces Retirement Home shows how various levels of
governments can claim control over the property. It also shows how the Land Packager
can lose control of the property by not having secure contractual agreements. Potomac Yard
illustrates the Land Packaging challenges that occur when the property lies in two separate
political jurisdictions. Finally, the Cabin Mountain Land case demonstrates a Land Packager’s
attempt to control a property throughout the permitting and approval process through a series
of closings.
Land Packaging 75
Notes
1 Murphy’s Law is an old adage that is usually stated, “Anything that can go wrong, will go wrong.”
2 ALTA Surveys are the Cadillac of boundary surveys. They are more accurate, more detailed,
and extensive than ordinary boundary surveys. A more complete discussion of Alta Surveys can
be found at: http://info.courthousedirect.com/blog/bid/323492/what-s-the-difference-between-an-
alta-acsm-land-title-survey-and-a-boundary-survey
3 http://realestatedevelopmentmatrix.com/textbook/res/South+Tryon+Assemblage+I.pdf
4 http://www.gaithersburghistory.com/crown-farm.html
5 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage2/Armed+Forces+Retirement+
Home.pdf
6 To respond to the RFQ, potential developers had to assemble a team, determine a strategy to
“protect, preserve, and enhance” the unique AFRH assets, submit a vision for the site, and explain
how the development would generate revenue to assist the AFRH to care for current and future
residents.
7 http://realestatedevelopmentmatrix.com/textbook/res/AFRH+press+release+June+14+06.pdf The
RFP required potential developers to prepare a more detailed development plan that included
the framework infrastructure, a sustainable development that would meet the USGBC LEED-ND
Pilot Program, and a financial offer.
8 http://realestatedevelopmentmatrix.com/textbook/res/afrh_press_release_03.26.07.pdf
9 http://realestatedevelopmentmatrix.com/textbook/res/afrh_mou_dc_and_usa.pdf
10 A Brief History of Potomac Yard:
1905: Richmond Fredericksburg and Potomac Railroad (RF&P) opens tracks and station
1906–1980: RF&P Rail switching yard
1975: Four Mile Run Flood Control Channel completed by US Army Corps of Engineers
1987: Site identified as toxic waste site because of diesel fuel contamination in Central
Operations area
1989: Rail yard decommissioned by CSX
1995: Redskins Stadium proposal denied, retail shopping center approved in center of site
1996: Big box shopping center constructed
1996: Acquired by Lazard Freres (now Lazard Ltd)
1999: Alexandria Coordinated Development District (CDD) Approved
2000: Completed soil remediation project in Central Operating Area
2000: Arlington Phased Development Site Plan (PDSP) Approved
March 22, 2001: Acquired by Crescent Resources, LLC
11 http://realestatedevelopmentmatrix.com/textbook/res/9-4-07Letter_IntentCabin+Mountainclean.pdf
8 Land Development
INTRODUCTION
Land Development is the third stage of the seven-Stage Real Estate Development Process
(see Exhibit 8.1). The general public considers this Stage of development as “real develop-
ment” since it requires the construction of the “horizontal infrastructure,” which includes
the roads, storm sewers, sanitary sewers, utility lines, and so forth. Land development also
includes common area improvements such as water retention ponds, parks, and other recrea-
tional areas. These observable activities give the neighbors and community a sense that
something is really happening on the property. This can be good or bad, depending on the
developer’s relationship with the many stakeholders in the project.
The Land Development Stage is unique in the Real Estate Development Process because
Land Developers usually sell their finished lots to several Building Developers, rather than
a single buyer.
Schematic diagram
Land Developers acquire the property from Land Packagers (see Exhibit 8.2), construct the
horizontal infrastructure, and then sell the finished lots or building pads to one or more

Land Development 77
Exhibit 8.2 Land Development Schematic diagram.
Building Developers. Of course, Land Developers may decide to continue on to the next
phase of development and do the “vertical construction” or Building Development.
Hopefully, Land Developers know that Building Development requires sets of skills, risks,
and Tasks that are very different from Land Development.
Box diagram
The box diagram in Exhibit 8.3 graphically illustrates the old adage: “The developer always
buys one thing and sells another.” In this case, Land Developers acquire land with proper
zoning for the proposed uses, a concept master plan, some necessary approvals, and some
feasibility studies already performed. Land Developers then construct the infrastructure
improvements to the site to create the economic opportunities for Building Developers.
78 Part II
Exhibit 8.3 Land Development Box diagram.
Land Developers sell building-ready (or shovel-ready) pads, sites, lots, or land bays to one
or more Building Developers.
What does “building ready” or “shovel ready” mean? These terms usually mean that
the building pad or sites have proper zoning, approvals, and construction permits for the
proposed building, as well as direct access to basic utilities such as water, sewers, and power;
that is, the utility lines are constructed to the edge of the site pad. The building sites also
have access to the roads that connect the sites to the major off-site public roads. The exact
definition of “building-ready” is flexible and may change depending on the contractual terms
and conditions agreed upon by the Land Developers and the Building Developers.
Venn diagram
The Venn Diagram (Exhibit 8.4) shows that the Stages of development are not clearly
defined, so that the Land Development activities may include Tasks usually undertaken by
Exhibit 8.4 Land Development Venn diagram.

Land Development 79
the Building Developer or those sometimes done by the Land Packager. For example, while
Land Developers usually addresses the soil contamination issues, Land Packagers may do
the remediation as a way to reduce the Land Developer’s risk and increase the price that
Land Developers are willing to pay. Along the same lines, Land Developers may do additional
site preparation or foundation excavation for Building Developers, to reduce site issues such
as rock formations or difficult soil conditions.
Circle diagram
The circle diagram (Exhibit 8.5) shows how Land Developers relate to Land Packagers and
Building Developers in the larger circle of the Real Estate Development Process.
Land Development: what happens

Land Developers buy the property with the paper enhancements1 (land with a plan) from
Land Packagers and then improve the land with the horizontal infrastructure and common
area improvements so it can be sold as finished building pads to one or more Building
Developers. A good example of a Land Developer is an industrial park developer who
Exhibit 8.5 Land Development Circle diagram.

80 Part II
constructs the road, utilities, and storm water management ponds and then sells the building
pads to Building Developers who construct warehouses or industrial facilities. Another
of example of a Land Developer would be a master-planned community developer who
constructs the roads, utilities, and recreational facilities and sells the building lots to home
builders.
Land development companies may be road building companies, excavation companies, or
utility companies. Other land development companies would include home building compa-
nies that want to develop their own inventory of lots. The major risks they face are cost
over-runs, major construction delays, and changing market conditions.
The land development business is a “beat the clock” enterprise. As soon as Land Developers
acquire the property, they must start construction and bring the finished lots to market accord-
ing to their schedules. Not only are Land Developers accruing interest on their construction
loans, but they are also taking the risk that the existing market conditions may deteriorate,
which would extend the contemplated sell-out period.2
Land Developers typically use equity capital to acquire the land and then use a short-term
construction loan with variable and accruing interest to fund the necessary horizontal improve-
ments. A critical provision in the construction mortgage are the provisions that allow Land
Developers to remove the “sold lots” as collateral, so they can be conveyed lien-free to the
Building Developers; these are commonly referred to as release provisions.3
Exhibit 8.6 shows that the input costs (acquisition costs, net holding costs, land develop-
ment costs, and marketing expenses) must be less than the sales price to the Building
Developers. The difference between the cost and the sales price is known as the “spread.”
Economists call this the “profit” earned in this stage. The expected profit needs to be large
enough to compensate the Land Developer for taking the risks in this stage of development. If
the tract of land to be developed is very large, the developer will need to break down the
development into phases so that the market is not over-supplied or saturated with building lots.
This would increase the eventual sell-out period and increase the risk to the Land Developer,
unless the Land Developer can arrange for the Land Packager to hold the undeveloped land
until the market is ready for it.
Ironically, the U.S. Internal Revenue Service classifies the profit that Land Developers
earn as “ordinary income” rather than “capital gains,” because Land Developers are considered
“dealers” for income tax purposes. Land Developers are special people in the eyes of the IRS.
Land Development: key players

Land Developers recognize that there are several key players who are instrumental to their
success in this phase of the development process. Some of these players are listed as follows:
Exhibit 8.6 Land Development equation.

Land Development 81
The existing land owner
The existing land owner may be the Land Banker, or more likely the Land Packager, and
must have control of the land and be willing to undergo improvements to it. The existing
land owners may be willing to sell the land to the Land Developer on an “as-needed” basis,
or by phases with attractive takedown provisions.4 Also, the existing land owner may be
willing to finance the land acquisition with a purchase-money mortgage5 that is subordinate
to the Land Developer’s construction loan. In this case, release provisions6 would be included
in the mortgage agreement, so Land Developers could sell the building lots debt-free (or
unencumbered) to Building Developers.
The state Department of Transportation, and the municipal department or

public works
These departments have jurisdiction over the road design requirements and the permits
needed to construct the roads according to approved plans. Their cooperation and timeliness
is critical for the Land Developer’s success. Many times, there are overlapping jurisdictions
so that Land Developers may need to meet the construction specifications of local and state
jurisdictions.
Local utility companies

Local utility companies include electric, gas, and water companies, as well as sanitary water
treatment authorities and communication companies. The timely and coordinated construc-
tion of these utilities is a key component of land development. Good working relations with
these utilities are imperative for successful land development.
The U.S. Environmental Protection Agency and the Army Corps of Engineers
The U.S. Environmental Protection Agency and its designee the Army Corps of Engineers
have jurisdiction over the “Waters of the United States,” which are commonly referred to as
wetlands. Successful Land Developers must comply with all of these regulations and obtain
the necessary approvals before beginning construction. These regulations are always being
modified, usually because of federal court decisions, so compliance may be difficult. Most
importantly, Land Developers don’t want to fight with these agencies because of the lengthy
delays that are involved.
Environmental engineers and experts

Environmental engineers and experts are critically important in determining what the environ-
mental consequences of the development are, and how these consequences can be anticipated,
monitored, and managed. Environmental plans are formulated prior to any construction and
these approved plans must be implemented and documented during construction.

The adjacent land owners will be the ones most impacted by the noise, dust, and possible
water run-off caused by the infrastructure construction activities. Invariably, there will be
82 Part II
ingress and egress issues, as well as discussions about the location of all staging activities.
The cooperation of adjacent land owners is imperative, so Land Developers should be
proactive in gaining their support and cooperation.
Every time land is developed, neighborhood anxiety increases because of the uncertain
long-term effects and consequences of the development. Successful Land Developers manage
the community’s expectations, both positive and negative. A neighborhood outreach strategy
includes meetings, printed information, websites, and news articles about the land develop-
ment activities, as well as the eventual use and operation of the property. The Land Development
Stage is probably the most publicly controversial part of the Real Estate Development Process
because in the eyes of the stakeholders, “Something is really happening!”
Civil engineers, surveyors, land planners, and landscape architects

These professionals ensure that improvements are built according to the master plan and in
the correct location at the correct elevation. Consequently, they are involved throughout the
construction period. Inaccurate or sloppy workmanship can be disastrous. Land Developers
must bring qualified and experienced professionals to the team so that the public and the
future land users can be confident that the land development improvements are built in
accordance with the approved plans and specifications.
General contractors
The general contractor and major subcontractors are needed to build the horizontal infra-
structure improvements on time and on budget. The contractor agreement needs to provide
for unexpected soil conditions, weather delays, and changes mandated by permitting author-
ities during construction. An inspection protocol must be established before, during, and
after construction.
Equity capital partners

Land Developers’ equity capital partners typically provide the money to acquire the land and
to fund any costs that are not funded by the construction loan. The equity capital partners
may also be instrumental in providing financial guarantees and bonds that are required by
government authorities and construction lenders.
Construction lenders
The construction lenders provide funds for certain improvements as they are built and
inspected. The construction loan is usually for a short period of time (24 to 48 months)
and with a variable interest rate that accrues during the loan period. Land Developers must
submit monthly draw requests to the construction lenders that are accurate and well docu-
mented. A good working relationship with the construction lender is imperative for success.
A critical part of the construction loan agreement is the provision to release the individual
building lots as collateral for the mortgage agreement. Thus, the Land Developers can sell
the unencumbered lots to Building Developers.
Land Development 83
Building Developers (buyers)
The Land Developer’s best friends are the Building Developers who will purchase the
finished building lots. Typically, the Land Developers and Building Developers have a
history of working together, so the details of the post-closing land developments can be
reasonably negotiated. Land Developers are successful when they manage to create profitable
opportunities for Building Developers. Because there may be several Building Developers
in a land development project, it is critical that Land Developers establish guidelines and
agreements that foster cooperation among the Building Developers, rather than cut-throat
competition.
To avoid ruinous competition, Building Developers who are successful bidders may want
the Land Developers to give post-closing guarantees that additional lots sales will be delayed
for a period of time until a certain level of leasing has been achieved by the Building
Developers. They may also ask for a first right of refusal, or the first right of offer, when
additional lots are brought to the market.
Land Development: critical Tasks

The critical Tasks in the Land Development Stage are as follows:
Obtain specific public approvals and permits

The public approvals and permits for the Land Development Stage are probably the most dif-
ficult to obtain. Approvals are needed at all levels of government—especially since the U.S.
Environmental Protection Agency is claiming sovereignty of virtually “all waters of the
United States.” This means that the U.S. Army Corps of Engineers/the state-level Departments
of Environmental Protection must approve the land development plans. Also, the overlapping
jurisdiction between state-level highway departments and municipal-level public works
departments make their joint approvals extremely difficult to obtain. In addition, regional
water and sewer authorities, as well as regional transportation and transit authorities, can have
multiple agendas that make obtaining permits very challenging. Moreover, construction
permits usually require Land Developers to post surety bonds7 and performance bonds.8
Negotiate various contracts within budget

Land Developers must arrange construction contracts with a general contractor and subcon-
tractors that are within the development budget. The Land Developer may have several
general contractors for the multiple projects that are required, such as storm water manage-
ment ponds construction, road and bridge construction, public parks and recreation areas,
off-site utility construction projects, and traffic control systems.
Stage, manage, and control development projects on time and on budget

The most important Task for Land Developers is to stage, manage, and control the construc-
tion of the multiple projects on schedule and on or under budget. Once construction has
begun, it is imperative that all of the necessary materials are on-site when needed, subcon-
tractors are available on schedule, and the required inspections are made in a timely manner.
Delays of any kind cost money and are almost impossible to make up later in the process.
84 Part II
Obtain and close sales contracts
During construction, Land Developers must market to, contract with, and sell to Building
Developers so that the finished lots can be sold within the projected sell-out period. Most
likely, Land Developers will sell to multiple Building Developers, and each one will have
specific timing and accessibility requirements. Without these sales, the Land Developer is
out of business. These sales become especially difficult if the potential Building Developers
compete with each other or if there are multiple uses in the project, such as residential and
commercial projects.
Negotiate development agreements with Building Developers

Often, Building Developers will want to close the sale and start construction before the land
development is complete. Therefore, the sales contracts will specify the following post-
closing provisions which are called Development Agreements:
• exactly what land development projects will be done after closing;

• exactly when the projects will be completed after closing;
• exactly what the penalties and cure provisions are if the Land Developers cannot fulfill
their post-closing obligations.
Create opportunities for Building Developers

In essence, the Land Developer must create attractive business opportunities for Building
Developers. The land development projects must provide an exciting environment for the
future building users, so that Building Developers can’t wait to buy the building-ready lots
and start the construction of the buildings.
Land Development: controllable costs

Controllable costs are costs or expenses that Land Developers can and must control or limit
to the best of their abilities. These costs must be identified and quantified prior to land
acquisition and then carefully monitored and managed during the Land Development Stage.
Acquisition costs
Land Developers must determine the maximum price they can pay for the acquisition of the
“land with a plan” and negotiate a price and terms within that maximum price objective.
Over-paying for land puts Land Developers in a hole that is difficult to dig out of!
Large land acquisitions may need cooperation from the seller so that the land can be
purchased in stages over time. A successful first phase of land development will increase the
value of subsequent phases so that Land Developers are in a position to acquire the more
valuable future phases at attractive prices.
Construction costs
Land Developers need an accurate construction budget and must negotiate contracts with
the various contractors/subcontractors within that budget. Because of the uncertainty of the
Land Development 85
actual soil conditions encountered and weather conditions experienced, contingency reserves9
should be established in the budget. The construction costs will determine the amount and
timing of the expenditures, as well as the amount of the required construction loan draws
and the accrued interest.
Permit and approval fees

The fees for approvals/permits should be known and included in the land development
budget. These fees can change administratively at any point depending on the local authori-
ties. There may also be expenses associated with obtaining those fees and permits, such as
design work, printing costs, editorial revisions, and so forth. Land Developers should know
the cost of permits and approvals that were granted to other Land Developers. These costs
and fees set precedents that government authorities usually respect.
Marketing expenses
Marketing expenses include the advertising and promotion of the project in order to sell
finished lots to Building Developers, as well as to build support for the project within the
community. Sales commissions for outside real estate brokers, as well the in-house sales
staff must also be included in this budget.
Holding costs
Holding costs include real estate taxes, insurance premiums, and office overheads. Operating
costs and income from interim land uses should also be included in these costs.
Construction financing
Construction loans usually have variable interest rates with the interest accruing during the
loan term. Construction lenders may also charge front-end fees or “points” to Land Developers,
which raise the cost of the borrowed capital. Construction loans work on a “draw” system that
requires the Land Developers to prove that work is being done according to the plans and
specification before the requested funds are disbursed by the lender. Accordingly, Land
Developers must provide documented proof of inspections that confirm the correct construc-
tion. This is a little tricky if the improvements are underground or beneath road beds.
Understanding and complying with the draw system will reduce the time needed to obtain the
construction funds.
Land Development: major risks
Delays in obtaining permits and approvals

The public sector is not as time-conscious as the Land Developer, so the approval and
permitting periods may take longer than expected, especially if the developer is not knowl-
edgeable about the process or the proposed project has some exceptional or controversial
features. Successful Land Developers know that “time wounds all deals,” so they must press
for the timely approvals without alienating or angering the governmental authorities.
Diplomacy is critical.
86 Part II
Unfortunately, some jurisdictions use the permitting process as an opportunity to re-
negotiate the terms and conditions for the approvals.
Delays in completion of improvements

The timely staging of the materials and crews is extremely vital to maintaining the projected
schedule. Also, the world-wide commodity markets for oil, cement, and steel can affect
the availability of construction materials while local construction activities can affect the
availability of workers and equipment. Because of such delays, the work simply does not get
done on time, and it is virtually impossible to make up for these delays.
Because Land Development is mostly an “outside sport,” adverse weather conditions
must be respected and considered in the construction schedule.
Cost over-runs
The major risk of cost over-runs is that the budgeted funds are not sufficient to cover unfore-
seen costs due to changes in the price of materials or labor. Higher costs will lead to lower
returns. Land Developers would like to put the risk of higher costs on the contractor’s
shoulders, but in return the contractors will charge a higher price for taking those risks. For
example, if the construction does not begin for 12 months, the price of building materials
may change dramatically, which in turn would dramatically affect the agreed upon develop-
ment budget and contracts. Land Developers and contractors could agree upon a price index
to adjust the pricing of the project.
Poor quality of improvements

Both the poor quality of the material, and the poor quality of the workmanship, can lead to
poor quality improvements. From the very beginning of the project, Land Developers must
insist that the material and the workmanship meet the highest standards. The major risk is
that the low quality is not discovered until the improvements have been constructed or
installed. When this happens, the improvements must be dug up, torn down, or removed and
replaced. This results in serious delays, as well as cost over-runs. Unsuitable soil conditions
are often the culprit for the faulty installation of horizontal improvements, which results in
settling problems. Soils must constantly be tested, and if they are not suitable they need to
be removed and replaced with appropriate aggregate material.
Unexpected soil conditions

The most elaborate geotechnical studies rely on a sampling of soil borings; this is an
imperfect science at best. The occurrence of unexpected rock formations or the existence
of unsuitable soil can affect the feasibility of constructing the land improvements and may
require them to be redesigned or re-engineered. In any event, this means delays and additional
costs.
Deteriorating market conditions

These negative market changes could be caused by national or international forces like the
collapse of the banking system, or they could be caused by local or regional forces such as
Land Development 87
the loss of a major employer. For Land Developers, these negative events result in longer
sell-out periods, may stall work completely, or may require a major shift in the master plan.
Downward shifts in the marketplace will cause a reduced demand by the end users of the
building, thereby decreasing the attractiveness of the building-ready pads to the Building
Developer. Land Developers must have a keen understanding of the market conditions of the
end users to be sure that Building Developers are willing to buy the land parcels they are
preparing.
Lower sales prices or higher cost of sales

The deteriorating market conditions will lower the demand for the building lots and the
prices that can be charged. Consequently, an abundance of competing land development
projects will force the sales prices lower and/or cause Land Developers to increase incentives
or inducements for the Building Developers to purchase the land. Lower prices and more
generous terms can ruin the profitability of a land development project. However, the slower
rate of sales, such as a six-year sell-out rather than a three-year sell-out period, can be equally
ruinous even if the target sales prices are achieved.
Unexpected environmental conditions

Unexpected environmental conditions can occur in the soil or may occur above ground. The
discovery of an old and undocumented oil spill or a dump site may create unexpected
costs or limit the feasibility of the development plans. Also, the discovery of endangered
animals or plant species may force the revision of such plans. Finally, floods or storms may
cause unworkable conditions. Land development is an outdoor sport!
Previously unknown but newly discovered grave or burial sites are incredibly difficult to
deal with. Approvals to remove the graves take extended periods to process and often the
approvals are never obtained. These kinds of archeological problems should be addressed
during the due diligence period prior to purchasing the site, but sometimes they are overlooked
or under appreciated.
Case studies of the Land Development Stage

Several case studies of the Land Development Stage of the Real Estate Development
Process are presented here to demonstrate and illustrate many of the discussion points in this
chapter. The examples below are a continuation of the Crown Farm and the Potomac Yard
developments that were discussed in the previous chapters.
Crown Farm scenario @REDM10
Crown Farm land development: Phase I

This case study focuses on the importance of phasing and how the sale of bays to building
developers creates the economic opportunity for the Land Developer.
The 182-acre Crown Farm property was purchased by Sunbrook Partners, a Land
Development company, out of bankruptcy from a consortium of lenders headed by Bank of
America for $77 million in 2010 (see Exhibit 8.7). Unfortunately, the approved master plan
88 Part II
Exhibit 8.7 Crown Farm aerial photo.
was not feasible for several design and market conditions, so Sunbrook had to “re-package”
the property by revising both the annexation agreement and the master plan with the City of
Gaithersburg. The revised overall master plan is shown below in Exhibit 8.8 and Phase I of
the revised master plan with illustrations is shown in Exhibit 8.9.
Exhibit 8.8 Revised overall master plan.

Land Development 89
Exhibit 8.9 Phase I of revised master plan.
As the Land Developer, Sunbrook’s goal was to construct the horizontal improvements, or
infrastructure, and then to sell the finished building sites to Building Developers. While the
overall infrastructure budget was $90 million, $50 million was allocated to the construction
of the Phase I improvements which included:
• major roads;
• retaining walls;
• storm water management ponds;
• wet utilities (water, storm water, and sanitary sewer lines);
• dry utilities (gas, electric, telecommunications lines).
The major Phase I infrastructure improvements are shown on Exhibit 8.10.
Phasing strategy
As you can see in Exhibit 8.11, the developable area was divided into three phases. Each
phase would bring additional building sites and uses to the market as the infrastructure was
expanded. Proper phasing for any Land Development Stage is critical for market absorption
of the finished lots and managing the capital financing needs of the improvements.
Exhibit 8.12 shows the major public roadways that the Land Developers constructed to
provide initial access to the land bays so that they could be sold to the Building Developers;
additional smaller roads were also added.
During Phase I construction, Sunbrook was able to sell all of the Phase I building pads to
various Building Developers who specialized in each product type. The retail pads (260,000 ft2)
were sold to JBGR, a retail Building Developer; the multi-family pads (537 units) were
sold to Bozzuto, a large local apartment builder; and the single family residential lots
were sold to numerous home builders including Ryland, Pulte, KB Homes, M.I. Homes, and
90 Part II
Exhibit 8.10 Major infrastructure improvements.
Wormald Homes. The purchase and sale agreements for all buyers included an “all-at-once”
provision that required the Building Developers to construct all of the vertical improve-
ments immediately, rather than to construct them in multiple phases or at independent
times. The purpose of these provisions was to immediately create a sense of place for the
new community and establish “Downtown Crown,” which would be the nexus of the mixed-
use development and serve as the main amenity and incentive for future home builders
on Phases II and III. The sale of the Phase I lots created the market demand for the continu-
ation of Phases II and III and provided the capital for the additional land development in
those areas.
Sunbrook completed the Phase I infrastructure improvements of the Land Development
Stage in 2014, on time and on budget! Phase II and III infrastructure construction began in
2015. In summary, Sunbrook acquired Crown Farm for $77 million. The total expected land
sales were $300 million and the expected development costs were $90 million. The potential
land sale value demonstrates the potential value created in the Land Development Stage by
constructing infrastructure improvements and creating prepared land bays for Building
Developers.
Land Development 91
Exhibit 8.11 Overall road system.
Potomac Yard land development: a tale of two municipalities @REDM11

This is a continuation of the Potomac Yard case study that was introduced and discussed in
Chapter 7 as an example of the Land Packaging Stage of the Real Estate Development Process.
This chapter focuses on Potomac Yard as an example of the Land Development Stage. Crescent
Resources, the Land Developer, acquired the 300-acre property on March 22, 2001, from
Commonwealth Atlantic Properties, the Land Packager, for $122 million by trading 16 “1031
properties.”
As shown in Exhibit 8.13, Potomac Yard is divided by Four Mile Run stream into an
88-acre Arlington County portion to the north, and a 212-acre City of Alexandria portion to
92 Part II
Exhibit 8.12 Phase I road construction.
the south. Consequently, the Land Development Stage is controlled by two master plan
ordinances: Arlington’s Phased Development Site Plan (PDSP) and Alexandria’s Coordinate
Development District (CDD). Both ordinances had accompanying Urban Design Guidelines,
which provided detailed description and specifications of the allowable improvements.
Alexandria Potomac Yard land development

Alexandria’s CDD provided that a two-mile long trunk sewer line had to constructed and
completed before any individual site plan would be approved. Alexandria’s motivation for
making the trunk sewer a pre-condition for development approval was caused by the capacity
Land Development 93
Exhibit 8.13 Potomac Yard conceptual master plan.
limitation and condition of the existing sewer system. In order to solve the existing problems,
as well as to accommodate the future development of Potomac Yard in Alexandria, the trunk
sewer construction became a required first step. Alexandria decided to add another 50% of
capacity to the required sewer capacity just to be safe, as well as exploit the opportunity
of having a private developer do (and pay for) something the City was unable to do.
The CDD conditions also provided for a trenchless installation technology to be used to
dig the sewer line, rather than traditional “open cut” construction methods. The trenchless
installation technology had never been used in an urban area.
The trunk sewer design began June 2001, and in March 2002, permits were issued by the
City of Alexandria, Virginia Department of Health, CSX Transportation, WMATA (Metro),
and Alexandria Sanitation Authority (ASA) in March 2002. The trunk sewer was completed
in June 2003, but the City of Alexandria did not issue a certificate of acceptance until
March 2004.12
Crescent began its trunk sewer effort by completing a feasibility study that reviewed factors
such as geology, groundwater levels, existing utility interference, topography, community
impact, and constructability. It was based on these factors, that the proposed alignment was
selected. Because of the geology and high groundwater levels, an earth-pressure balanced
technique was chosen. This technique maintains a constant pressure by slurry injection to
counteract the earth and water pressures.
Coinciding with the feasibility activities, Crescent implemented an aggressive community
outreach program, which included informational meetings, mailings, web-based updates, a
toll-free hotline to register complaints, and a student mural project. The community outreach
efforts included meetings with over 30 impacted neighborhood associations and 11 business/
civic groups. The result of the extensive community outreach efforts was widespread support
and acceptance of the project.
At the time the Potomac Yard Trunk Sewer Project was constructed, it was the longest
micro-tunnel project in an urban setting.
94 Part II
Exhibit 8.14 Trunk sewer shaft preparation.
The first phase of the project included the installation of the vertical shafts, ranging
between 30–50 feet deep.13 The six-month shaft installation effort included many bouts
with existing unknown utilities, potential archaeological sites, and overhead utility lines.
Exhibits 8.14, 8.15 and 8.16 show the installation of the vertical shafts into pre-drilled
holes. The larger shafts in Exhibit 8.15 contained the drilling rigs, and the smaller shafts in
Exhibit 8.16 received the drilled pipes.14
The second critical phase of construction was the installation of the pipe by micro-tunnel.
In order to maintain an aggressive schedule, two—and eventually three—separate tunnel
crews were employed at various locations along the alignment. During the entire process, all
installations were monitored by surveying crews to ensure that no detrimental settling was
experienced.
The completion of the trunk sewer project enabled the sale of Land Bays A and C (Potomac
Greens and Potomac Plaza) to a local townhouse/apartment development partnership, Eakin
Youngentob Associates and Elm Street Development.15
Exhibit 8.15 Trunk sewer shaft installation.

Land Development 95
Exhibit 8.16 Trunk sewer construction.
The remaining parcels of the Alexandria Portion of Potomac Yard were sold without any
further on-site infrastructure improvements to a partnership of Pulte Homes and Centex
Homes, two national real estate homebuilding companies who had limited experience in
urban land development.
In summary, the $12 million trunk sewer project enabled Crescent Resources to sell over
$133 million of land bays in Alexandria. This is a good example of a private Land Developer
constructing a major off-site infrastructure improvement as part of the Land Development
Stage and creating valuable building sites.
It also demonstrates the public nature of real estate development and the importance
of Land Developers working to seek community stakeholder support. Literally hundreds of
thousands of citizens were inconvenienced by this project and did not receive any direct
benefits.
Arlington Potomac Yard land development

In 2002, Crescent realized that the residential markets were much stronger than the office
markets, so it decided to bring the residential land bays in Arlington to the market. This
decision required that the Arlington Infrastructure be constructed as soon as possible.
Design work began in January 2002, and building permits and approvals were issued by
the City of Alexandria, Arlington County, Virginia Department of Health, and the Virginia
Department of Transportation. Construction of the on-site infrastructure commenced in
96 Part II
Exhibit 8.17 Alexandria land sales.
June 2003, with mass grading operations and installation of the deep utilities. It was completed
to base pavement on the roads by September 2005.
As a former river bed, a flood control project, and railroad switching yard, the geotechnical
conditions were most challenging. Tidal flows from the adjacent Four Mile Run stream
dictated work times for the installation of storm sewers.
Many creative geotechnical solutions were implemented to reinforce road subgrades. The
actual construction was monitored and subjected to performance milestones in multiple
development and completion agreements.
The Arlington infrastructure budget was $20 million for the construction of the following
projects:
• 5,000 linear feet of public roads with associated utilities and traffic signals;
• 1,500 linear feet of private roads with wet and dry utilities;
• a sanitary sewer pump station located on Arlington County property with one million
gallons per day capacity. (The pump station included 50% excess capacity for use by
Arlington County.)
In 2003, Crescent elected to market the various land bays as finished (or to be finished)
sites to Building Developers and thus planned to construct the entire infrastructure plan.
A contributing factor to this decision was the overall mass earthwork and soil management
plan.
Ultimate development plans would generate nearly 1.2 million cubic yards of excess
dirt from Arlington, but the Alexandria development would need nearly 650,000 cubic yards
of import to balance. Also, approximately 40,000 tons of contaminated cinder ballast
(discovered on the site after closing) had to be handled as special waste. The Virginia
Waste Disposal Regulations made disposal of the material off-site extremely difficult and
very costly.
Land Development 97
Crescent’s approach to address these soil issues was twofold:
1 Address the soil management issues by creating a Model Soil Management Plan
(SMP). The SMP would establish in-situ soil characterization protocols, earth moving
procedures, daily screening protocols, confirmatory testing protocols, and airborne par-
ticulate monitoring. The SMP was approved by Virginia Department of Environmental
Quality in the summer of 2003. The SMP would later become the framework for several
development agreements and the off-site disposal of the impacted material.
2 Find possible re-use opportunities for cinder ballast.
Exhibit 8.18 shows the Soil Management Plan in action. The soils are tested and characterized
in place before being loaded onto trucks. If they are not contaminated,16 they are hauled to
and dumped in Alexandria. If they are contaminated, they are taken to a dump site in
Arlington.
The photo in Exhibit 8.19 shows the interior road on the right (finished to the base pavement)
and the pile of “impacted soil” in the middle. The top of the photo shows the Arlington
County Waste Water Treatment Plant and existing office buildings on U.S. Route 1. The
required pump station is to be constructed off-site on the Water Treatment Plant property,
and all of the Potomac Yard sewer lines must cross under U.S. Route 1, which was also a
county road known as the Jefferson Davis Highway.
The design and permitting phase posed many challenges, due in part to the fact that the
scope of work straddled county/city boundaries, involved state highways and local streets,
and crossed a federal flood control project, so multiple jurisdictions claimed review and
approval authority.
Exhibit 8.18 Mass Grading in Arlington.

98 Part II
Exhibit 8.19 Arlington infrastructure challenges.
Ultimately, Crescent would obtain approvals from six different agencies:
1 Arlington County;
2 City of Alexandria;
3 Virginia Department of Transportation (VDOT);
4 Virginia Department of Environmental Quality (VDEQ);
5 Virginia Department of Environment and Health (VDEH);
6 The U.S. Army Corp of Engineers.
The Soil Management Plan required all questionable or impacted soil to be removed and
piled up for later removal from the site. Most of this soil was cinder ballast fill (from coal-
fired steam engines) that was contaminated with arsenic; a popular defoliant during the days
of steam engines. This material was eventually delivered to local land fill companies as daily
fill and road construction without any “premium” as contaminated soil.
When the U.S. Army Corp of Engineers dredged and straightened Four Mile Run (1970s),
it dumped the dredged material into an “uncontrolled” fill area. This uncompacted fill caused
several problems in the Land Development Stage. For example, the uncompacted clay soil
held “perched water,” a seam of water held in the soil. Consequently, when the perched water
was excavated, several acres of water would drain immediately into the excavation area.
Exhibit 8.20 shows the track hoe sinking up to its roof (note the driver with the white
hat on top of the roof) and the rescue bulldozer (note the driver running for safety) being
engulfed by soupy clay material as they are swamped, and sink into the muddy excavation.
No one was hurt, and the men and machines were all dragged to safety. Work resumed
Land Development 99
Exhibit 8.20 Perched water problems in Arlington.
the next day with new, long-armed track hoes digging from the safe areas away from the
“perched water area.”
Like the cinder ballast problem, this is a good example of difficult soil conditions caused
by previous land users and not by Mother Nature. Land Developers must be keenly aware of
the historic uses of the site, along with its natural geological conditions. Geotechnical studies
are invaluable to land developers, along with Phase I and Phase II environmental reports.
During the construction of the Arlington infrastructure, Crescent was able to sell Land
Bays B, C, D, E, and F using development agreements that were post-closing obligations
of the Land Developer, in which Crescent agreed to complete certain infrastructure projects
and meet various Arlington PDSP requirements and obligations. The land bay sales are
shown in Exhibit 8.21. The following Building Developers were involved in these Arlington
land bay sales:17
• June 11, 2004: Land Bay D-East was sold to Camden Property Trust, a multi-family
developer and REIT, for $16,427,111.
• October 28, 2004: Land Bays B, C, D-West, and E were sold to Meridian Development,
a mixed-use property developer, for $80 million.
• December 15, 2005: Land Bay F was sold to Comstock Homes, a condominium
developer, for $21.15 million.
The Arlington portion of Potomac Yard is a good example of the Land Developer creating
value by solving the contaminated soil issues and constructing the Arlington infrastructure.
100 Part II
Exhibit 8.21 Land bay sales in Arlington Potomac Yard.
In summary, over five years, the Land Developer purchased the property for $122 million,
constructed the Alexandria trunk sewer for $12 million, constructed the Arlington infra-
structure for $20 million, and incurred $3 million of other costs: totalling $157 million
of costs. The total revenues from land bay sales were $258 million, so the profit (or spread)
was $101 million. This is good example of creating value in the Land Development Stage.
Belgate City infrastructure case study @REDM18

Sometimes, Land Development projects may be required by municipalities or are created in
partnership with the local municipality. One example of this is the Belgate City Infrastructure
project in which the Land Developer (Crescent Resources) participated in a development
agreement with the City of Charlotte to construct roadways and water lines that were
necessary for Crescent’s development plan and desired by the city. By partnering with the
City, the Land Developer was able to benefit from another means of funding (contribution
from the City); however, this did not alleviate the process of approvals from the Department
of Transportation.
Potomac Yard water quality case study @REDM19

One way to mitigate concerns from neighborhood groups is to keep them informed about the
ways in which the Land Developer is limiting the environmental impact of the development
or, hopefully, the ways in which the development is improving their environment. This
case study is a presentation that was made to numerous neighborhood groups and environ-
mental organizations to describe the positive effects of the land development infrastructure
improvements on the water quality of the Potomac River. As part of the land development,
the Land Developer made repairs and improvements on the Arlington and Alexandria
sanitary sewer and waste water systems. Providing presentations to neighborhood groups
Land Development 101
like this one are critical marketing components, since the final visible remnants of most
underground improvements are only small manhole covers, which lack the gravitas to dem-
onstrate the great benefit to the surrounding community.
Summary
Land Developers acquire “land with a plan” from the Land Packager and sell finished build-
ing sites to the Building Developer. In between the land acquisition and the lot sales, Land
Developers must construct the required horizontal infrastructure and the common area
improvements on time and on budget: it’s a beat the clock game. Land Developers must also
sell to multiple Building Developers, who may or may not be competitors. Land Developers
must with also deal with multiple phases of development, as well as numerous post-closing
conditions.
The Crown Farm case study illustrates a multiple-phase land development. The Potomac
Yard case study demonstrates the challenges of off-site infrastructure improvements and dif-
ficult soil conditions. The Belgate City case study shows how a Land Developer and munici-
pality can work together in a private-public partnership to finance and construct mutually
beneficial road improvements. Finally, the Potomac Yard water quality case study shows
how a Land Developer can market the project to community stakeholders to increase public
support.
Notes
1 Paper enhancements refer to the permits and approvals necessary for the Land Developer, as well
as market, environmental, and engineering studies.
2 Sell-out period refers to the length of time it takes for the Land Developer to sell all of the finished
building pads or lots.
3 Release provisions in construction loan documents provide that a lot can be released as mortgage
collateral if the Land Developers pay more than the pro-rata value of the lot. For example, if a lot
represented 10% of the mortgage collateral, it would could be released as mortgage collateral at a
120% release rate if the Land Developer paid off 12% of the loan.
4 Take-down provisions in a land purchase agreement define when and how the land can be purchased
during the contract period. Attractive take-down provisions would enable the land developer to
purchase only part of the property when it was ready for immediate development. The balance of
the property would be purchased at a later date.
5 A purchase-money mortgage is created when the seller provides debt financing to the buyer in the
form of a mortgage note.
6 Release provisions in the purchase-money mortgage provide for the Land Developer (borrower) to
withdraw parcels of ground from the seller’s mortgage collateral or lien.
7 In general, a surety bond is a promise by a guarantor (usually an insurance company) to pay one
party (usually a government agency) a certain amount of money if a second party (usually the real
estate developer) fails to meet a contractual obligation.
8 A performance bond is a type of surety bond used in real estate construction and development.
Many times a land developer will require its road building contractor to post a “bond” that guaran-
tees an amount of money will be paid by the guarantor to finish the project in the event that the
contractor goes bankrupt or otherwise defaults on the agreement and cannot complete the project.
Also, a municipality may require a land developer to post a performance bond to guarantee that the
approved infrastructure will be completed.
9 Contingency reserves are budget lines that are not for specific costs, but rather are for unexpected
items or cost over-runs.
11 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage3/Potomac+Yard.pdf
102 Part II
12 The project was awarded Trenchless Technology’s New Installation of the Year in 2004.
13 The sewer ranges in depth from 22 feet to 42 feet deep below the surface and has approximately
25 feet elevation change between the start and termination point. The system consists of 24 vertical
shafts that range in depth from 30–50 feet.
14 The shafts are connected by 8,643 linear feet of 30-inch Vitrified Clay Pipe and 2,500 linear feet of
27-inch PVC (PolyVinylChloride) pipe.
15 Potomac Properties were two excess parcels of ground (not part of the Potomac Yard CDD) that
were sold to a local retail developer.
16 Soils were deemed contaminated if they contained mineral constituencies above a certain threshold.
17 The Land Developer did not sell Land Bay A because it had decided to undertake the Building
Developer Role after preleasing a substantial amount of office space on Land Bay A.
18 http://realestatedevelopmentmatrix.com/textbook/res/Belgate+City+Infrastructure+Dev+Agr+
5-21-07.pdf
19 http://realestatedevelopmentmatrix.com/textbook/res/potomac_yard_and_the_water_quality_of_
the_potomac_river.pdf
9 Building Development
INTRODUCTION
Building Development is the fourth stage in the Real Estate Development Process,
Exhibit 9.1. Land Development is sometimes referred to as “horizontal development,” and
Building Development is referred to as “vertical development.” Building Developers who
routinely sell their completed buildings are often referred to as “merchant builders.” Home
builders are also good examples of Building Developers.
The building construction part of the Building Development Stage is probably the most
studied and most emphasized part of the Real Estate Development Process in our colleges
and universities, as architects and engineers study the most efficient designs and construc-
tion techniques for the latest technologies, materials, and sustainable standards. Consequently,
today’s building contractors are really good. They are able to estimate costs to the dollar and
schedule time to the day. Building contractors often provide estimating and scheduling
advice as “pre-construction services” to Building Developers, which is invaluable. This
kind of “front-end” analysis helps to keep Building Developers out of “bad projects and
losing deals.”

104 Part II
Schematic diagram
The Building Development Stage is the fourth stage in the overall Real Estate Development
Process as shown in the schematic diagram in Exhibit 9.2. In the Building Development Stage,
the Building Developers buy a building site from Land Developers, construct a building, and
then sell it to Building Operators. Building Developers who continue on to the Building
Operations Stage often face problems as the development enterprise must be recapitalized
with a long-term mortgage. Building Developers soon realize that the critical Tasks and
specialized skills in Building Operations are significantly different than those in Building
Development.
Box diagram
The box diagram in Exhibit 9.3 emphasizes the development rule: “Buy one thing and sell
another.” In this case, the Building Developer buys a building pad (or building-ready site)
Exhibit 9.2 Building Development Schematic diagram.

Building Development 105
Exhibit 9.3 Building Development Box diagram.
from the Land Developer so that all the Building Developer has to do is construct the
building(s) and sell the improved property (land and building(s)) to the Building Operator.
The Building Operator may be an owner-user who occupies the building as part of its overall
business plan, or sometimes the Building Operator may be an investor who leases the
property to third-party users. Of course, the family that buys the new house and makes it
their home is the ultimate owner-user!
Venn diagram
Exhibit 9.4 demonstrates that the Stages of the Real Estate Development Process are not
neatly defined and separated, and that they may overlap to some extent.
This Venn diagram illustrates how the Land Developer may do some of the site prepar-
ation or excavation as a way to entice the Building Developer to purchase the property.
Exhibit 9.4 Building Development Venn diagram.

106 Part II
For example, the Land Developer may grade the site to remove any large surface irregularities
or other conditions that would make a building foundation difficult, or the Land Developer
may actually prepare the site for a parking structure or multi-level parking lot. The Land
Developer may also accept responsibility for difficult or contaminated soil conditions, so the
Building Developer will not be exposed to these risks.
The Building Developer could construct a building for a “build-to-suit” tenant; one who
will occupy and lease the entire property. In this case, the Building Developer will capture
or recognize all of the increased property value by removing the risks associated with leasing
before selling the property to a Building Operator. This is an example of the Building
Developer taking on the leasing task before the Building Operator acquires the property.
However, the Building Operator usually does not have the entire building pre-leased to a
single tenant. More often, the property may be partially pre-leased or not leased at all.
Whoever leases the property removes the occupancy risks and captures the resulting profit
or increased value. Sometimes Building Operators actually seek out properties that are not
leased so that they can capture all of the leasing profit and value increases.
Circle diagram
The circle diagram shown in Exhibit 9.5 show how Building Developers relate to Land
Developers and Building Operators in the great circle of real estate development.
Exhibit 9.5 Building Development Circle diagram.

Building Development: what happens
Building Developers buy the finished pad from Land Developers and then undertake the
vertical development by constructing the building improvements. During construction,
Building Developers may also attempt to lease the building, so the finished building can
be sold to Building Operators. Building Developers who construct an office building and
then sell the finished product—that may or may not be leased—are often called “merchant
builders.” Home builders are another good example of Building Developers.
Exhibit 9.6 is an illustration of the Building Development Equation. That is to say, the
acquisition price, holding costs, hard costs, and soft costs should be less than the sales price
to the Building Operator. The difference between those two values is known as the “spread.”
The spread is the marginal value that is created in this Stage of development. Economists
call this the “profit” earned in this stage. The spread is earned by selling the property at a
Market Capitalization Rate1 that is less than the Building Developer’s Return on Total Cost.2
The typical capitalization of the Building Development Stage involves a short-term
construction loan and equity capital. The construction loan will not cover all of the
development costs so that equity capital is required to pay for the rest of the shortfall.
Building Development: key players
Land Developers
Land Developers need to offer the finished building site to Building Developers at a price
and with terms that are compatible with the Building Developer’s strategy, budget, and
capital expectations. The acquisition needs to be timely and fair to the person who controls
the land. A difficult problem can be the control of future or subsequent site pad purchases.
Building Developers may ask for the first right of refusal, or the right of first offer on future
lot sales. Building Developers may also ask for future lot sales to be restricted to non-
competitors or delayed for a specific time or lease-up period.
Architects
Building Developers must deal with several kinds of architects, such as building architects,
interior architects, and landscape architects. Building architects design the size, shape, and
exterior covering of the building, while interior architects design the inside spaces of the
Exhibit 9.6 Building Development equation.

108 Part II
building such as lobbies, common areas, and tenant finishes. Landscape architects design the
outside areas of the building lot including the roof-top gardens. All of these architects are
important to Building Developers, and very large architectural firms will have all three.
More commonly, the architects will have alliances with other architects with whom they
have worked in the past. Sometimes, a nationally recognized building design architect
will provide conceptual drawings, and the hard work of creating working drawings and
specifications is turned over to the “architect of record,” which is usually a local firm that is
knowledgeable about the local building codes and permitting requirements. All of these
architects should have a keen understanding of green building designs and certification
requirements.
Engineers
Like architects, several kinds of engineers are important to Building Developers. The
two broad engineering categories are structural and mechanical. However, within these
categories, there are several specialties that are used depending on the building design
and location. Some engineers specialize in mechanical, electrical, and plumbing systems; and
others, such as acoustical engineers, focus on particular building issues. Environmental
engineers are hard to categorize, but they are important, too. However, all engineers should
be familiar with the latest green building practices and requirements to achieve a green
certification.
General contractor and major subcontractors

When Building Developers choose a general contractor, they are also choosing, directly or
indirectly, the major subcontractors who will do the majority of the work. Both the general
and major subcontractors need to be experienced and available, and offer competitive
pricing.
Tenants
The tenants, or the end users of the building, are extremely important to Building Developers
as they want to lease the property and consequently receive the maximum value for the
completed property with tenants in place. Even if the building is completely vacant and
unleased, the constructed building must be attractive and serviceable to future tenants
and end users for a successful project.
Leasing and sales agents

Building Developers have two marketing problems: first, to lease the building under con-
struction; and second, to sell the building at the end of the construction period. Leasing
agents who specialize in the appropriate product type (office, retail, industrial, etc.) are criti-
cally important, whether they have leasing agreements with the developer (owner’s agents)
or with the tenants (tenant’s representative). Sales agents are also critically important if the
developer wants to sell the improved property. Again, the sales agents can have agency
agreements with either the owners or the buyers. Building Developers should engage both
leasing and sales agents as soon as they acquire the building pad.
Building inspectors
Building inspectors work directly for the local municipalities, either as employees or inde-
pendent contractors. They perform quality assurance inspections for certifications and
municipal permits. Contractors and Building Developers must work closely with these
inspectors to stay on schedule.
Environmental professionals
Environmental professionals may be architects, engineers, or other professionals who provide
a wide range of services, but in the Building Development Stage they facilitate achieving
green building certificates (LEED or Energy Star). They are also critical in the “commission-
ing3” of the building. Building commissioning is required for LEED Certifications as well as
for many government occupied buildings. Additionally, environmental professionals can guide
and perform environmental remediation efforts, if needed.
The construction lender is a banking specialist who provides the interim construction loan
to fund certain specified improvements. Building Developers must submit a draw request for
funds to the lender that describes the constructed improvements and provides verification
that they have been correctly installed. A knowledgeable and responsive construction lender
is critical for the scheduling and timing of the building construction. Since these draw
requests are usually monthly, a good working relationship with the construction lender is
imperative.
Building operators
Building Developers must maintain good relations with numerous Building Operators so that
a sale of the property can be arranged. Building Developers must understand the strategies,
preferences, and capital capacities of these Building Operators. Ideally, the Building Operators
would be involved throughout the construction period so that the finished building and its
systems are familiar and operating correctly.
Building Development: critical Tasks
Obtain construction permits and approvals

Building Developers seem to complain about this Task the most. Most local governments
have “expediters” or “facilitators” who are invaluable in getting the permits and approval
applications in a timely fashion. Also, the building contractors usually have an excellent
working knowledge of the permitting process and know what is required and who can
approve it. Many times, the municipalities have a series of building permits such as:
• excavation, sheeting and shoring;

• foundation to grade;
• building shell;
• partial occupancy;
• building occupancy.
110 Part II
Negotiate contracts within budget
Building Developers must arrange pricing and contracts with the general contractor that are
within the construction budget. In addition, Building Developers must negotiate contracts
or agreements with all of the other vendors and professionals who are part of the larger
development budget.
Stage, manage, and control construction projects

Building Developers, in conjunction with their project managers, must stage, manage, and
control the construction projects, so they are completed on time and on budget. The myriad
of issues and conflicts that occur every day must be resolved quickly, fairly, and efficiently.
Essentially, the contractors establish their maximum profit when they agree to the price for
the project. Thus, they must work as quickly and efficiently as possible to capture as much
of the profit as they can. This motivation is in contrast to leasing and sales agents, who do
not have profit potential until a prospective buyer or tenant is presented.
Stage, manage, and control the marketing efforts of the leasing and sales agents
The marketing of the building(s) for lease and/or sale occurs during the construction period,
and often conflicts arise between the marketing and the construction teams. Marketing and
construction are equally important, so Building Developers must balance the needs, demands,
and time constraints of both activities. At the beginning of the Building Development Stage,
the construction is more important, and toward the end of the Building Development Stage, the
marketing of the project is more important. These are good problems to have, and a successful
Building Developer will stage, manage, and control both the construction activities and the
marketing activities.
Arrange interim and long-term financing

Sufficient capital—both debt and equity—must be arranged to cover the hard costs, soft
costs, and site acquisition costs. A construction loan is usually obtained from a commercial
bank for the majority of the hard or direct construction costs. Often, the construction loan
will cover some of the soft costs and land costs, but not all of them. While the building con-
struction period is known, the lease-up period and eventual sale of the property is uncertain.
Consequently, the construction loan should have pre-arranged extension periods.
Sometimes a long-term loan is arranged to pay off (or take out) the short-term loans if the
Building Developer’s ownership continues for longer than the specified construction and
lease-up periods. Other times a mini-perm loan4 can be arranged for the Building Developer
to extend the lease-up and sales period.
Arrange necessary equity capital

Building Development costs that are not covered by the construction loan must be covered
by a line-of-credit loan, guaranteed by the Equity Partners or by direct contributions from
Equity Partners. These equity contributions should be made through an equity reserve that is
funded at the beginning of construction. The equity reserves should also be adequate to
cover the cashflow shortfalls during the lease-up period.
Negotiate and close lease agreements
Lease agreements can be very complicated in order to both meet the occupancy needs of the
tenants, and the financial requirements of the Building Developer. However, there are two
critical milestones: first, when the lease is executed; and second, when the tenant moves in and
takes occupancy. All other dates in the lease are tied to these events. Sometimes the landlord
will offer the tenant an inducement such as a rent-free period that is outside of the lease period.
This is a mistake. All lease agreements should be documented within the lease.
Negotiate and close sales contracts

Property sales must be negotiated, executed, and closed in a fair and timely manner.
A smooth transition from the Building Developer to the Building Operator is critical for the
completion of a successful project for both sides. The transfer of ownership involves not
only obtaining a legal title from a deed and leases, but also practical ownership in the form
of vendor agreements, equipment warranties, escrow deposits, and other service agreements.
Obtain appropriate green building designations

Except for the existing building designations, all of the green building certification
requirements must be documented and fulfilled during the Building Development Stage.
This is a prime example of how Building Developers and the Building Operators need to
work together during building construction, lease-up, and occupancy. Green building
certification goals must be established in the design and engineering phase of construction
and then implemented and documented during construction. Green building certifications
may not be required by the local municipalities, by the investor or lenders, or even by the
tenants, but they are rapidly becoming a competitive standard in the marketplace. Green and
sustainable building practices are good business and good advertising.
Create opportunities for Building Operators

Building Operators require buildings that run efficiently, reliably, and profitability. These
buildings must be attractive to potential tenants, end users, and lending institutions.
Therefore, Building Developers need to provide those opportunities.
Building Development: controllable costs
Acquisition costs
Building Developers must determine the maximum price they can pay for the building site
while still incurring the other development costs and staying within the development budget.
This is sometimes referred to as the “Builders’ Justified Land Price.”
Direct construction costs

Building Developers often select a primary general contractor and negotiate a Guaranteed
Maximum Price (GMP) for the building. General contractors and Building Developers
then work to stay within that GMP through bidding to subcontractors, or scope of work
112 Part II
adjustments. These contracts usually provide for the sharing of cost savings so that the general
contractors receive a portion of the savings through “value engineering,” lower material prices,
or lower subcontractor bids.
Construction interest and financing fees

The amount and terms of the construction loan are determined at the beginning of the project
by the construction lender. However, the interest rate is usually variable and, therefore,
uncontrollable; except that there are ways to control the interest rate variability especially for
very large loans.
Building Developers must also budget for and control financing fees or “points” that are
charged by the construction lenders, and the permanent or take-out lenders.5 These fees
are paid directly to the financial institutions or to the mortgage brokers who arrange the
financing.
Approval and permit fees

There are fees for approvals/permits associated with the building construction. There also
may be other fees associated with the master plan approvals that require “proffers” (pay-
ments to municipalities in exchange for the right to construct the building). These fees may
be associated with parks and recreational facilities, affordable housing, public art, or transit
facilities. Building Developers must identify and budget for these fees before construction
begins.
Architectural and engineering fees

Architectural and engineering fees are often negotiated as a lump sum, but also with hourly
rates for various categories of work. The lump sum maximum price usually specifies the
expected hours to be worked during the contract period. Building Developers must be aware
of how these professionals mitigate the risk of “scope creep” by specifying hourly rates if the
maximum time limits are exceeded.
Environmental costs
Environmental testing may provide a good estimate of how much (if any) environmental
work needs to be done. However, unforeseen environmental issues can be costly, so adequate
financial reserves for contingencies should be budgeted for when environmental problems
are expected.
Change orders
Change orders are changes to the construction contract that are usually caused by changing
preferences of the tenants, users, or owners. These additional costs, if not controlled, can
cause financial ruin. These cost changes must be controlled through proper documentation
and billings. It seems as though some tenants do not consider their space needs until the
building is already under construction and then request numerous changes to the approved
plans and specifications. (The old joke among building contractors is that, “they bid the
project at cost, and then make their profit on the change orders.”) A well-defined and carefully
documented procedure is essential so that requests for information and actual building
changes are appropriately priced and constructed.
Building Development: major risks

The major risks for Building Developers are that they cannot accomplish the “critical Tasks”
in a timely and efficient manner. Categorically, they are the same risks that Land Developers
face, except that construction is mostly above grade and Building Developers are leasing
prospective tenants and simultaneously selling to the Building Operator. Consequently, they
are impacted much more by changes in the current market conditions.
Delays in obtaining permits and approvals

The public sector is not as time-conscious as the Building Developer, so the approval and
permitting periods may take longer than expected, especially if the developer is not knowl-
edgeable about the process, or the building has some exceptional or controversial features.
This should not be a risk except when special uses or unique building features require a lot
of time-consuming discussion and explanation.
Delays in completion of improvements

Delayed completion means that work simply does not get done on time. The staging of the
construction materials and crews is extremely vital to maintaining the projected schedule.
However, necessary materials or building components may become unavailable when
needed, or subcontractors may have scheduling or financing problems. These delays can
ripple through the entire development schedule. Finally, prospective tenants may change
their move-in schedules or building finish requirements.
Cost over-runs
Building Developers using a Guaranteed Maximum Price (GMP) attempt to put the risk
of higher costs on the contractor’s shoulders. However, for some large and longer-term
construction projects, the material prices are based on price indices for various commodities.
Cost over-runs may also be caused by the tenants’ space requirements. These additional
costs need to be documented in change orders to the contractor and passed on to the tenant
for reimbursement if possible. Finally, cost over-runs may be caused by estimation errors.
Who checks the estimators?

Both the poor quality of the material and the workmanship can lead to poor quality improve-
ments. From the very beginning of the project, Building Developers must insist that the
material and the workmanship meet the highest standards. They are aided in this quality
control by the construction lender’s requirement that all reimbursed improvements must
be inspected. Inspecting architects and engineers must physically inspect the construction
and certify that the improvements have been built according to the approved plans and
specifications.
114 Part II
Negative shifts in the marketplace will directly reduce the tenants’ demand for additional or
new office space. These shifts could be caused by local, national, or international forces.
Lowered demand will lead to a longer lease-up period, leases with lower rental rates, and
higher concessions.6 Finally, the negative market conditions will cause other tenants in other
buildings to reduce their space needs, and a shadow market of “leased but unoccupied space”
will occur. Eventually, the unleased space will affect the open market, causing decreased
occupancy levels across the market.
Lower sales prices or higher cost of sales

The deteriorating market conditions will cause lower rental rates and occupancies, which
will decrease the sales prices of the completed building(s). Building Developers may be
tempted to ride out the market downturn, but most Building Developers have short-term
construction loans that are coming due and need to be refinanced. If the capital markets are
not functioning, as in the case of the recent Great Recession, Building Developers are faced
with defaulting on their loans and eventual foreclosure.
Case studies of the Building Development Stage

Three case studies of the Building Development Stage of the Real Estate Development
chapter. Below are Building Development examples of a transit-oriented development and
two partially pre-leased office buildings.
Crown Farm becomes “Downtown Crown” @REDM7

The Crown Farm development has been discussed in the last three chapters as it has pro-
gressed from the Land Banking Stage, to the Land Packaging Stage, to the Land Development
Stage, as shown in Exhibits 9.7 and 9.8. In this chapter, the Building Development Stage of
Crown Farm is discussed as a consortium of Building Developers construct the building to
make Downtown Crown come to life.
Sunbrook divided the overall Building Development Stage into three phases, and
completed the Phase I infrastructure improvements in 2013, as shown in Exhibit 9.9.
Sunbrook sold the retail zoned building pads to JBGR and the multi-family zoned building
pads to Bozzuto with the provision that they construct all of the allowable density at once,
thereby creating a place called “Downtown Crown,” a transit-oriented community. Exhibit 9.10
shows the higher density retail and multi-family building development on the right side of the
photograph and the low-density residential development on the left side.
Sunbrook sold the residential lots to several homebuilders who would construct different
styles and models of homes to appeal to a wide variety of families, with varying income
levels. The homebuilders included Ryland, KB Homes, Pulte, Wormald, and M.I. Homes.
The Land Developer’s horizontal improvements set the stage for the Building Developer’s
vertical improvements, which were built according to the conceptual master plan that was
developed by the Land Packager. Exhibit 9.11 is a rendering of the Town Center Plaza that
was approved by the City of Gaithersburg, and Exhibits 9.12 and 9.13 contain photos of the
actual buildings that were constructed and completed in the fall of 2014.
Exhibit 9.7 Crown Farm Land Banking Stage.
Exhibit 9.8 Crown Farm revised conceptual master plan.
The final built-out town center closely resembles what was proposed in the Land Packaging
Stage by Sunbrook. The Crown Farm development then continued onto Phase II of the
master plan by extending the land and building development to the eastern portions of
the total site.
Exhibit 9.9 Crown Farm Phase I infrastructure.
Exhibit 9.10 Crown Farm Phase I building development.

The retail Building Developer, JBGR, sold the completed retail buildings to RIPA in
December 2014 for a 5.25% overall capitalization rate. Bozzuto, the multi-family Building
Developer, continued to manage its projects and assumed the Building Operator role. Finally,
the homebuilders sold out their Phase I inventory and have continued to build in Phase II.
Exhibit 9.11 Rendering of the approved Town Center Plaza.
Exhibit 9.12 Actual Town Center Plaza.

118 Part II
Exhibit 9.13 Completed streetscape of Downtown Crown.
Crown Farm is a good example of the first four Stages of the Real Estate Development
Matrix. It demonstrates the various roles of the key players as each creates additional value
by using special skills to achieve specific Tasks that require additional capital, and it
highlights how the success of each Stage is imperative for the continuation and success of
the next Stage of development.
One and Two Potomac Yard: an environmental challenge in

Arlington @REDM8
Potomac Yard was discussed in Chapter 7 as an example in the Land Packaging Stage as the
Developer obtained master plan approvals in the City of Alexandria and Arlington County.
In Chapter 8, the Land Developer struggled to meet the pre-conditions of the master plan
ordinances. In Alexandria, a two-mile trunk sewer line had to be constructed before any land
bays could be sold. In Arlington, the 40-acre North Tract had to be transferred, free and clear
of all encumbrances, into Arlington County before the increased zoning densities were
vested, except for Land Bay A. Land Bay A’s zoning density was already vested in the prior
zoning ordinance, so it was exempted from the North Tract transfer condition. Consequently,
while it was trying to resolve a bogus lawsuit by Charles E. Smith Company that caused a
lien on the North Tract, Crescent Resources investigated the possibility of constructing
640,000 ft2 of office space on Land Bay A.
In 2003, Crescent began the process of obtaining design and site plan approval in
Arlington County for Land Bay A. In Arlington County, the site plan approval was called a
“4.1 Approval.” The 4.1 Approval process was a very public and very extensive process that
required approvals by numerous Arlington County Commissions before it was approved by
the Planning Commission and then voted on by the County Board. This process involved
numerous neighborhood association meetings and dozens of public meetings.
Crescent assembled an impressive team of key players: architects, engineers, and con-
struction and marketing professionals, that finally obtained the 4.1 Approval. The approved
design of One and Two Potomac Yard is shown in Exhibit 9.14.
The 4.1 Site Plan Approval added 71 requirements for the Building Development Stage
that were in addition to the 46 requirements from the Arlington’s master plan approval, the
Phased Development Site Plan (PDSP).
Exhibit 9.14 Approved design of One and Two Potomac Yard.
During the PDSP approval process, Crescent responded to a U.S. General Services
Administration’s (GSA) Request for Proposals (RFP) for a 405,000 ft2, ten-year lease for the
U.S. Environmental Protection Agency (EPA). Crescent was awarded the EPA lease after
the 4.1 Approval was granted, and the EPA lease had two unique provisions:
1 The buildings must meet United States Green Building Council’s (USGBC) Leadership
in Environmental and Energy Design (LEED Silver Certified for new construction (NC)
upon completion. Failure to meet the LEED Silver Certification would reduce the gross
rent by 10%!
2 The buildings must also meet the U.S. Government’s requirements for Level IV Security
as determined by the U.S. Federal Protection Services.
The GSA lease contained 200 pages of requirements, and the EPA’s Program of Requirements
(POR) added another 100 pages of requirements for the building construction and operation. The
Building Developer’s challenge was to meet all of these requirements on time and on budget!
Meanwhile, in 2005 the USGBC’s LEED requirements for new building construction
were constantly changing, as the rules for awarding points were being defined and clarified.
The buildings were originally designed as a “speculative” office project that only qualified
for 17 points of the threshold of 33 points for a Silver rating. Crescent assembled a team of
environmental professionals (LEED AP) that developed a strategy to capture the easy points
(the low hanging points) and then to:
• redesign the HVAC systems;

• monitor all construction techniques;
120 Part II
• recycle 70% of construction waste materials;
• select appropriate LEED approved building products and recycled building materials;
• employ professionals to commission all buildings prior to occupancy;
• perform all necessary indoor air quality testing.
After this pre-construction LEED planning, the construction budget was increased to
$4 million ($6.00ft2). Also, because all interior tenant spaces had to meet the LEED NC
requirements, Crescent stopped all efforts to pre-lease additional office space until the LEED
Silver rating was achieved.
The Level IV Security rating required the six-storey parking structure to be redesigned
so that automobiles could be restricted to pre-determined buildings and floors. Also, the
building lobbies had to be redesigned to accommodate security equipment and personnel
and to restrict public access to designated areas. This change was difficult for Arlington to
accept because the county planners envisioned, “an exciting street-level retail experience”
for its citizens. As a compromise, the county required large TV screens to be placed “face
out” in each window that would constantly play “environmental programming.” In reality,
these screens televised 24-hour cable news programming!
The two buildings, One and Two Potomac Yard, had a total development budget of
$129 million that was broken down into land costs of $8.8 million, hard costs of $91.2 million,
and soft costs of $29 million.
Exhibit 9.15 shows the proximity of Land Bay A to the Potomac River, Regan National
Airport, and the CSX rail corridor, as well as to Crystal Drive and the Hyatt Hotel. The
adjacent land impacted the actual construction of the two buildings on top of a six-storey
parking structure with three levels above grade and three levels below grade.
Several major risks were noteworthy:
• Excavation of the below-grade parking structure that was also below sea level.
• Operation of the on-site, concrete batch plant for the post-tension concrete frame.
• Staging and installation of the precast panels from Crystal Drive beside the Hyatt Hotel.
• Meeting and documenting green building requirements.
• Advanced commissioning of all building systems.
• Accommodating and documenting 398 GSA change orders.
While the construction was done on time and on budget, there were several critical Tasks that
caused stress with the adjacent land owners and tested the diplomatic skills of the Building
Developer:
• Pile driving activity during early morning hours woke up guests in the adjacent hotel.
• Removal of existing road bed of Crystal Drive caused flooding in the adjacent
underground parking garage.
• The adjacent land owner started construction on an apartment building, so both projects
closed the adjacent street while staging materials.
• A re-bar bundle “nicked” a passing Virginia Rail Express Train as the bundle was being
lowered onto the building floor by an overhead crane.
Exhibits 9.16 and 9.17 show the closeness of the neighbors that were impacted by Crescent’s
use of four overhead construction cranes. Consequently, Crescent had to negotiate construc-
tion crane agreements with the Hyatt Hotel, the Federal Aviation Administration (FAA), the
Exhibit 9.15 Photo montage of One and Two Potomac Yard on Land Bay A.
Exhibit 9.16 Top view construction crane swings.

122 Part II
Exhibit 9.17 Side view of the construction crane placement.
Washington Area Airport Authority, the CSX Transportation Corporation, and the Virginia
Rail Express.
In September 2005, Crescent entered into a pre-sale agreement with JP Morgan for One
and Two Potomac Yard. The purchase price was $213.5 million with the following funding
provisions:
• Funding at Shell Completion: $100 million

• Funding at GSA Lease Commencement: $95.5 million
• Funding at LEED-NC Silver Certification: $18 million
At the GSA lease commencement, JP Morgan took over the role of Building Operator in the
fifth Stage of the Real Estate Development Process.
The development of One and Two Potomac Yard is a good example of a Building Operator
obtaining the necessary approvals and permits to construct the improvements, pre-leasing
the space to a government agency (and learning all of the anagrams related to the lease),
constructing a USGBC LEED Certified building, and pre-selling the building with phased
funding conditions.
International Plaza IV: a proposed eight-storey office building in Tampa,

Florida @REDM9
International Plaza IV was a proposed eight-storey suburban office in the Westshore area in
Tampa, Florida. In this case study, Crescent Resources is considering undertaking the project
as the Building Developer on a site known as “Corporate Center Four,” which is next to the
International Plaza Shopping Center and the Tampa International Airport.
Opening in 2001, the International Plaza Shopping Center made the Tampa International
Airport one of the few international airports to have direct access to a major shopping center.
Crescent Resources has developed and sold over one million ft2 of office space around that
shopping center since 1999:
• International Plaza I 1999;

• International Plaza II 2001;
• International Plaza III 2004.
Construction of International Plaza IV began in 2007 and was finished 17 months later.
Exhibit 9.18 is the site plan for the eight-storey office building and accompanying five-
storey parking garage. Exhibit 9.19 shows an artist’s rendering of these two structures.
“Back of the Envelope” analysis

Proforma projections included a $32 per ft2 rental rate, 8% vacancy rate, and $11 per ft2
operating expenses. When these assumptions were used with the building’s net rentable area
of 247,000 ft2, the Net Operating Income (NOI) is estimated to be $4.50 million or $18.44
per rental ft2.
The land costs were estimated to be $4.94 million; hard costs were estimated to be
$36.81 million; and soft costs were estimated to be $13.78 million. Consequently, the total
costs were $50.53 million.
The Building Developer compares the expected return on total costs to the market overall
capitalization rate to evaluate the “spread,” or potential profits, when the property is sold to
Exhibit 9.18 Site plan.

124 Part II
Exhibit 9.19 Rendering of International Plaza and the parking garage.
the Building Operator. In this case, the return on total costs was 8.20% (NOI divided by Total
Costs), and the estimated overall capitalization was 6.75%, so the spread was 1.45%. In
other words, if the property is estimated to be developed for $50.53 million and sold for
$67.5 million (NOI divided by market capitalization rate), the developer’s profit would be
$11.95 million. The question facing the Building Developer is, “Is this enough profit to take
the major risks incurred in the Building Development Stage?”
Crescent usually looked for a minimum spread of 1.5%, and the projected spread was
1.46%. However, it had substantial experience building and leasing in this market. Crescent
decided to revisit its market underwriting and due diligence studies, and then reconsider
the project.
Eventually, Crescent decided that its income and building cost projections were conserva-
tive, so the risks of the project were lower than other projects and the 1.46% spread (which
rounded to 1.5%) would be an appropriate return for the risks taken in this project.
International Plaza IV is a good example of the analysis and decision-making process
Building Developers undertake when evaluating a project.
Arrange financing: Phipps Tower joint venture memo @REDM10

There are many ways to engage in a joint venture partnership to finance a building develop-
ment project, and each project and each partner will include their own requirements. Phipps
Tower is one example of a joint venture strategy to finance a Building Development project.
In this case, the Building Developer, Crescent Resources, was offering to provide the land
as its equity contribution, and the joint venture partner would contribute the same value as
the land in cash contributions to the equity stack, at which point the remainder of the costs
would be financed through a construction loan. This case study also provides a possible fee
structure to reward the Building Developer during the process, in addition to the distribution
of the cash proceeds split with the partner. This is a good example of how Building Developers
are always looking for project financing opportunities.
Environmental professionals: One and Two Potomac Yard @REDM11

Environmental professionals include all those who design, construct, commission, and
manage the facilities based on green building and sustainability criteria for the project. In the
Potomac Yard case study, The USGBC sponsored a report that included interviews with
the project manager, the tenant’s appointed project manager, the general contractor’s project
manager, an outside consultant specializing in achieving sustainability certifications, engi-
neers, a commissioning agent, and the future Building Operators. These were the key players
and professions integrally involved in achieving the LEED Gold certification for One and
Two Potomac Yard.
Summary
Building Developers must acquire the site, finance and construct the improvements, and then
lease and sell the completed building structure. Simultaneously constructing and marketing
the property requires Building Developers to stage, manage, and control two very different
processes. Because of the short-term nature of the construction loan, Building Developers
(like Land Developers) are in a “beat the clock” situation. The current emphasis on green
building construction adds another dimension of complexity to the process, as Building
Developers must meet additional material, construction, and performance criteria that are
established by various green building certifying organizations.
The Crown Farm case study illustrates the simultaneous construction efforts of several
Building Developers in an effort to create a new urban place, Downtown Crown. The One and
Two Potomac Yard example demonstrates how a green certification pre-lease requirement
is handled in the context of a pre-sale of the buildings. The International Plaza IV case study
considers the Building Developer’s decision to “build or not-to-build” given the estimated
construction costs, rental rates, and market capitalization rates. Similarly, the Phipps Tower
case study shows how a Building Developer attempts to attract a joint venture partner to finance
a contemplated office tower. Finally, eight environmental professionals are interviewed about
their roles in building a certified green building from their very different perspectives.
Notes
1 Market Capitalization Rate is defined as the ratio between the Net Operating Income and the Sales
Price.
2 Return on Total Cost is defined as the ratio between the Net Operating Income and the Total
Development Costs.
3 Commissioning the building confirms the operating efficiency of the building systems by determining
that all of the components and controls of the building system are working correctly and accurately
before the building is occupied.
4 Mini-perm loans are basically construction loans that automatically extend for two to three years
after the construction period. Interest accrues during the construction period, but must be paid
currently during the extension period.
5 Take-out lenders agree to purchase the construction loan under certain conditions defined in a
tri-party agreement with the borrower and construction lender. The fees for a take-out loan are
typically 1–2% of the full construction loan amount.
126 Part II
6 Concessions are also known as tenant inducements and may include a free-rent period, above
standard tenant improvements, or moving cost subsidies.
8 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage4/Potomac+Yard.pdf http://
realestatedevelopmentmatrix.com/textbook/res/3._the_greening_of_one_and_two_potomac_yard_
v2.pdf
9 http://realestatedevelopmentmatrix.com/textbook/res/IP4+White+Paper+10+16.pdf
10 http://realestatedevelopmentmatrix.com/textbook/res/phipps_tower_memo.pdf
11 http://realestatedevelopmentmatrix.com/textbook/res/case_study_one_and_two_potomac_
yard.pdf
10 Building Operations
INTRODUCTION
Building Operations is the fifth Stage of the Real Estate Development Process (see
Exhibit 10.1). Once a majority of the building construction has been completed (core, shell,
and common areas), the Building Operations Stage begins. Tenant occupancy occurs during
this Stage and continues throughout the Stage as the constructed buildings are leased-up and
released.
Building Operations is considered a Stage in the Real Estate Development Process because
economic value can be created by successful Building Operators in this Stage of development.
Building Operators create value by converting the constructed building to a portfolio of
leases with happy tenants and accurate record keeping.
The Building Operations Stage is also the time during which major increases in value can
occur through financing and refinancing activities, as well as the sale and resale of the prop-
erty. There can be several Building Operators during this Stage, which may be as long as
several decades.
The Building Operators with the large property portfolios are usually referred to as “insti-
tutional investors” and may include pension funds, insurance companies, or public real estate
investment trusts. Building Operators can also be owner-users who occupy the constructed

128 Part II
building as part of their business enterprises. Families that buy houses and make them into
their homes can also be considered Building Operators.
Schematic diagram
The schematic diagram in Exhibit 10.2 represents the entire Real Estate Development
Process and highlights the Building Operations Stage. The Building Operations Stage
follows the Building Development Stage as the Building Developer sells the completed (and
perhaps partially leased building) to the Building Operator. Many times, Building Developers
decide not to sell the completed building and to continue on to the Building Operations
Stage. However, it should be noted that a new team of professionals must be assembled, as
they face a new set of critical Tasks that require special skills.
The property may be sold many times to many Building Operators during its economic
life. However, when the property suffers from economic or functional obsolescence, it is
Exhibit 10.2 Building Operations Schematic diagram.

Building Operations 129
Exhibit 10.3 Building Operations Box diagram.
sold to a Building Renovator. Of course, if Building Operators take on the role of Building
Renovators, to be successful they must form a new team with different skills.
Box diagram
The box diagram in Exhibit 10.3 illustrates the fundamental rule of value creation in the
Real Estate Development Process, “Buy one thing, sell another.” In this case, Building
Operators purchase a fully constructed building from Building Developers, and then at the
end of the building’s economic life, sell the underperforming, worn-out property to Building
Renovators. This may appear to be a very grim proposal without much opportunity to create
economic value.
In fact, many Building Operators may own the property during the Building Operations
Stage, just as many different lenders and equity investors may provide capital for the
property.
Building Operators are responsible for many kinds of “remodeling” work, as tenants
move in and out and as public areas are refurbished or reconstructed. The question becomes,
“When does remodeling become renovation? When is a pile a heap?” (so to speak).
Generally speaking, the skills necessary to renovate a property are different than the skills
usually considered necessary to operate a property.
Venn diagram
As the Venn diagram in Exhibit 10.4 shows, the Real Estate Development Stages are not clearly
defined, but instead overlap in the process. The Building Operations Stage is an opportunity
to increase property value, rather than just a process for minimizing operating expenses.
130 Part II
Exhibit 10.4 Building Operations Venn diagram.
A well-documented operating history is fundamental to reducing the perceived riskiness

of the real estate investment. When riskiness is reduced, capitalization rates decrease, and
consequently property values increase.
Leasing is the most prominent example of the Stages of the Real Estate Development
Process not having clearly defined boundaries. The leasing activity is the most important
overlapping area between the Building Development and the Building Operations Stages.
The leasing activities also include constructing the tenant improvements, moving in the new
tenants, and activating and enforcing all of the provisions of the new lease agreements.
Whoever leases the building captures the value created by reducing the lease-up risk and
increasing the net income of the property. Some Building Operators try to avoid the lease-up
risk by only acquiring properties that are already leased, while other Building Operators
actually seek out unleased or partially leased buildings so they can gain the additional
revenue by leasing up the property.
The overlapping boundary between the roles of the Building Operator and the Building
Renovator may cause serious problems (and opportunities) with the hold-over tenants;
those tenants who continue to occupy space during the Building Renovation Stage.
Hold-over tenants can positively affect the renovation efforts with their continued occu-
pancy and support. On the other hand, the demands of the hold-over tenants can be disruptive
and costly as the renovation activities must accommodate their continued occupancy and
operations.
Circle diagram
The circle diagram in Exhibit 10.5 illustrates how the Building Operators buy properties
from Building Developers and eventually sell properties to Building Renovators in the larger
circle of the Real Estate Development Process. The Circle diagram also shows how Building
Operators sometimes buy buildings from Building Renovators.
Building Operations: what happens

The Building Operations equation in Exhibit 10.6 illustrates how Building Operators
incur the costs of acquiring the property; leasing up the property to assemble a “portfolio
of leases,” and instituting and managing information systems that document the operations.
Exhibit 10.5 Building Operations Circle diagram.
Exhibit 10.6 Building Operations equation.
The Building Operator must submit timely and accurate reports to the following:
• tenants;
• mortgage lenders;
• equity investors;
• governmental taxing services;
• other stakeholders, such as environment rating agencies (USGBC LEED).
132 Part II
This documentation not only provides current information to the existing investors, but also
demonstrates to prospective investors how profitable and valuable the property really is. The
difference between these costs and the expected increase in value is known as the “spread.”
The spread is the value that is created in this Stage of development. Economists call this the
“profit” earned in this Stage. This spread may occur quickly, or over many years.
Typical capitalization of Building Operations includes a long-term, amortizing mortgage
and equity capital partners. Building Operators also employ cash reserves, lines of credit, or
gap mortgages to manage major capital expenditures incurred during the holding period.
Building Operations: key players

The key players in the Building Operations Stage are as follows:
Building Developers as property sellers

When Building Developers complete their required tasks, they are motivated to sell their
improved properties to Building Operators in order to capture the value that they have
created. They also may be motivated to pay off short-term construction loans that are coming
due, or to free up capital that can be employed in another development. In any case, their
willingness to provide Building Operators with an opportunity to acquire the property with
an attractive price and terms is critical for the success of the Building Operator. Sometimes,
Building Operators may negotiate at “pre-sale” which means that the Building Operators
agree to sell the property when some agreed upon benchmark is achieved, like the completion
of the building shell or the attainment of a certain level of occupancy.
Building Operators as property sellers

Another group of motivated sellers are Building Operators who want to sell their properties
for a number of reasons. These Building Operators may be motivated by pressure from
equity investors who want to sell the property, or by expected property conditions that they
do not want to deal with, such as a major lease expiration. Building Operators can benefit
from the determination of other Building Operators to sell their properties: one developer’s
problem is another’s opportunity! Sometimes, Building Operators who want to sell may be
able to provide attractive financial terms, such as purchase money mortgages to facilitate the
sale to the Building Operators who want to buy.
Asset managers
Asset managers view the property from the investment perspective and must constantly
analyze the credit markets and investor markets for financial opportunities, such as refinanc-
ing the debt, selling the property, or attracting new equity investors. Asset managers are
responsible for reporting to the equity investors and lenders, as well as managing the leases
on a property. Asset managers also consider the individual property in the context of the
portfolio of properties that they may be managing.
Property managers
Property managers oversee the operation of the facility, such as the collection of rent, the
regular maintenance of building systems, and the construction of tenant improvements and
common area repairs and replacements. Property managers usually prepare monthly activity
reports for asset managers.
Tenants
Rent paying tenants are Building Operators’ best friends because they are responsible for the
economic viability of the property. The rights and responsibilities of the tenants are defined
in the lease agreement. The Building Operators believe that the most important responsibil-
ity of the tenants is to operate a successful business, so they can pay the rent on time. The
tenants’ business operations require certain hours of occupancy, which impact security
systems, electrical and power consumption, building access and restrictions, and common
area uses.
Leasing agents
Leasing agents negotiate lease terms and acquire new tenants as leases roll over. They are
paid on a commission basis, and the commission payments for renewal leases are always
controversial. The accurate market information that they provide Building Operators is
critical for a successful leasing strategy.
Building systems engineers

Building systems engineers oversee and provide regular maintenance of the major building
systems, such as heating, air conditioning, plumbing, elevators, electrical, and security. They
also manage small building projects and common area construction projects. Increasingly
complex operating systems require trained and skilled building engineers, who can work
with and manage third-party vendors to keep the building systems running efficiently.
Permanent mortgage lenders

The “permanent mortgage lender” is really a lender who provides a mortgage loan with a
5 to 20-year term with an amortizing feature. Permanent loans are put in place for the
acquisition of the property and usually last until the property is sold or the mortgage is
refinanced.
Equity capital partners

Equity capital partners provide the capital that is subordinate to the mortgage loans and
usually make a contribution to the partnership when the property is acquired. Sometimes
equity investors may be asked to make additional capital contributions or partnership loans.
There may be different classes or groups of equity capital partners. Some equity partners
may get annual preferential returns, while others may receive capital distributions that are
subordinate to these preferred returns.

Good neighbor relationships need to be managed and attended to; Building Operators should
know who owns and uses the adjacent properties. Disputes with adjacent property owners
134 Part II
are exhausting and unprofitable. Good business relationships require good communication
and mutual respect and courtesy.
Environmental consultants
Environmental consultants can assist in the inspection and remediation of potential environ-
mental issues in the building, and they can also assist in applying for and certifying various
environmental and sustainability certifications (Energy Star, LEED, and BOMA 360).
“Healthy buildings” are necessary for good tenant relationships, low tenant roll-overs, and
lower operating costs. A “sick building” is a nightmare and a stigma that is hard to erase.
Municipal building inspectors

Local authorities require regular inspections and certifications of building systems, such as
fire protection, elevator safety, and indoor air quality systems. These inspections may be
done by municipal employees or qualified third-parties. Also, many remodeling projects or
building repairs need to be permitted and inspected upon completion.
Tax assessors
The determination of the property’s value for real estate tax assessment purposes may
be done at the state, county, or municipal level. Tax assessors provide an estimate of the prop-
erty’s value for real estate tax determination. Knowledgeable tax assessors, good building
records, and engaged property owners are necessary if Building Operators want to challenge
or appeal the property’s assessed valuation. Sometimes, tax assessors are overly optimistic or
aggressive in their estimates of the property’s value; however, their valuations are also
restricted by laws and regulations.
Police officers, fire fighters, and emergency medical technicians

Building Operators must maintain good relations with police officers, fire fighters, and
emergency medical technicians by keeping them informed about the property’s security
systems, life-safety and evacuation procedures, and emergency access points and con-
ventions. These first responders should be aware of who occupies the property and what
special conditions they may face in case of an emergency. Building Operators have a
sacred responsibility to protect the health and safety of their tenants, and the police officers,
fire fighters, and emergency medical technicians are fundamental to fulfilling those
responsibilities.
Neighborhood associations
Neighborhood associations—sometimes called “building improvement districts”—are often
responsible for maintaining quasi-public spaces around private properties that are not ade-
quately maintained or serviced by municipal governments. These areas may include sidewalks,
alleys, trash receptacles, and public loitering areas. These associations can also bring health
and safety concerns to the attention of the police and fire protection departments. Building
Operators should be supportive members of their neighborhood associations.
Building Operations: critical Tasks
The following are the most critical Tasks in the Building Operations Stage, although they are
not listed in order of importance.
Lease-up and re-lease rentable space

Building Operators must lease-up the property and then re-lease space as it is vacated by
departing tenants. Leasing professionals must be managed, whether they are employees of
Building Operators or outside leasing brokers. Leases must be negotiated at market rents with
appropriated expense allocations and reimbursements. Also, the amount and nature of tenant
improvements must be specified, again with appropriate allocations and reimbursements.
Finally, rental inducements should be carefully negotiated to close the lease contract.
Manage building leases

Tenant leases must be carefully managed to keep them in full force and effect: rent payments
need to be made on time; tenant improvements need to be constructed in accordance with the
lease specifications; and operating expenses should be shared, capped, or allocated according
to the lease. Tenants’ operating hours should be monitored and security systems should be
fully operational. A particular tenant’s lease renewal and space expansion options need to
be respected and coordinated with those of the other tenants. Finally, additional fees for
service must be billed and collected as the lease provides.
Overall, leases must be kept up-to-date and constantly checked for compliance on the part
of both the landlord and the tenant. There are usually building rules and regulations that are
included with the lease that outline building policies and procedures to help keep the peace
among tenants, as well as between the landlord and individual tenants. These rules should be
kept current and distributed regularly.
Operate building systems

Major building operating systems must be monitored and maintained on a regular basis. The
use of third-party vendors to accomplish this task is recommended. Daily trash collection
and interior cleaning services are critical to maintaining good tenant relations and a healthy
environment. Recycling trash and waste is a good way to keep the tenants engaged in the
upkeep and maintenance of their spaces, and it is good for the environment, too.
Manage vendor contracts

Not all third-party vendors are created equal, so Building Operators must constantly seek
out the best service providers at competitive prices. Third-party vendors are used for trash
collection and recycling, security, window cleaning, exterior building maintenance, and
safety systems, as well as for landscaping, snow removal, and outside clean-up.
Document building operations

Building Operators must accurately record the financial transactions (income and expenses),
as well as building maintenance and leasing activities. Successful Building Operators
136 Part II
generate accurate and timely reports for investors, lenders, and government agencies. These
reports require the joint cooperation of the property managers and the asset manager.
If reports are not timely, they are considered inaccurate (and inadequate as well). Late or
inaccurate reports are not good for:
• investors, because they can cause suspicion and distrust;

• lenders, because they can cause default;
• taxing agencies, because they can cause penalties, interest, audits, and additional taxes.
Ensure the health and safety of the building users

For Building Operators, the health and safety of the tenants is paramount. Emergency evacu-
ation plans should be developed, distributed, and practiced. In addition, “shelter in place”
plans should be developed for use during terrorists’ attacks, earthquakes, and for disabled
persons. Plans for weather emergencies, such as snow storms, hurricanes, or flooding must
also be developed and distributed to building users. All of these plans should also be distrib-
uted to police and fire authorities for comment, approval, and general knowledge. Business
continuity plans for what happens after an emergency can help tenants resume business oper-
ations as quickly as possible. Business continuity plans should be developed by individual
tenants, as well as property managers.
Obtain appropriate sustainability designations

Not only do Building Operators want to get credit for their efficient operations in the
marketplace, some leases and some jurisdictions now require that certain green building
certifications are attained and maintained. These may include the Energy Star designation
from the U.S. Department of Energy, or LEED EB-OM from the United States Green
Building Council (USGBC).1
Find sources of low-cost capital

Building Operators must always be on the lookout for sources of low-cost capital. This may
be mortgage loans with lower interest rates, equity investors with lower return expectations,
or financial institutions with new investment strategies. Of course, the existing lenders and
equity investors need to be informed about these new opportunities, so Building Operators
should evaluate the pros and cons of these recapitalization opportunities.
Building Operations: controllable costs

For the Building Operator, all of the operating costs and expenditures should be controllable,
except for the leasing and re-leasing risks. However, a judicious management of lease
expirations will help to mitigate this risk.
Property management
The property management fee is usually based on the actual out-of-pocket expenses of the
property manager, plus a percentage of the collected rents. Property management agreements
should provide for pre-arranged termination of the agreement with appropriate notification
and minimal effect on the tenants, investors, and lenders.
Operating expenses
These expenses are annually budgeted, and then reported monthly with “actual to budget”
comparisons.
• Security services. Security services contracts can be designed to meet the level of
security required by the tenants and by the neighborhood. Of course, the nature of the
tenants and their business operations will dictate most of their security needs. Fees
for tenant-specific security needs are usually paid by the tenant.
• Janitorial services. There are usually several third-party vendors who will provide jani-
torial and housekeeping services for the building and its users. These vendors will hire
workers and ensure that their immigration status and security background checks are
adequate. This can be a tricky business. In addition, the housekeeping services are now
asked to comply with green-building standards.
• Landscaping services. Regularly scheduled landscaping services are vital in maintaining
an attractive building. The services should include fertilizing, mowing, trimming, and
cleanup, as well as the maintenance of the sprinkler systems (if used). Snow removal
can also be provided by these vendors. A new wrinkle in landscaping is the proper
installation and maintenance of green roofs and roof-top gardens.
• Waste removal services. Waste removal services can be provided by private or public
vendors. Popular recycling practices require housekeeping/janitorial services to work
closely with the waste removal vendors. To avoid conflicts, the pick-up time and the
location of trash removal facilities must be clearly defined in the service agreement.
• Energy monitoring and testing. Energy monitoring and system testing will ensure the
proper operation of energy systems to maximize system efficiency and minimize
potential failures in the future.
• Utilities. Leases should specify the landlord’s and tenants’ responsibilities for electricity,
waste, and gas usage. Separate meters for each tenant are valuable in controlling these
costs. The landlord and tenants can control the usage, but the prices may fluctuate.
Financing costs
The financing costs, which include interest and origination fees, as well as extension and
prepayment fees, are determined when the property is acquired so they are easily budgeted.
However, refinancing arrangements can change these items.
Working capital reserves

Working capital reserves should be agreed upon among Building Operators and their asset/
property managers and the equity investors. Reserve levels should be calculated monthly
and replenished as needed.
Reserves for wasting parts and replacements

Financial reserves should be established when the property is acquired for “wasting parts.”
These are major building components that need to be replaced during the expected holding
period. These may include roofs, parking lots, HVAC equipment, or landscaping. Alternatively,
reserves could be increased annually with payments from the cashflow. The reserves should be
clearly identified in the financial reports so transparency can be maintained.
138 Part II
Building Operations: major risks
The nature of the long-term holding periods that are common in the Building Operations
Stage helps to mitigate many of the sudden changes that can cause ruin in other Stages of
the Real Estate Development Process. With adequate reserves, staggered lease periods,
credit-worthy tenants, long-term fixed-rate financing, and patient equity investors, Building
Operators should be able to ride out sharp changes in market conditions. Here, though, some
major risks are outlined.
Delays in obtaining permits

Tenant space improvements may require building permits, so construction cannot proceed
without the approval of local authorities. Usually, these delays are not lengthy, but the
authorities may ask for changes to the building permit request. Unusual or special-purpose
improvements should be carefully explained to the permitting authorities.
Poor tenant relationships

Poor tenant relationships may occur for many reasons, including inaccurate or poorly drafted
lease agreements. However, landlord/tenant disputes need to be quickly addressed and fairly
resolved. Ideally, tenants in multiple-tenant buildings should get along as “one, big, happy
family.” However, Building Operators may need to play the role of parents in the event of
intra-building “family feuds.”
Building Operators must realize that all tenants are quirky to some extent and want their
special needs to be respected and accommodated.
Completion delays and cost over-runs: tenant and common area improvements
Completion delays and cost over-runs of the construction of tenant improvements or common
areas are usually caused by shortages in material or labor. However, these delays may be
caused by tenants changing their minds or expectations, or the architect not clearly commu-
nicating the nature of the common area improvements. Building Operators must quickly
resolve these misunderstandings.
Because of the nature of tenant or common area improvements, the cost over-runs should
not be too serious unless there is a major misunderstanding. Soliciting and securing bids
from contractors before starting construction is an important way to clarify the nature and
scope of the work to be done.

The risk of poor quality improvements is mitigated by Building Operators using reliable
contractors and suppliers of materials. However, it is still important for Building Operators
to inspect the material and workmanship during every day of construction.
Deteriorating market or neighborhood conditions

Adequate financial reserves should help Building Operators survive sudden changes in the
market conditions; however, neighborhood deterioration is very difficult to quickly remedy.
Building Operators must become neighborhood activists to champion positive changes in the
neighborhood. Speaking at neighborhood meetings, testifying at public meetings, or contact-
ing political leaders are all positive ways that Building Operators can make a difference.
Unexpected environmental conditions

Mold is the most common environmental challenge for Building Operators. Wet conditions
caused by leaking pipes, inadequate window seals, poor outside drainage, or flooding events
are all possible causes of mold. When discovered, mold must be eliminated immediately.
Sometimes, environmental risks can come from government regulators redefining a “haz-
ardous material.” For example, in the 1970s and 1980s, the Federal Government specified that
vinyl asbestos tile must be used for flooring in government facilities. But in the 2000s, the
Federal Government declared these tiles to be hazardous materials and forced landlords to
remove them and replace them with non-hazardous flooring, according to the new definition
of “hazardous materials.”
Case studies of the Building Operations Stage

Five case studies of the Building Operations Stage of the Real Estate Development Process
are presented here to demonstrate and illustrate many of the discussion points in this chapter.
Below are Building Operations case studies of a new office project, a re-leased office
building, and the conversion of an underground television studio into an educational facility.
One and Two Potomac Yard: leased-up and re-sold @REDM2

This case study shows how One and Two Potomac Yard was acquired, operated, leased-up,
and re-sold during the Building Operations Stage. It is located on Land Bay A in the Arlington
County portion of Potomac Yard: a master planned, urban-infill, transit-oriented, mixed-use
development (see Exhibit 10.7).
Exhibit 10.7 Potomac Yard master plan.

140 Part II
Exhibit 10.8 One and Two Potomac Yard.
The 640,000 ft2 One and Two Potomac Yard property (as shown in Exhibit 10.8) was
bought by JP Morgan for $215 million from Crescent Resources in November 2004.
The total purchase price was $213.5 million, and was paid in three fundings: $100 million at
shell completion; $95.5 million when the U.S. EPA moved in and the lease commenced; and
$18 million when the property received the USGBC LEED-NC Silver Certification.3 The
property was put in one of JP Morgan’s real estate portfolios for pension fund investors.
JP Morgan became the Building Operator when the EPA assumed occupancy, and the ten-
year lease began. JP Morgan hired a third-party professional property management company
to manage the property according to the lease requirements and the Green Building
Guidelines that were approved by the USGBC.
Beside the USGBC Silver LEED-NC certification, the EPA lease also required the property
to achieve the Building Star designation that is awarded by the U.S. Department of Energy.
The Energy Star designation is based on actual operating records to verify the operational
efficiency of the buildings.
JP Morgan hired a national brokerage firm to lease the remaining vacant space. The leasing
efforts focused on federal government agencies that needed Level IV security, as well as
USGBC LEED-NC certification.
In 2008, One and Two Potomac Yard was awarded the U.S. Department of Energy’s
Energy Star, and in 2009, the property achieved a USGBC LEED Gold Award for existing
buildings (EB). Also, JP Morgan’s leasing strategy was successful, and the property was
leased to over 90% with Federal Government tenants.
At that time, USAA, a large insurance company, was assembling a portfolio of green,
government-leased properties for pension funds and sovereign wealth funds that were
Exhibit 10.9 Investment Grade Value Index vs One and Potomac Yard.
seeking very low-risk real estate investments in the United States. Consequently, JP Morgan
was able to sell One and Two Potomac Yard to USAA for $250 million in 2010.
Exhibit 10.9 shows the value appreciation of One and Two Potomac Yard from 2005 to
2010 and compares it to Co-star’s Real Estate Investment Grade Value Index for the same time
period. The value increase from 2004 to 2005 was due to the Building Developer constructing
the property for $135 million and selling it to JP Morgan for $213.5 million. However, the
value increase from 2005 to 2010 was entirely due to the efforts of the Building Operator, who
leased-up the property and efficiently operated and maintained excellent records to document
its performance to the USGBC and the U.S. Department of Energy. This 17% increase in
property value is even more impressive when it is compared to Co-Star’s Investment Grade
Index that experienced a 24% decrease in property for the same time period.
This case study also shows the importance of finding Building Operators who have a
lower cost of capital. In this case, USAA had a lower cost of capital than JP Morgan, as
USAA marketed a portfolio of low-risk, green buildings with government leases to investors
seeking very safe investments.
1400 K Street, Washington, DC @REDM4

The 1400 K Street case study discusses some common problems that Building Operators
must address that include lease roll-over, green building certification, and new tenants with
new uses.
A 187,000 ft2 office building, 1400 K Street, is only three blocks from the White House
and one block from a metro Station in Washington, DC. This area is commonly referred to
as the Golden Triangle because political lobbying firms dominate the office market.
The 12-storey building contains 178,000 ft2 of office space, 9,000 ft2 of retail space, and
87,000 ft2 of parking. Originally built in 1981, the building was renovated in 2005. In 2014,
142 Part II
Exhibit 10.10 1400 K Street.
the Building Operator faced the roll-over (lease expirations) of three major leases that
represented 25% of the office space. The Building Operators (owners) also decided to apply
for USGBC’s LEED Gold Rating for existing buildings (EB), and to lease to two restaurants
on the first floor.
Leasing
Building Operators must have a marketing team to address the continuous challenges of
renewing existing leases and re-leasing vacant space when it comes to market. In early 2015,
the building was 83% occupied as some tenants renewed their leases and others moved out.
Constructing the tenant improvements and moving in new tenants without disturbing the
current tenants is always challenging.
New restaurant spaces

Tenants love the convenience of restaurants in their building, but restaurants often require
additional equipment and building systems beyond what is standard in an office or mixed-use
building. New restaurants are especially problematic when the original structure was built
with no intention of housing restaurants. Therefore, new restrooms needed to be installed in
each restaurant space, and new ventilation systems had to be constructed and integrated
into the other building systems; also, one tenant required natural gas lines to be installed
for the commercial stoves. Performing these building improvements required a contractor
specializing in restaurant fit-outs and their collaboration with the building engineers on site.
Green certification
LEED Existing Building Certification is an option for buildings that were constructed
before the creation of USGBC and LEED. This process may require renovations or updates
to building systems that might be costly; however, they also make the building more
efficient and produce lower operating costs in the long run. For this case study, switching
lighting to LED lamps immediately caused a drop in electricity usage. Green certific-
ation also becomes an important marketing advantage in attracting new, environmentally
conscious tenants.
For the Existing Building Certification, complete participation by tenants and contractors
is crucial. For this case study, recycling was a major requirement, so a certain percentage of
the total building waste had to be recycled. The janitorial contractor had to be committed to
all recycling policies, and the tenants had to adhere to the recycling strategies put in place.
Without complete dedication from both, the requirement was unobtainable and may have
prevented certification.
The good news is that the building was awarded Gold LEED-EB in October of 2014. Both
restaurants opened and were successfully operating in 2015, and the building reached 95%
occupancy in 2016.
This is a good case study illustrating the many tasks that the Building Operators must
meet to create value in this stage of development.
650 Massachusetts Avenue @REDM5

This case study demonstrates how a quirky, special-purpose, below grade space can be
rebuilt, re-fitted, and re-purposed for a non-traditional tenant with special needs. It also begs
the question, “When does a tenant improvement project become a building renovation in
terms of the seven Stages of development in the Real Estate Development Process?”
650 Massachusetts Avenue, NW, sits at the northern-most edge of the Chinatown
neighborhood in Washington, DC, and just south of the Walter E. Washington Convention
Center (see Exhibit 10.11).
Built in 1990, the building has eight floors above grade and three floors below grade, and
contains 301,000 ft2 of office, 25,000 ft2 of retail, and 93,000 ft2 parking garage.
In 2010, an audio/visual company vacated 90,000 ft2 of recording studio and office space,
leaving three floors of below grade, column-free space. This space created a unique opportu-
nity for re-leasing to a specialized tenant. In 2012, Georgetown University signed a lease for
the space, and construction of the new tenant build-out began. The renovation included the
addition of new concrete floor slabs, the demolition of existing concrete floor slabs, and
the installation of a dedicated elevator for the tenant space, as shown in Exhibit 10.12.
The entrance for the Georgetown University School of Continuing Studies featured a
glass box design with a four-storey atrium inside (see Exhibit 10.12).
The Building Operators had to construct the new space while continuing the undisturbed
occupancy of the retail and office tenants in the remaining 236,000 ft2 in the building. The
major challenges during the construction period included: controlling the dust and noise;
temporarily shutting down entrances, sidewalks, and roadways; and installing a new dedicated
elevator in the new tenant space.
After the tenant improvements were completed and Georgetown University began
operations, the major challenges became: operating and controlling separate entrances and
security systems; accommodating increased public traffic to the building with opposite hours
Exhibit 10.11 650 Massachusetts Avenue.
Exhibit 10.12 Renderings of 650 Massachusetts Avenue.

of operations; and integrating and combining new systems in the university space with the
existing building systems.
This is a good example of the Building Operator creating value by finding a creative
solution for non-traditional space and completing major tenant improvements and renovations
to accommodate the new user.
Hampton Courts – residential acquisition @REDM6

On the opposite side of Building Developers selling their completed projects, are Building
Operators looking to buy, as in the Hampton Courts residential acquisition case study. The
Building Operator, an investment fund, is seeking to acquire a two-year old, 95% leased
apartment complex from the Building Developer to add to their real estate holdings. In this
case study, the Building Developer has already leased the property and created a stabilized
cashflow in order to capture a higher sales price from the Building Operator.
1812 North Moore Street @REDM7

What happens when a completed building is not leased, and what could cause that to happen?
In the 1812 North Moore case study, a trophy-class building stood empty for four years after
completion. This non-leased building was the result of poor market conditions and required
rents that were too high. In 2017, Nestle agreed to move its headquarters to the building;
however, at the time of writing this book, it has yet to move in.
Summary
The Building Operations Stage may last five to ten years, or for several decades. Building
Operators create economic value by leasing and re-leasing vacant rental space, by keeping
accurate records, by submitting timely reports, and by minimizing the cost of capital through
financing and refinancing activities. Building Operators sell their properties to other Building
Operators or to Building Renovators if they need major repairs/additions, or need to be
repositioned in the marketplace.
The Potomac Yard case study illustrates the increase in property value that can be achieved
by leasing the property, obtaining green certifications, and selling to another Building
Operator with a lower cost of capital. The 1400 K Street case study examines the many chal-
lenges that Building Operators face: lease roll-overs, major tenant improvements, and green
certification; while 650 Massachusetts Avenue demonstrates how Building Operators can
increase value by finding a new tenant for unique vacated spaces. The Hampton Courts
case study focuses on the acquisition of an existing property from a Building Developer, and
the 1812 North Moore example considers the problem of leasing-up a newly constructed
office tower.
Notes
1 LEED EB-OM is the certification achieved through U.S. Green Building Council (USGBC) for an
existing, in-operation building that meets certain sustainability standards and practices. This
acronym stands for: Leadership in Energy and Environmental Design Existing Building – Operations
& Maintenance.
2 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage5/One+&+Two+Potomac+Yard.
pdf
146 Part II
3 One and Two Potomac Yard received the USGBC LEED_NC Gold certification in July, 2006.
4 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage5/1400+K+Street.pdf
5 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage5/650+Massachusetts+Avenue.pdf
6 http://realestatedevelopmentmatrix.com/textbook/res/apt_1988_hampton_courts.pdf
7 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage5/1812+N+Moore.pdf
11 Building Renovation
INTRODUCTION
Building Renovation is the sixth Stage of the seven-Stage Real Estate Development Process
(see Exhibit 11.1). Building Renovators identify the physical and functional deficiencies of a
property, correct those deficiencies, and re-market the property to a different submarket.1
Building Renovators maximize the value of the property by changing the users, but not the
use. That is, office buildings remain office buildings, warehouses remain warehouses, or retail
buildings remain retail buildings. However, Building Renovators increase the building’s
efficiency and usefulness, and consequently increase the value of the renovated property.
Schematic diagram
The schematic diagram in Exhibit 11.2 illustrates the Building Renovation Stage position
in the Real Estate Development Process. Building Renovation usually occurs when an operat-
ing building is underperforming, compared to similar product types in the market. For example,
the tenants of the subject property are paying lower rents than the market average, or unleased
space is difficult to rent. Undergoing building renovations will hopefully secure higher rents
and greater functionality of the building, without changing how the building is being used.

148 Part II
Exhibit 11.2 Building Renovation Schematic diagram.
Once the renovation is complete, Building Renovators can continue to operate the building
or sell the property to a Building Operator. But when the building is no longer at its highest
and best use, and the deficiencies can no longer be cured, the property is sold to a Property
Redeveloper.
Box Diagram
Exhibit 11.3 demonstrates the key activity in real estate development, “Buy one thing and
sell another.” In this diagram, Building Renovators buy an underperforming asset, remedy
the property’s deficiencies, and then either sell the re-marketed property to a Building
Operator or hold it until the end of its economic life and then sell the worn-out property to a
Property Redeveloper.
Building Renovation 149
Exhibit 11.3 Building Renovation Box diagram.
Building renovations are very common in shopping centers and hotels as consumers’
tastes and preferences alter, or as transportation systems change (thereby changing the
property’s relative location). Also, an office building may be renovated to meet the needs of
a different type of office user. For example, high tech companies may prefer an “open office
environment” rather than the traditional enclosed office floor plans, or an office building that
is designed for a single user may be renovated to accommodate multiple users.
Venn diagram
Exhibit 11.4 demonstrates the overlapping nature of the Real Estate Development Stages.
A Building Renovator may acquire a building from a Building Operator that has a “hold-
over tenant,” a renter with a long-term lease and additional renewal options. Clearly, Building
Renovators must determine how to accommodate hold-over tenants while undertaking the
required renovation activities. This often occurs in a shopping center where a major tenant
Exhibit 11.4 Building Renovation Venn diagram.

150 Part II
has a very favorable lease and wants to continue operations even during the renovation and
re-marketing of the property.
When the property is worn-out and it is no longer economically feasible to renovate it,
there may still be tenants with long-term lease agreements. These tenants become “interim
users” when the property is sold to the Property Redeveloper, who is waiting for the right
time to change the uses of the property in the redevelopment process.
Circle diagram
Exhibit 11.5 shows how the Building Renovation Stage may cycle back to the Building
Operations Stage several times before moving on to the Property Redevelopment Stage.
Building renovations can occur multiple times throughout the lifespan of a building, as
the cycle of operations, to renovations, to operations repeats. This cycle continues until the
building is no longer an effective or viable space in the market, at which time the property
moves into the Property Redevelopment Stage.
Building Renovation: what happens

Building Renovators buy properties which have substantial economic and/or physical
depreciation and create value by fixing these deficiencies then re-positioning and operating
Exhibit 11.5 Building Renovation Circle diagram.

Exhibit 11.6 Building Renovation equation.
the properties until they are ready for redevelopment. The unique skills and risks for Building
Renovators are often found in companies that specialize in historic renovation, for example.
Building Renovators have a keen knowledge and understanding of the real estate market in
which they work. They know which tenants are expanding and ready to move, which tenants
are ready to go out of business, and which Building Operators are ready to sell their proper-
ties. They are able to see opportunities where others may only see worn-out property in need
of repair. They epitomize the saying, “No problems; only opportunities.” They are truly the
“turn-around artists” of the real estate world. Currently, many shopping center developers are
looking for old shopping centers that need to be fixed-up and re-marketed to different retail
tenants.
Building Renovation developments can be capitalized in a variety of ways. Usually the
project is acquired with equity capital or through a purchase money mortgage from the seller.
Sometimes, the Building Renovator can assume the existing mortgage as part of the acquisi-
tion transaction. The required renovation improvements are usually financed with a short-
term construction loan, which is then replaced with a permanent or long-term loan when the
renovations are complete and the property is re-leased to new tenants.
The diagram in Exhibit 11.6 illustrates the Building Renovation equation. That is, the sum
of the acquisition costs, holding costs, operating costs, and renovation costs should be less
than the operating income and eventual sales price (property disposition price) after the
renovations are complete. The difference between those two values is known as the “spread.”
The spread is the marginal value that is created in this Stage of development. Economists
call this the “profit” earned in this Stage. This spread should occur quickly in the Building
Renovation Stage.
Building Renovation: key players
Selling Building Operators

The selling Building Operator must be motivated to sell the property that is performing
poorly and in need of repair.
This seller may be the source of seller-financing2 arrangements that allow the Building
Renovator to acquire the property and begin the renovation process.
Buying Building Operators

Buying Building Operators are the Building Renovators’ best friends as the Building
Operators are seeking opportunities to create value by leasing the renovated property.
152 Part II
Sometimes, successful Building Renovators are able to negotiate a pre-sale agreement with
Building Operators before or during the renovation construction so that the sale closes and
title transfers at the end of the designated renovation period.
Property Redevelopers
Property Redevelopers are prepared to take control of the renovated property when it can no
longer be renovated because of overwhelming physical deterioration or functional deficien-
cies. Property Redevelopers are like Land Bankers because they hold the property until the
market conditions improve and the property is ready for new land uses.
Existing permanent mortgage lenders

Most existing properties are encumbered with a permanent mortgage of some kind that is
in the first lien position. The seller’s permanent lender may allow the existing loan to be
assigned to or assumed by the Building Renovator. The permanent lender may also agree to
subordinate its first lien position, so the Building Renovator can give the construction lender
a first lien position.
New permanent mortgage lenders

The new permanent mortgage lenders may fund the acquisition costs and later make an
additional funding to cover the renovation costs as the construction occurs. Alternatively,
new mortgage lenders may not fund the project until the renovation and leasing is complete.
Construction lenders fund the renovation costs with an accruing interest rate over a specific
time period. The construction loan would be repaid with a new permanent loan or through
the proceeds from the sale of the renovated property. Because of the highly risky nature
of the renovation process, construction lenders will require a first lien position and/or
personal guarantees from Building Renovators. Experienced Building Renovators and
experienced renovation loan lenders are invaluable in this delicate dance.
Property managers
Property managers are responsible for the collection of rents from the hold-over tenants, as
well as the regular maintenance of the existing building systems. The property managers
may or may not be replaced by project managers when the renovation begins, but in any
case, coordination between the property managers and the project managers is critical for
successful renovations.
Project managers
Project managers work for Building Renovators and oversee and manage the renovation
construction and re-leasing on a daily basis. These are the most important players in the
Building Renovation Stage because they must maintain building operations for hold-
over tenants, while overseeing the construction of the new renovations and moving in the
new tenants in a timely and cost-effective manner.
Tenants
Hold-over tenants must be accommodated as the renovation takes place, so they can continue
operations in the building or vacate the building when their leases expire. New leases with
future tenants must be signed during the Building Renovation Stage. Hopefully, the future
tenants will agree to higher rental rates once the property has been renovated and they take
occupancy
Leasing agents
Leasing agents may help negotiate revised lease terms for hold-over tenants and simultane-
ously help find future tenants for the newly renovated space. Leasing agents may also assist
in the underwriting process3 and the cost-benefit analysis of a potential renovation. Their
expert knowledge of the local markets helps to determine what improvements will garner
higher rental rates based on current trends, such as large lobby improvements or updated
floor plans for open-space concepts.
Building systems engineers

Building systems engineers are responsible for the regular maintenance and minor improve-
ments of the existing building systems. Their knowledge of the building specifics is critical
for the integration of the new systems and the existing building systems. Also, since these
engineers will be responsible for continuing the operation and maintenance of the new build-
ing systems implemented during the renovation, it is important that they are informed and
educated about how to efficiently operate the new systems.
Renovation contractors
Renovation contractors construct the new renovation improvements and remove portions
of the existing structure when they are no longer needed. They will hire the subcontractors
with special knowledge and skills for the renovation project. Renovation contractors have
special skills that are different from those required for new construction. In renovation
projects, very little is “plumb, square, or level,” so renovation contractors must make numer-
ous adjustments to accommodate the “as is” condition of the old property. In addition,
renovation contractors must be sensitive to historical features of the existing structure.
Local historians
Local historians provide information on the building’s original intent or purpose and explain
what historical significance the building may or may not have had in the community. Local
historians may also help in navigating historical preservation requirements if applicable.
Environmental experts
Environmental experts perform an environmental analysis on the existing property prior to
construction and then direct and oversee any required environmental remediation efforts,
such as asbestos encapsulation or mold removal. Environmental experts are also critical to
evaluate hazardous or suspicious conditions that can be encountered during construction.
154 Part II
The neighborhood activists provide input on the needs of the community and lobby for com-
munity improvements or other projects that may either be part of the renovated property, or
entirely off-site. Neighborhood support is critical for local political support, so Building
Renovators must cultivate positive relationships.
Building Renovation: critical tasks

While many of the Building Renovators’ critical Tasks are very similar to those of the Building
Operators, the presence of hold-over tenants and the concern for historic and hazardous
conditions cause special issues.
Provide an accurate analysis of the market conditions

Building Renovators must be able to see market opportunities and envision how the renovated
property will capture these. This vision must be grounded in solid market evidence and a keen
understanding of the market operations. Submarkets in a region react differently with each
other; some directly and some indirectly. The relationship between downtown and suburban
retail areas is a prime example. When a downtown shopping area has high crime rates, shop-
pers will choose to travel to the suburban shopping area. Building Renovators must determine
the best way to exploit these shifts in consumer behavior. Understanding the needs of under-
served market niches requires an intimate knowledge of the operational needs of existing and
new tenants.
Building Renovators must be specific and precise in their market judgments. This is
why successful Building Renovators usually specialize in one product type, e.g. retail, in one
market area, e.g. Northern Virginia. This is also why so many Building Renovators come
from a brokerage background and have gray hair!
Obtain construction permits and approvals

Renovation improvements require applicable building permits from local authorities. There
are often regulatory thresholds (size, cost, use) that determine what improvements can be
made and what permits are required.
The National Historic Preservation Act of 1966 (NHPA) focuses on the development and
renovation of historic properties that are federally funded or permitted. The NHPA also
authorizes State Historic Preservation Offices (SHPOs) to evaluate the effect of develop-
ment on historic properties that are federally funded or permitted. SHPOs are very serious
about protecting historic buildings and sites from rapacious real estate developers. Building
Renovators must cooperate with and work with them.
The National Environmental Policy Act of 1969 (NEPA) also included the evaluation
of historic properties and places in the required Environmental Impact Statement (EIS).
Over the last 50 years, the authority of the State Historic Preservation Offices and the U.S.
Environmental Protection Agency has been expanded to include properties that may become
historic properties, even if they are not yet designated. Again, Building Renovators must stay
up-to-date with the latest requirements and required approvals.
Negotiate various contracts within budget
Building Renovators may negotiate a Guaranteed Maximum Price (GMP) with general
contractors; the general contractor may then hire subcontractors for specific skills, as long as
it is within the scope of work4 and the GMP agreed to by the property owner.
Another possibility is to hire renovation contractors for a fixed fee, and then they will help
the Building Renovators negotiate contracts and prices with multiple subcontractors as
needed to satisfy all needs of the total scope of work. Allowances5 are often used in cost-line
items in renovation projects when the exact nature or scope of the project is unknown. These
allowances should be constantly reviewed and updated as better information about building
conditions is obtained.
Stage, manage, and control the construction projects and leasing efforts
Building Renovators must stage, manage, and control both the construction and leasing
of the renovated improvements so that they are on time and on budget. Simultaneously man-
aging and controlling the construction and marketing of the renovation project is very
difficult because the contractors and the leasing agents have different agendas in terms of
access, timing, and budget priorities. Because of the nature of some renovation projects,
the safety of both the workers and the public require very strict limitations on access to the
property. However, the marketing people like to show their prospective tenants the excite-
ment and energy of the new space. Building Renovators must help the construction teams
and the marketing teams understand each other’s objectives, so they can work together in a
complementary manner.
Maintain good relations with the hold-over tenants

If a portion of the building continues to operate normally during renovation, it is imperative
to have excellent communication with existing, hold-over tenants, so their concerns about
disruption to their space are addressed and the safety of their employees and customers are
insured. Regular meetings to update these tenants, along with “hotline” telephone numbers,
are advised. This is where the project manager is invaluable.
Building Renovation: controllable costs

Given the uncertainty surrounding the timing and extent of many renovation projects,
Building Renovators must control or limit costs to the best of their abilities. These costs may
be difficult to identify and quantify prior to the acquisition of the property and commencement
of the renovation, but they must be carefully monitored and managed during the renovation
period. Allowance line items are especially problematic, but they must be controlled.
Construction costs
Building Renovators must work with engineering consultants, building engineers, environ-
mental experts, and property managers to mitigate any possible unforeseen situations or
building oddities that may arise during construction.6 Using allowances for any special
accommodations to the original scope will prevent “scope creep” or additional change orders
as work continues.
156 Part II
Operating costs during construction
Some basic building systems (electricity, plumbing, and heat) may need to continue during
the renovation. If tenants move out of, or into, the building during renovation, the Building
Renovator must include those costs in their renovation budget and have the cash on hand to
pay those bills.
Management costs
Building Renovators may need to continue to pay a property manager during the renovation,
as well as a project manager. These management costs are predictable and controllable and
vital to a successful project.
Marketing costs
A marketing budget that includes advertising, promotional events, and leasing should be
established at the beginning of the project, and then the marketing costs should be managed
in accordance with the budget to avoid overspending.
Building Renovation: major risks

The major risks in the Renovation Stage are the same major risks that occur in the Building
Development Stage. However, the Renovation Stage tends to be shorter so the risks can be
better controlled, except when unexpected building conditions are discovered during renovation.
Delay in obtaining permits

Renovation work cannot proceed without the approval of local authorities. This is usually
not a problem until it is. If the neighborhood activists object to the project, their influence
may be reflected in the approval process. Local authorities may ask for changes to the scope
of the project or request additional conditions for its approval. Timeliness is paramount.
Historic preservation approvals need to be addressed early on and diligently pursued.
Completion delays and cost over-runs

Completion delays can be caused by numerous conditions. Political opposition is the hardest
to deal with, but shortages of material or contractors may also cause delays. Building
Renovators need to carefully assess these risks before they take the first draw from the con-
struction loan, and the interest clock starts to run. Cost over-runs, like completion delays, can
be caused for numerous reasons. Initial budgets and monthly accounting reports comparing
the budgeted costs to the actual expenses can keep these risks under control. Every renovation
budget must have a “contingency” line item in the budget to offset these risks.

Both the quality of the material and the quality of the workmanship must be closely monitored
from the beginning of the renovation. Once the inferior material has been installed, or the
inferior workmanship discovered, the cost of removal and replacement can be ruinous. In
this area, experience counts and daily inspections are a must.
Because of the short nature of the renovation period, the market should not deteriorate
too quickly. However, the market conditions that Building Renovators expect may not mate-
rialize, so the renovated property is not re-leased as anticipated. This is where Plan B is
important. Renovators must determine how to re-lease the property to different tenants and
address the deteriorating market conditions.
Unexpected environmental or structural conditions

Regardless of the amount of due diligence and pre-construction testing, environmental or
structural conditions may be discovered or the conditions may be worse than expected.
Asbestos insulation, lead paint, and mold infestation are the usual environmental culprits.
Sometimes, rotten wooden structural members or unstable foundations may be encountered
during renovation as well.
Case studies of the Building Renovation Stage

Three case studies of the Building Renovation Stage of the Real Estate Development Process
are presented here to demonstrate and illustrate many of the discussion points in this chapter.
Below, are Building Renovation case studies of a regional shopping mall, a boutique shopping
center, and a downtown office building.
Tysons Corner Shopping Center: 45 years of renovations @REDM7

The three building renovations of the Tysons Corner Shopping Center are a good example
of how a property can be renovated to respond to changing market conditions, especially
transportation improvements:
• 1969: 1.5 million ft2 served by state and local highways.

• 1987: 1.8 million ft2 served by interstate highways.
• 2005: 2.3 million ft2 served by interstates, toll roads, and bus systems.
• 2015: 2.6 million ft2 served by a regional metro rail system.
Located in the Washington, DC, metropolitan area, Tysons Corner is located in the McClain
portion of Fairfax County, one of the highest income areas in the United States. It was
originally developed for office space, creating a major suburban office plaza. However, the
addition of Tysons Corner Center Mall in 1968 and Galleria Mall in 1987 transformed
the area into one of the largest major retail hubs in the United States. The recent completion
of three metro stations accessing Tysons Corner provided the possibility of a larger resident
population and an opportunity for mixed-use, transit-oriented development.
The Tysons Corner area is defined by the Capital Beltway (I-495), Chain Bridge Road
(U.S. Route 123), and the Leesburg Pike (County Route 7). The Silver Line of the Washington
Metropolitan Area Transit Authority (WMATA) currently connects Tyson Corner to the
Greater Washington Area, and it will soon connect Tyson corner to Dulles International
Airport in Loudon County, Virginia.
The Tysons Corner Shopping Center was originally built on a triangular, 85-acre site. At that
time, the Center was billed as one of America’s largest interior malls as it had 1.5 million ft2 of
retail space with all surface parking (see Exhibit 11.8).
Exhibit 11.7 Tysons Corner regional map.
Exhibit 11.8 Tysons Corner Center in 1969.

Exhibit 11.9 Tysons Corner Center in 1987.
By 1987, the occupancy of Tysons Corner Shopping Center was 98.8%, and sales volume
averaged a 10.5% growth rate from 1970 to 1987 (see Exhibit 11.9). A new development
partnership acquired the Center in 1987 and combined both the land and building owner-
ship.8 This partnership decided to renovate the Center and move from a Building Operator to
a Building Renovator.
The renovation plan added 240,000 ft2 of retail area by converting the truck unloading level
to useable retail space and by adding five new anchor retail sites. The addition of five parking
structures freed up 23 acres for a 250-room hotel and future office development (see Exhibit
11.10). The construction of these improvements began in 1988 and was completed in 1989.
In 2003, new owners began the planning, permitting, and leasing for the largest major
renovation at the Tysons Corner Center. Construction was completed in 2005 with the grand
re-opening of the new 350,000 ft2 wing (see Exhibits 11.11 and 11.12). The new wing
160 Part II
Exhibit 11.10 Preliminary land plan for renovation (1987).
included a food court, restaurants, retail stores, and an 18-screen movie theater. The owners
explained that with over 20 million shoppers per year, it made more sense to expand and
renovate, rather than to redevelop the site.
In 2007, a four-phase development plan was approved for Tysons Corner Center Property
by Fairfax County that would expand the mixed-use development to six million ft2, with
2.67 million ft2 of retail. Today, this plan is almost fully built out (see Exhibit 11.13).
The Shops at Georgetown: high-end boutiques to discount retailers @REDM9

This is a great example of how value can be created in the Building Renovation Stage by
making minor tenant improvements and re-positioning the property in the market.
The Shops at Georgetown Park was a high-end, indoor retail center in the middle of the
Georgetown neighborhood in Washington, DC. Georgetown is known for its wealthy residents,
luxury shops, and night life.
Georgetown Park is located at the southwest corner of M Street, NW and Wisconsin
Avenue, NW—M Street is the main throughway for both pedestrians and transit vehicles in
Exhibit 11.11 Tysons Corner Center new wing in 2005.
Exhibit 11.12 Tysons Corner Center interior renovations in 2005.
Georgetown. The shops are set back behind street-front retail stores, and shoppers must
come through limited entryways to the interior of the center for access. As retail market
trends shifted towards outdoor, open-air retail centers, numerous boutique shops and major
retailers moved out of Georgetown Park to the storefronts on M Street.
162 Part II
Exhibit 11.13 Tysons Corner Center future phased development.
Throughout the 2000s, demand for the interior retail space continued to decline. Consequently,
the occupancy of the 20-year old, 305,000 ft2, three-storey mall continued to decline. The
interior photos in Exhibits 11.14 and 11.15 show the inside of the mall during regular operat-
ing hours. There was a rumor that a large glass window pane fell on to the lower level during
mall hours, and no one was hurt and no damage was done because no one was there!
In 2010, the Vornado REIT bought the property at auction for $61 million. From 2010
to 2014, Vornado allowed the few remaining leases to expire, and it re-marketed the space to
larger discount retailers (see Exhibit 11.16). Vornado signed leases with TJ Maxx, HomeGoods,
Michaels, and DSW. Initially, the reaction from the Georgetown community was mixed; some
were excited to have more retail options, while others worried about bringing in discount stores
to an area that has historically been high-end luxury retail. However, Vornado continued to raise
the occupancy by signing leases with credit tenants, including the DC Office of Motor Vehicles.
In August 2014, Vornado was able to sell the renovated Shops at Georgetown to Jamestown
Properties for $272.5 million!
2001 M Street: a rare opportunity @REDM10

This case study shows how a Class B office building can be renovated into a Class A office
building. 2001 M Street is close to the White House and in the Golden Triangle office market
in Washington, DC.
Brookfield Properties acquired 2001 M Street as part of a multi-property purchase from a
major, Washington-based REIT in 2010 (see Exhibit 11.17). The nine-storey building was
Exhibit 11.14 Interior boutique shops.
Exhibit 11.15 Interior boutique shops.

Exhibit 11.16 New front entrance.
Exhibit 11.17 Original 2001 M Street.

built in 1986 and had 228,000 ft2 of office with 25,000 square floor plates. It was fully
occupied by a single tenant.
Shortly after the acquisition, in 2011, the single tenant moved out. Brookfield announced
its intention to become a Building Renovator when its senior vice-president said, “It’s a
rare opportunity where you get the full building back and have the opportunity to fully repo-
sition it. We spent a lot of time and money looking at those options, and the conclusion
we came to is that it’s a really good, visible location, and it makes sense to go ahead with a
full renovation.”
Brookfield’s renovation plan was to do the following:
• gut the existing building;

• expand the floor plate size to 32,000 ft2;
• increase the building height to ten stories;
• increase the rentable area to 320,000 ft2;
• re-skin the building in glass;
• re-market it as a Class A office building.
The renovation began in 2011 and was finished in 2015 (see Exhibit 11.18).
Today, the building is fully leased, and Brookfield has returned to the Building Operations
Stage.
This is a good example of the Building Renovator’s mantra, “No problems; only
opportunities!”
Exhibit 11.18 Renovated 2001 M Street.

166 Part II
Summary
Successful Building Renovators have a superior knowledge of the marketplace: they know
what spaces/users are entering a market, and what spaces/users are leaving a market,
and they have a keen sense of unmet needs in the real estate marketplace. Consequently,
Building Renovators create value by acquiring under-performing properties with major
un-leased spaces and then making major repairs, additions, and improvements that attract
new tenants. Building Renovators don’t change the original use or zoning of the properties,
but they improve the cashflows of the renovated properties. These properties are then sold
to Building Operators or held and eventually sold to Property Redevelopers at the end of
their economic lives.
The Tysons Corner Shopping Center case study reviews the 50-year history of a major
mall as it successfully adjusts to changing shopping practices, transportation improve-
ments, and retail tenant’s needs. The Shops at Georgetown example illustrates how a prop-
erty can be re-positioned in the marketplace by changing from smaller, high-end boutique
tenants to large, discount retailers. The 2001 M Street case study demonstrates how a major
renovation effort can change a vacant Class B office building to a larger, leased-up Class A
office property.
Notes
1 Submarket – every real estate market is composed of several submarkets. Submarkets may be
defined by quality (Class A, B, or C office), by physical size (neighborhood, community, or regional
shopping centers), or by geographical area (central business district or suburban locations).
2 Seller-financing occurs when the seller agrees to finance part of sales price in the form of a note and
mortgage on the property. This arrangement is usually called a “purchase money mortgage.” The
seller may also be able to arrange the assumption of an existing mortgage by the Building Renovator.
3 Underwriting process refers usually to the determination of how much money can be borrowed
to finance the project. The process is based on the earning power of the property, along with the
current financial conditions in the debt market, such as interest rates, debt-coverage ratios, and
loan-to-value ratios.
4 Scope of work refers to the amount and type of construction that is expected. Renovation improve-
ments often start simple and then expand as unexpected conditions are met or new tenants want
different improvements. In these cases, the scope of work must be expanded, and the cost estimates
adjusted. This problem is usually referred to as “scope creep.”
5 Allowances are used when there is considerable uncertainty about the cost or description of certain
budget items, such as tenant improvements or environmental remediation.
6 For example, a previous owner may have fixed a leak in the ceiling by attaching a plastic waste
paper basket to the dripping pipe, thereby allowing the drip to continue and mold to grow.
7 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage6/Tysons+Corner+Shopping+
Center.pdf
8 The Acquisition Memo is at the following hyperlink: http://realestatedevelopmentmatrix.com/
textbook/res/ret._1985_tysons_corner.pdf
9 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage6/The+Shops+at+Georgetown.pdf
10 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage6/2001+M+Street.pdf
12 Property Redevelopment
INTRODUCTION
As shown in Exhibit 12.1, the Property Redevelopment Stage is the last Stage in the traditional
Real Estate Development Process, but it is really the first Stage of the Redevelopment Process.
Property Redevelopers are much like Land Bankers, except that Property Redevelopers buy
properties with existing structures and a history of land uses. This Stage is also a relatively
passive one, as Redevelopers, like the Land Bankers, must wait for external market forces to
increase their properties’ values to the extent that they are ready to be re-zoned so that new and
different land uses can be developed.
Schematic diagram
The schematic diagram presented in Exhibit 12.2 shows the Property Redevelopment Stage
at the end of the Real Estate Development Process. Property Redevelopers must analyze
the current and future market conditions and then imagine new, productive uses for proper-
ties that have clearly outlived their existing physical improvements. Property Redevelopers
may help the general public visualize or imagine the advantages and possibilities of these

168 Part II
Exhibit 12.2 Property Redevelopment Schematic diagram.
properties in light of the expected market changes. These expected changes may be public
infrastructure improvements, or private initiatives to reinvigorate the neighborhood.
Once the potential of a worn-out property is recognized and it becomes more valuable,
Property Redevelopers sell the property to Land Packagers who effectively become Property
Re-Packagers and the Real Estate (Re)Development Process starts all over again.
Most often, the role of Property Redeveloper falls to entities who inherit the properties
in one way or another. For example, municipalities inherit properties because the owners
have stopped paying the real estate taxes, or the owners have stopped maintaining the prop-
erties, which are then condemned as public hazards. In either event, the municipalities assign
the properties to public redevelopment authorities who attempt to sell the properties to
private entities who will become Land Packagers and begin the active redevelopment of the
Property Redevelopment 169
properties. In a similar manner, counties and states may also inherit abandoned properties
that need to be redeveloped. In addition, corporations and public utilities may have proper-
ties that are no longer used and need to be re-purposed. Perhaps the U.S. Department of
Defense’s Base Relocation and Closure (BRAC) is the best-known example of redeveloping
obsolete or unused military facilities by leasing them to private developers.
Box diagram
The box diagram in Exhibit 12.3 demonstrates the adage that to add value, the real estate
developer must, “Buy one thing and then sell another.”
In the Redevelopment Stage, Property Redevelopers buy a sorry, worn-out property with
little potential and sell a sorry, worn-out property with great potential. This usually occurs
when a property is underperforming and feasibility studies suggest that another type of
real estate product(s) would a better use of the site. This differs from Building Renovation
because the property not only undergoes the major renovation or reconstruction, but it also
changes use as well. To clarify, Building Renovators may convert an old department store
into a series of smaller boutique shops (the use stays the same); the Property Redeveloper
takes the old department store and converts the property into student housing (change
in use).
Venn diagram
The Venn diagram in Exhibit 12.4 shows how the Property Redevelopment Stage overlaps
with the Building Renovation Stage, as well as the Land Packaging Stage. The Building
Renovation Stage begins with hold-over tenants and ends with interim uses, which may then
be transferred to Property Redevelopers. These interim uses are helpful in reducing the
Property Redevelopers’ holding costs. Many times, the governmental agencies or authorities
will try to get the properties re-zoned or included in some type of governmental redevelopment
Exhibit 12.3 Property Redevelopment Box diagram.

170 Part II
Exhibit 12.4 Property Redevelopment Venn diagram.
program, that may include financing opportunities or tax credits. Government Redevelopers
are eager to induce private Land Packagers in the redevelopment process by providing lenient
terms and prices. For example, private Land Packagers may not need to commit capital to the
project until the appropriate zoning is obtained, or until project financing is available. These
public-private partnerships are common in this Property Redevelopment Stage.
Circle diagram
The circle diagram shown in Exhibit 12.5 demonstrates how the Property Redevelopment
Stage moves to the Land (Re)Packaging Stage and the Real Estate Development Process
begins again. Once Property Redevelopers create, clarify and focus the new vision of
the property, the redevelopment of the property goes to the (Re)Packaging Stage, where the
appropriate public approvals are obtained, and planning and market studies are conducted.
Land Packagers commission various feasibility studies to show the viability and potential of
the redeveloped property.
The circle diagram illustrates that the Land Banking and Property Redevelopment
Stages share similar characteristics regarding their relationship to the Land Packaging Stage.
The main difference, though, is that Land Banking involves raw, undeveloped land and
property.
Redevelopment involves land that has already been developed and has a history of land
uses with physical improvements. In other words, once a site has completed the Real Estate
Development Process, it cannot go back to raw land in Land Banking. Instead, the site
progresses from the Property Redevelopment Stage back to the Land Packaging Stage.
Property Redevelopment: what happens

Property Redevelopers buy a property with such serious physical or functional deficiencies
that the improvements must be torn down or redeveloped for another use—for example,
changing from an office building to a retail center. This essentially begins the Real Estate
Development Process all over again. Property Redevelopers are in the same role as Land
Bankers, except that Land Bankers usually work with green field properties, and Property
Exhibit 12.5 Property Redevelopment Circle diagram.
Redevelopers usually work with brown field properties. In every major city, government-
sponsored redevelopment agencies are probably the largest players in this Stage, even
though they didn’t exactly “buy” their holdings from Building Renovators. Usually, the muni-
cipalities acquire the properties through tax foreclosures and assign these properties to the
redevelopment agencies to be sold.
The acquisition costs are sometimes zero as redevelopment agencies have properties
assigned to them from municipalities with the direction to sell them or move them off the
books. This is the same situation that real estate departments in a large corporation may find
themselves in when properties are no longer needed and simply need to be liquidated or sold
to other entities.
The holding costs may be substantial or minimal depending on the size and nature of the
property. Often, there are environmental concerns which must be identified and evaluated
before willing buyers can be found. Finally, there may be safety issues associated with
deteriorating or dilapidated buildings.
The sale of the property to be redeveloped may be problematic and subject to numerous
conditions to close. In any event, the sales price to the Property Redeveloper must exceed the
172 Part II
Exhibit 12.6 Property Redevelopment equation.
sum of the net holding costs, and the acquisition price by enough to justify the risks incurred in
the development process. This difference is the required “spread” or profit (see Exhibit 12.6).
How long it takes for the expected increase in value to happen is hard to predict as this is a
major risk in the Property Redevelopment Stage.
Property Redevelopment: key players

Some of the key players in the Property Redevelopment Stage are as follows:
Private property owners

Property Redevelopers need to identify private property owners who are motivated either to
sell their properties, or just to get rid of them. They may include families that have inherited
deteriorated properties or businesses that no longer can use certain facilities.
Redevelopment authorities
Redevelopment authorities typically control the distressed properties by having municipali-
ties assign them the responsibility of selling or disposing of the properties. Many times,
these authorities attempt to outline a redevelopment program that guides the disposition
process.
Zoning commissions and planning departments

Municipal zoning commissions and planning departments are instrumental in setting the
stage for a property to become an attractive prospect for the Land (Re)Packager. They need
to embrace the new vision and encourage and support the re-zoning and re-purposing of the
deteriorated property.
Structural engineers
Structural engineers need to evaluate the existing condition of the structure and surrounding
infrastructure in terms of the feasibility of reusing them, or demolishing them in a safe and
timely manner. Many times, deteriorated property can pose dangers for interim users or
neighbors. Structural engineers can help devise safe holding plans.
Demolition contractors
Demolition contractors, who have experience in salvaging and demolishing old structures
with environmental or structural problems, are very important at this Stage. This can be a
very tricky business in dense urban areas, so demolition cannot be undertaken lightly.
Surveyors and title insurers

Surveyors and title insurers determine the size and area of the property to be redeveloped,
who owns it, and how the property can be sold or transferred. Worn-out or abandoned urban
properties often have serious boundary issues and title problems that can severely restrict the
future uses of the property. Old easements and neighbor encroachments must be identified
and resolved for redevelopment to be possible. Also, clouds in the chain of ownership can
prevent the transfer of a clear title to Land Packagers.
Environmental experts
Environmental experts evaluate the redevelopment potential of a property as it relates to,
or is affected by, its current environmental conditions, as well as possible hazardous condi-
tions caused by previous uses. Besides the surface, subsurface, and atmospheric conditions,
these old properties could have historic or cultural significance that would impact their
redevelopment potential. Old grave sites are particularly challenging.
The neighborhood or surrounding area will enhance or detract from the redevelopment of
a property. It is critical to have neighborhood support for whatever redevelopment is
contemplated. While, “you can’t fight City Hall,” City Hall doesn’t want to fight neighborhood
associations.
Political leadership
Political leaders need to be champions for the redevelopment of the property; these are
usually local politicians who want to improve the urban area. Without political support, the
redevelopment will never happen.
Local historians
Local historians can help uncover possible historic attributes of the redeveloped property.
This historic evaluation is important for public support. Often there are grants or tax credits
for the renovation or redevelopment of historic properties.
Attorneys
Attorneys are critical for the drafting of the risk allocation provisions of the sale of the proper-
ties. Even though property sellers may want to “wipe their hands clean” of the property,
buyers will want covenants, warrants, or guarantees that survive the sale of the property and
continue the sellers’ liability and protect the buyers going forward. Environmental liability is
particularly troublesome, as are unresolved lawsuits.
174 Part II
Land (Re)Packagers
Property Redevelopers need to identify the possible Land (Re)Packagers who can see the
potential and are willing to lead the charge for redevelopment approvals. Land (Re)Packagers
are usually in the private sector, and often there are discussions about public-private partnerships
for redevelopment projects.
Property Redevelopment: critical Tasks

Property Redevelopers face many challenges. Here is an incomplete discussion about some
of the most critical Tasks.
Negotiate the acquisition price and terms

Property Redevelopers need to negotiate an acquisition price that does not need to be paid in
cash to the seller at closing. Redevelopers attempt to minimize their out-of-pocket cash and
maximize their control of the property. Option agreements, sales contracts with variable
good faith deposit conditions, or management and consulting agreements can be used in
accomplishing this task. The important part is to control the property—not necessarily to
own it. Building Renovators want to control when and how the property is sold, and under
what terms and conditions.
Purchase-money mortgages1 are possible alternatives for Property Redevelopers to
minimize their up-front cash obligations, but these mortgages should be non-recourse2 to the
Property Redevelopers and have pre-negotiated deeds in lieu of foreclosure provisions.3
Arrange carrying costs

The carrying costs for redevelopment properties include not only property taxes and
insurance, but also the security and maintenance of deteriorating structures. Public safety is
paramount, as is the safety of employees and interim users. Carrying costs can be minimized
by leasing parts of the redevelopment property to interim users. However, interim land uses
can complicate or delay the eventual redevelopment of the property, especially if the
neighborhood likes the interim land uses better than possible redevelopment uses. Open
space afforded by playing fields or vegetable gardens can become the highest and best use
of the site in the neighbors’ eyes. Also, an apparently benign use, such as a used-car lot, can
cause environmental concerns about battery disposal and oil leaks.
Control legal and consulting expenses

Redevelopment properties can be the subject of endless legal briefs and opinions, as well as
the topic of numerous research projects, architectural studies, and market surveys. Property
Redevelopers must control their enthusiasm for the property and be judicious in commis-
sioning these reports. Co-opting the local government or neighborhood organizations to
undertake both these reports, and the accompanying costs, is critical.
Limit maximum loss

Property Redevelopers need to find a way out of the deal if (and when) everything goes wrong.
Redevelopment properties can have environmental issues that could become the responsibility
of the Property Redevelopers; they must arrange protection from this liability before the
property is acquired. Also, structured sales arrangements that involve seller financing may
have personal guarantees that obligate the Property Redeveloper. The default provisions in
these agreements should limit the Property Redeveloper’s continuing liability after the contract
or mortgage obligation is terminated.4 Also, Property Redevelopers do not want to inadvertently
inherit old fights and feuds along with the liabilities associated with them.
Develop political and neighborhood support

Property Redevelopers must develop political and neighborhood support for the redevelop-
ment without encumbering the project with future use obligations or monetary commitments.
Establishing flexibility within approvals and municipal obligations, in order to respond to
changing market conditions, is imperative for a viable redevelopment plan. For example,
promising to build recreational facilities such as a soccer field, or donating a monetary lump
sum to the municipality, are tools often used by Redevelopers.
Acquire additional land parcels

Property Redevelopers may acquire additional land parcels to enhance the redevelopment
potential of the larger site. This assemblage process can increase the original property’s
development potential in several ways:
• Additional land acquisitions can provide increased accessibility or exposure.

• Additional property acquisitions can increase the size of the redevelopment property
so that it meets certain threshold requirements for redevelopment.
• Additional property acquisitions may eliminate a noxious adjacent land use or a
troublesome neighbor.
The Property Redeveloper can easily commit too much cash to these acquisitions: control is
more important than ownership.
Find interim land uses

Property Redevelopers must find interim land uses to defray holding costs. The rule for
interim land uses is, “First do not harm.” A children’s playground or a dog park may seem
innocuous at the beginning and demonstrate that the Redeveloper is a good neighbor, but
these interim land uses can become permanent in the eyes of the neighbors or politicians,
thereby causing political opposition to the private redevelopment of the property. However,
income-producing interim land uses can afford the Redeveloper time to wait for the positive
market changes.
Create opportunities for Land (Re)Packagers

The Property Redeveloper’s main goals are to help the Land (Re)Packager see the vision
and the possible economic value of the redevelopment property. This can be easy or difficult,
but it must be done. Maps, drawings, endorsements, and letters of intent from future possible
users are all part of the Property Redeveloper’s tool kit to help the Land (Re)Packager
understand the potential reuse of the property.
176 Part II
Property Redevelopment: controllable costs
Controllable costs and expenses are ones that Property Redevelopers can and must control or
limit to the best of their abilities. These costs must be identified and quantified prior to acqui-
sition and then carefully monitored and managed during the holding period. Redevelopers
must be disciplined to control these costs and to parsimoniously dole out any available cash.
Acquisition costs of adjacent land parcels

Property Redevelopers may have fallen in love with their property and start to think that
it just needs to be a little bit bigger to capture more of the additional value that they will
be creating. Redevelopers must creatively use purchase options, sales contracts, leases, and
management agreements to control the adjacent land parcels and reduce cash expenditures
to budgeted amounts.
Marketing expenses
The Property Redeveloper’s challenge is to improve the development potential of the site
in the public’s eye. This is usually done with news articles published in newspapers, reported
on television, or distributed on the internet. However, Redevelopers should recognize that the
Land Packagers must be the real target of any marketing effort. Consequently, Redevelopers
cannot afford to spend too much cash on general advertising or promotion. Some Property
Redevelopers have effectively used social media as a low-cost marketing medium.5
Sales and leasing fees

Developers must avoid inadvertently paying sales commissions or leasing fees in the process
of holding and promoting the property, finding interim uses, and acquiring additional sites.
Properties with a long history usually have a long history of persons who would like to benefit
from sales or leasing commissions. The seller should guarantee that there are no outstanding
commissions to be paid.
Consulting expenses
Finally, the number of interesting studies and volume of valuable advice can overwhelm
Property Redevelopers, so they must be judicious in engaging structural engineers, historians,
environmental engineers, political lobbyists, designers, architects, and marketing consultants
with a keen sense of how the study findings will enhance the property’s redevelopment
potential.
Property Redevelopment: major risks

Property Redevelopers face the same major risks as Land Bankers, only more nuanced and
in a more politically charged environment.
Acquired land parcels

The acquired property may never become attractive to the general public or specific users
because of economic changes, such as a recession. Demographic changes can also alter
the attractiveness of the property, such as the “millennium generation” having a preference
for living in loft apartments in old warehouse neighborhoods—changes in tastes and
preferences may also be caused by new urban immigrants who don’t embrace golf or tennis
facilities.
Public infrastructure projects

Under the best of conditions, public infrastructure projects take a long time to be completed.
Unfortunately, infrastructure projects are constantly being announced by public authorities
and then abandoned when the desired funding was not obtained. Also, new transit systems
may not be considered desirable because of population changes, or a light rail-line project may
be abandoned because of cost over-runs. Alternatively, the municipal water and sewer lines
may not be extended because of lawsuits or inter-jurisdictional conflicts.
Environmental issues
Environmental issues are always problematic and should be researched and evaluated during
the due diligence study period. Unfortunately, environmental issues can also be discovered
after closing. Some examples of possible environmental issues may be:
• the underground water table was contaminated much more than initially thought;
• the building was constructed and insulated with hazardous materials throughout;
• a valuable archeological site was discovered on the property.
Neighborhood social issues or problems

Urban neighborhoods are constantly changing, and sometimes not for the good. The city
may have decided to abandon plans to improve or rehabilitate a neighborhood for any
number of reasons. Increases in crime or murder rates inhibit the public will to invest in an
area. Also, domestic riots or terrorism activities can stigmatize an area with a bad reputation.
Property Redevelopers must be prepared for these changes and plan for a much longer
holding period.
Case studies of the Property Redevelopment Stage

Three case studies of the Property Redevelopment Stage of the Real Estate Development
chapter. Below are Property Redevelopment case studies of an old insane asylum, a defunct
municipal airport, and an abandoned railroad yard.
Historic St. Elizabeth’s Hospital to become urban mixed-use development

@REDM6
St Elizabeth’s Property Redevelopment case study is a good example of the District of
Columbia attempting to start the active redevelopment of an under-used property by creating
a concept master plan and then asking private sector developers to respond to its viability.
The RFP selection process attempts to solicit new ideas and to convince the general public
of the merits of the redevelopment.
178 Part II
Exhibit 12.7 Historic St. Elizabeth’s Hospital.
St. Elizabeth’s is an historic hospital campus in Washington, DC, which has been owned
by the municipality since 1987. The District’s Redevelopment Authority is now exploring
options for private developers to redevelop parts of the property to better serve the local
neighborhood around St. Elizabeth’s and improve the economy of Washington, DC. The
“federal sequestration” effort emphasized the need for Washington to diversify the local
economy and reduce its reliance on the Federal Government as the major employer.
St. Elizabeth’s is in the southeast quadrant of Washington, DC, the most economically
underdeveloped part of the District of Columbia. It is within walking distance of the Congress
Heights Metro Station on the East Campus, and within close proximity to the Anacostia
Metro Station on the West Campus. There are also proposed transit ways by the District of
Columbia in the area that will need to be taken into account for future land development. The
East Campus was the parcel of land chosen for redevelopment.
The original 600-acres tract of land was used as agricultural farmland. In 1855, the Federal
Government opened the Government Hospital for the Insane (see Exhibit 12.7). The hospital
operated primarily as a mental institution until the Civil War, at which time soldiers were
treated there and referred to it simply as St. Elizabeth’s to conceal its traditional insane
asylum reputation. In 1916, the name was officially changed to St. Elizabeth’s. The hospital
continued to operate as a leading institution for mental health and expanded over the 1900s.
In 2010, a new hospital was completed, leaving the other historic buildings outdated and in
need of renovation.
The District of Columbia has owned the St. Elizabeth’s site since 1987, so the question
is, “Why redevelop now?” There are several compelling reasons for the property’s
redevelopment:
• Excess Land. Unused parcels were physically developable and were near a metro site,
thus creating an opportunity for a transit-oriented, mixed-use development.
• Underperforming. The existing buildings were functionally and physically obsolete
as medical facilities, so they were no longer the “highest and best use” of the site. New
higher and better uses (more appropriate uses) would generate greater property taxes for
the District.
• Need for greater connection and access. Southeast DC is often viewed as the “wrong-
side-of-tracks,” so creating a new city center or urban place to promote and build the
community would benefit the existing residents and increase property values by
encouraging better housing and employment opportunities in Southeast DC.
• Diversify employment centers. The Federal Government is the largest tenant in the real
estate market in Washington, DC; it is also the major employer in the District. DC is
hoping to diversify the economy to create a richer economic portfolio, as well as mitigate
against the consequences of any future federal sequestrations or shutdowns.
Working with the District of Columbia poses many challenges, similar to those of the Armed
Forces Retirement Home and Potomac Yard when the property moves to the Land Packaging
Stage of Development. They include:
• Retention and renovation of historic buildings.

• Lack of existing employment centers already in the area.
• Lack of incentive for potential retailers, due to existing low-income residents.
• Need to create incentives for employers and people to move into the area.
The District of Columbia engaged a planning firm to develop a Phase I Concept Plan which
specified 1.6 million ft2 of potential commercial development which included:
• an Innovation/Academic Hub (175,000 ft2);

• residential Village (200 units);
• office/retail center (604,000 ft2);
• interim uses for parking (350 spaces).
In early 2014, the DC Redevelopment Authority issued a Request for Proposals (RFP) for a
Phase I development of St Elizabeth’s East Campus. Phase I would encompass infrastructure,
an anchor institution, an event pavilion, interim land uses, and an innovation hub. The RFP’s
Executive Summary stated:7
The District of Columbia (the “District”) is seeking proposals from developers or

development teams interested in serving as a Master Developer (“Respondents”) for
the first phase of St. Elizabeth’s East (“Phase I”). Phase I is a 1.6 million square foot,
mixed-use and technology-focused development opportunity at the East campus of
the former St. Elizabeth’s Hospital in Southeast Washington, D.C. At 183-acres,
St. Elizabeth’s East is the largest remaining undeveloped parcel in the country’s top real
estate market and has flexible new zoning in place for approximately 5 million square
feet of development. Redevelopment presents an unparalleled opportunity in the nation’s
capital to create a new technology-focused community, combining business, research,
higher education and residential uses in a collaborative environment. As envisioned,
St. Elizabeth’s East will combine a modern “Innovation Hub” with the graceful pre-war
180 Part II
Exhibit 12.8 Redbrick LMD’s Phase I Concept Plan (2.5 million GSF).
buildings adaptively reused for convenient urban living, just an easy walk from the
Congress Heights Metro Station.”
The Authority included a concept master plan for 1.6 million gross square feet (GSF) of
building area to help the prospective master developers visualize the potential of this
redevelopment opportunity. The request for a master developer indicated that the District
was unsure of the Real Estate Development Process and was looking for a master developer
to effectively do everything (Land Packaging, Land Development, Building Development,
and Building Operations). This was an impossible task.
The RFP for Phase I was released on March 31, 2014, and the deadline for responses
was June 27, 2014. Five development companies responded. On September 30, 2014, the
respondents presented their proposals to the general public, and on December 29, 2014,
Redbrick LMD was chosen as the master developer.
Exhibit 12.8 is Redbrick LMD’s winning concept master plan. The most striking part
of this well-conceived plan was that the proposed density of 2.6 million ft2 of development
is 56% greater than the District’s concept plan of 1.6 million. Clearly, from the private
developer’s point of view, bigger was definitely better!
Edmonton City Center Airport redevelopment: a quest for sustainability

@REDM8
This is a good example of the Edmonton City Council desiring to redevelop its municipal
airport, which was constructed in 1932 and is currently in the middle of town. The City
Council has a vision of a cutting edge, world-class, sustainable development.
As shown in Exhibit 12.9, Edmonton is in the Canadian Province of Alberta, and the
closed Edmonton City Center Airport (ECCA) is just north of the downtown.
Exhibit 12.9 Edmonton regional map.
Exhibit 12.10 is an aerial photo of the 536-acre ECCA land that the City Council has re-
named Blatchford, and would like to redevelop as an example to the international community
of a sustainable place—a place that is designed to make it possible, and easy, for residents to
reduce their ecological footprint and their carbon dioxide emission by specified amounts,
while improving their quality of life.9 The ECCA lands were envisioned to be home to 30,000
Edmontonians living in a carbon neutral community that uses 100% renewable energy.
The Council used a two-stage approach to soliciting proposals. First, a Request for
Information (RFI) was issued, which emphasized an understanding of the challenges, asked
respondents to outline the quality, scope and experience of the resources of the team, along
with evidence of creativity and innovation in the field of sustainability. The RFI also included
the “Master Plan Principles” that were to guide the respondents.
There were seven main design principles:
1 Design Excellence. The proposed development must capture the spirit of its place and
showcase the best practices of exemplary world leading design. As it unfolds over time,
this community must be seen as a model for local and global design excellence.
2 Empower People. This community should meet its demands in ways that give it better
control over what it consumes. This will be a model community that empowers indi-
viduals to change their collective habits to conserve, preserve, and mindfully consume
what can be generated locally and within a net zero carbon footprint.
182 Part II
Exhibit 12.10 Aerial photo of the ECCA.
3 Reduce Consumption. Buildings must be designed for a long lifecycle and be suited to
flexibility and reuse without resorting to large-scale disposal. Waste should be seen as
resource to be reprocessed into something useful or treated to recover value or energy.
4 Offer Lifestyle Options. This new community must be a place where people choose to
live and work and where it is easy for residents to adopt a sustainable lifestyle. Choices
must be offered across all aspects of living and working, and these choices need to be
sustainable and affordable.
5 Innovate. The vision is predicated on innovation in environmental practices, social
experimentation, and in economic opportunities.
6 Measure Achievements. A clear framework and appropriate metrics must be implemented
to inform the ongoing process of design, construction, and occupation.
7 Raising the Bar. Edmonton’s vision is to expand on the successes of the leading edge
sustainable communities and raise the bar worldwide for those communities who will
follow.
Thirty-two submissions to the RFI were received from all over the world. They were
evaluated by a panel of judges who reduced the list to five respondents who were qualified
to respond to the Request for Proposals (RFP). These “preferred responders” were each
given a $50,000 honorarium to work with the city to undertake a master planning exercise
over a 12-month period.
In 2011, the City Council chose the Perkins and Will firm to prepare a master plan and
began the detailed planning of Phase I in 2013. Exhibit 12.11 shows an oblique rendering
Exhibit 12.11 Winning master plan proposal.
of the Perkins and Will master plan, and a video presentation of their plan can be found at
@REDM.10
The City Council had an aggressive redevelopment schedule: the official ground breaking
was in 2014, and building sites were to become available in 2017. However, the worldwide
glut of natural gas and oil prices caused a precipitous drop in prices, as well as a severe
recession in Edmonton. Ironically, the redevelopment of the ECCA land into a world-class
sustainable place will have to wait until the fossil fuel prices recover.
This case study is a good example of a city not only committing to sustainable develop-
ment practices, but also going to the trouble of actually defining what sustainable development
means, what sustainable outcomes will look like, and setting metrics and milestones to
measure the success of these goals.
Potomac Yard: railyard redeveloped to an urban infill development @REDM11

This example demonstrates how a private corporation became a Property Redeveloper when
it strategically changed its operations and thereby made a special purpose land into a
redevelopment opportunity. The circle diagram shown in Exhibit 12.4 demonstrates how
the Property Redevelopment Stage moves to the Land Packaging Stage and the Real Estate
Development Process begins again.
Since the late 1800s, first the Richmond Fredericksburg and Potomac Railroad (RF&P),
and then CSX Transportation Corporation (CSX), used the Potomac Yard Property as a
switching yard to build southbound and northbound trains (see Exhibit 12.12). Located along
184 Part II
Exhibit 12.12 Potomac Yard circa 1980.
the Potomac River in northern Virginia, most of Potomac Yard was claimed from the Potomac
River using fill material.
When CSX decided to change its switching yard to a more flexible location, Potomac
Yard became an excess land holding. CSX decided to decommission the 80-track rail yard
and its Central Operations area. The CSX main rail corridor was moved from the west side
Exhibit 12.13 Decommissioned Arlington North Tract.
of the Yard to the east side, and the train-making tracks were completely removed. The flood
control bridges over Four-Mile Run were left in place. Exhibits 12.13, 12.14, and 12.15
show the decommissioned Potomac Yard.
After the decommissioning was complete, speculation began about the future use
of Potomac Yard. In 1992, Virginia Governor L. Douglas Wilder, and Redskins football
team owner, Jack Kent Cooke, arranged a press conference on the Alexandria portion of
Potomac Yard, complete with a helicopter arrival, to announce that there would be a profes-
sional football stadium constructed on Potomac Yard as the new home of the Washington
Redskins. Unfortunately, neither the Alexandria nor the Arlington local officials were noti-
fied of this announcement. The public outcry against the stadium was overwhelming, and
for the first time in modern history, the City of Alexandria and the County of Arlington
joined together to oppose the stadium development. After several weeks of media bombasts
and citizens’ letters to the editors, Jack Kent Cooke announced that the stadium project at
Potomac Yard would be abandoned because of “environmental issues.”12 Clearly, neither the
Governor nor the Redskins owner appreciated that real estate development was a public
process.
Following this Public Relations debacle, CSX created several interim land uses including
a warehouse, a rental car facility, and a big box retail center. Coincident with these activities,
CSX arranged a sale of all of its RF&P assets to the international investment banking firm,
Lazard Freres. Thus, Lazard formed Commonwealth Atlantic Properties (CAP) to take over
Exhibit 12.14 Decommissioned Arlington South Tract with flood control bridges.
Exhibit 12.15 Decommissioned Alexandria Tract.

the real estate development process and begin the Land Packaging Stage of Potomac Yard,
which takes us back to the examples in Chapter 7.
Summary
The Property Redevelopment Stage is similar to the Land Banking Stage because it is a
rather passive investment position that relies on major market trends for success. However,
the Property Redevelopment Stage is also unlike the Land Banking Stage because it must
deal with a history of land uses and building structures, as well as numerous neighbors and
stakeholders. Property Redevelopers must seek out Land Packagers to actively change
the property zoning and prepare the site for Land and Building Developers. Consequently,
Property Redevelopers must identify historic and environmental issues, structural conditions
of existing structures, survey and title problems, and possible sources of capital through
various public-private partnership arrangements. Property Redevelopers are different from
Building Renovators because they actually change the use of the property.
The St. Elizabeth’s Hospital case study demonstrates how the Property Redeveloper,
the District of Columbia, can promote private involvement in the development by commis-
sioning a preliminary master plan and then requesting proposal for development (RFPs)
from several private developers. The Edmonton City Center Airport case study illustrates how
the Property Redeveloper, the City of Edmonton, attempted to create a vision for the redevel-
oped property by establishing sustainability guidelines and then engaging several qualified
planning firms to prepare competing land plans for the community to consider. Finally, the
Potomac Yard example shows how the Property Redeveloper, CSX Corporation, can set
the stage for Land Packagers by decommissioning an old railroad yard and relocating its
major rail line.
Notes
1 Purchase-money mortgages occur when the seller agrees to finance part of the purchase price as a
mortgage loan.
2 Non-recourse provisions state that in the event of default and foreclosure of the note, that the lender
will only look to the property for repayment of the unpaid obligations. In other words, the borrower
is not personally liable for repayment of the mortgage loan.
3 Deed in lieu of foreclosure provisions means that in the event of default, the lender will accept the
deed to the property as full payment of the loan obligation.
4 See endnotes 2 and 3 above.
5 The redevelopment of Atlantic Station in Atlanta, Georgia has done this successfully.
6 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage7/St+Elizabeth.pdf
7 https://dgs.dc.gov/sites/default/files/dc/sites/dgs/publication/attachments/RFP-St%20Elizabeths%20
Infrastrucutre%20Phase%201.pdf
8 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage7/Blatchford+Edmonton+Canada.
pdf
9 James Mckellar, Lecture presentation at Johns Hopkins Carey Business School, February 27, 2015.
10 www.youtube.com/watch?v=w33nLGlcYZ0
11 http://realestatedevelopmentmatrix.com/textbook/res/task1/stage7/Potomac+Yard.pdf
12 www.washingtonpost.com/wp-srv/sports/redskins/longterm/1997/stadium/timeline/1992/
alexaban.htm
Part III
13 Real Estate Development Tasks
An overview
INTRODUCTION
This chapter is an overview of the Real Estate Development Task groups that form the
horizontal axis on the Real Estate Development Matrix (Exhibit 13.1), which will be dis-
cussed in detail in the subsequent eight chapters. The theme of the Real Estate Development
Matrix is that property value can be increased in each cell by accomplishing certain tasks
that require special skills. In Part II (Chapters 5–12), the critical Tasks for each Stage
of development were briefly introduced as the most important Tasks to be accomplished
in that Stage. However, there are other Tasks in each Stage of Development that must also
be closely examined and resolved. The Tasks that were not listed as “critical” in Part II will
become the most critical ones if they are ignored or not dealt with directly. To better under-
stand this process, the Real Estate Development Tasks that must be addressed in each Stage
have been broken down into eight major groups:
I Acquisition
II Financing
III Market Analysis and Marketing Strategies
IV Environmental Issues

192 Part III
V Approvals and Permits
VI Physical Improvements
VII Transportation and Accessibility
VIII Sales and Disposition
With the exception of the Acquisition Tasks and the Sales and Disposition Tasks, each Task
category requires special skills that must be mastered by real estate developers to be successful.
The Acquisition Tasks and the Sales and Disposition Tasks are very similar; they are really
two sides of the same coin. The major difference between these two Task groups is the
perspective of the developer. The Acquisition Tasks require developers to determine how
they will create value for themselves in the current Stage, while the Sales and Disposition
Tasks require developers to examine the next Stage of development and how value can be
created for the Buying Developers.
Again, with the exception of the Acquisition Tasks, and the Sales and Disposition Tasks,
these Task groups are not ranked in chronological order. Each Stage of development begins
with the Acquisition Tasks and ends with the Sales and Disposition Tasks. Effectively, the
other Tasks are accomplished simultaneously. These Tasks are related to and dependent upon
one another. Accomplishing these Tasks is messy and confusing work. Developers must
master multi-tasking and time management as they work through the Real Estate Development
Process, because they must tend to everything involved in completing multiple Tasks at the
same time!
For example, most of the Real Estate Development Tasks require permits and approvals
as well as financing, and all of the Tasks are dependent upon economic market conditions.
Finally Environmental Tasks, and Transportation and Accessibility Tasks, affect all of the
other tasks as well.
Which Task in the most important? The one that the developer didn’t do!
A metaphorical digression
Metaphorically, accomplishing these Tasks can be thought of as a mathematical programming
problem with an objective function that is optimized subject to a series of limiting constraints.
The traditional setup for math programing problems is as follows:
Objective function: optimize, minimize, or maximize

Subject to:
Limiting condition 1
Limiting condition 2
Etc.
The Real Estate Development Process is constantly changing since it is very dynamic and
poorly specified in the sense that limiting conditions are not exact or precise. Consequently,
the objective of a real estate development is not to find the optimum solution, but to find
a solution that satisfies all of the limiting conditions. The objective function is said to be a
“satisficing” criterion, rather than an optimizing criterion.
Therefore, the Real Estate Development Process can be stated as follows:
Objective function: To find a development plan that can satisfy the requirements for
each task group.
Tasks: an overview 193
Subject to meeting the following conditions:
Acquisition
Financing
Market Analysis and Marketing Strategies
Environmental Issues
Approvals and Permits
Physical Improvements
Transportation and Accessibility
Sales and Disposition
The Task Groups are the limiting constraints that must be satisfied. When taken together,
they will hopefully define a “Feasible Set” of solutions that will meet all of these conditions.
The developer’s job is to find the Feasible Set and to stay in it. The ability of the real estate
development plan to withstand changing market conditions and remain in the Feasible Set is
a measure of the robustness of the development plan.
Part III outline

In each of the next eight chapters, a Task category, or group, is broken down and discussed
in terms of the subtasks that need to be addressed, accomplished, resolved, avoided, or
transferred, as follows:
Chapter 14: Acquisition Tasks
a Feasibility studies
b Underwriting requirements
c Contract negotiations
d Due diligence reviews
e Closing conditions
Chapter 15: Financing Tasks
a Financial projections
b Capital formation and accumulation
c Financial management and reporting
Chapter 16: Market Analysis and Marketing Strategies Tasks
a Conduct site level strategies

b Analyze current and future market conditions
c Analyze competitive properties
d Determine promotional and advertising programs
e Market forecasting strategies.
Chapter 17: Environmental Issues
a Phase I, II, and III environmental site assessments

b Certifications
c Atmospheric, surface, and subsurface conditions
d Cultural and historical conditions
194 Part III
Chapter 18: Approvals and Permits Tasks
a Respect the natural tension in the approvals and permits process

b Communicate with understanding
c Expect and prepare for the worst
d Obtain the required approvals and permits
Chapter 19: Physical Improvements Tasks
a Planning and design

b Engineering
c Construction
d Maintenance
Chapter 20: Transportation and Accessibility Tasks
a Off-site transportation
b On-site accessibility
c On- and off-site construction
d On- and off-site maintenance
Chapter 21: Sales and Disposition Tasks
a Seller’s due diligence

b Market the property for sale
c Negotiate and execute a sales contract
d Development agreements
e Closing transactions
Summary
In each Stage of the Real Estate Development Process, all of the development Tasks must
be addressed, not just the critical Tasks discussed in Part II. Each Stage begins with the
Acquisition Tasks and ends with the Disposition Tasks. The other six Tasks are not listed in
chronological order, nor in order of importance—rather, they are accomplished in an iterative
manner, so that in the end, these Tasks are achieved almost simultaneously.
14 I. Acquisition Tasks
INTRODUCTION
Each Stage of the Real Estate Development Process is comprised of eight groups of
Development Tasks. To accomplish these Tasks, the developers must have a keen sense
of their goals and objectives. They must answer the question, “What are we looking for?”
Like the old saying goes, “If you don’t know where you are going, any road will get you
there.” To understand what a good deal or opportunity would look like, developers must
establish criteria with which to evaluate the opportunities, and employ a strategy to seek out
and identify attractive properties.
The developers must think of the Acquisition Tasks as an opportunity to do the following:
• Acquire a property with an attractive price and acceptable terms and conditions;
developers must evaluate the transaction costs.
• Add economic value to the acquired properties by successfully completing critical
Tasks. Developers must identify exactly what critical Tasks can create value and
determine if they can accomplish those tasks.

196 Part III
• Sell the improved properties to willing buyers. From the moment of acquisition,
developers must look for the next owners of the properties: that is, to new developers
who will undertake the challenges of the next stage of real estate development.
• Capture the “spread” between the cost to create1 and the value created.2 Spread is defined
as the economic profit that the developer is seeking as the reward for successfully
completing the Acquisition Tasks and creating additional economic value. The “spread”
can also be defined as the “marginal value.”3
The Acquisition Tasks require developers to determine if they have the abilities, resources,
and temperament (physical, emotional, and financial), to assemble a team to accomplish the
required Tasks, as well as the wherewithal to bear the risks associated with these tasks.
To clarify, the Acquisition Tasks may cause developers “to pass” or not to buy potential
development properties, but the process of evaluating these properties as possible acquisitions
is important.
In the same manner, the Disposition Tasks (the last Task group in every stage of the Real
Estate Development Process) may lead to the decision to not sell the properties and to carry
forward into the next stage of development. Again, it is important to evaluate the disposition
of the properties and the capturing of the value created. Even if developers do not want to
sell the property, they must undertake the Acquisition Tasks for the next stage and objectively
answer the question, “Would I buy this property if I didn’t already own it?”
Often, the Acquisition Tasks are broken down into five subtasks:
a Feasibility studies.
b Underwriting requirements.
c Contract negotiations.
d Due diligence reviews.
e Closing conditions.
Many real estate professionals use the terms “feasibility studies,” “underwriting require-
ments,” and “due diligence reviews” interchangeably. However, this can be confusing, and
the buyers and sellers need to agree on what they are talking about. In general, “feasibility
studies” are done in conjunction with nonbinding letters of intent; “underwriting require-
ments” relate to the financing of the real estate; and “due diligence reviews” are conducted
after a contract has been negotiated, but before closing occurs.
a. Feasibility studies
The “feasibility” of a project is determined by many different studies. These studies are done
by many different kinds of professionals, all of whom like to declare whether or not the
project is feasible. Feasibility studies of all kinds are usually done early in the acquisition
process. Often in a nonbinding Letter of Intent (LOI), prospective developers who want
to buy a property are given a “free look period,” during which time they are expected to
undertake the various types of feasibility studies.
Physical and engineering feasibility

The physical characteristics of the land and existing improvements, such as the shape and
size of the lot, the site topography, the subsurface conditions, and the age and condition of
I. Acquisition 197
the improvements, are evaluated to determine if they can support the proposed development
plan. Colloquially, the developers must determine if they, “can put ten pounds in a five-
pound bag.”
The costs to construct the proposed new improvements and implement the development
plan are also determined and evaluated in terms of the adequacy and availability of the mate-
rials, as well as the availability of general contractors and major subcontractors. The simple
questions are, “Can it be done?,” “How long will it take?,” and “How much will it cost?”
Market feasibility
Current market conditions must be determined and evaluated as a baseline from which to
evaluate what future market changes can make the proposed project successful, or unsuc-
cessful. The basic metrics include:
• current employment levels;

• current rental rates of competitive properties;
• current vacancy rates of competitive properties;
• current sales prices of competitive properties;
• current supply (or stock) of existing competitive properties;
• current competitive properties that are under development.
While this market data is imperative, the real challenge is to estimate and predict future
market conditions. The market feasibility study must determine how much the future market
conditions must improve to make the proposed development successful and/or how much the
future market conditions can deteriorate, before the proposed development is unsuccessful.
Financial feasibility
The financial feasibility of a proposed real estate development combines the estimated costs
from the physical and engineering studies, with the expected future market conditions, to
determine if the anticipated profitability meets the developers’ financial profit and investment
criteria.
There are many measures of profitability. The Gross Profit or Gross Margin is simply
the difference between the expected Total Revenues generated by the development, and the
Total Costs of the development divided by the Total Revenues:
Total Revenues - Total Costs

Gross Margin =
Total Revenues
This is a measure of the total return without adjustment for the time value of money.
A similar return is the Overall Return, which is defined as the difference between the Total
Revenues and the Total Costs divided by the Total Costs:
Total Revenues - Total Costs

Overall Return =
Total Costs
This Overall Return is often referred to as unlevered cash-on-cash returns. It is also compared
to a market-derived Overall Capitalization Rate. The difference between the Overall
Capitalization Rate and the Overall Return is called the “spread” by Building Developers.
198 Part III
Developments with relatively short time periods, such as 24–36 months, are usually
evaluated using Gross Profit measures or Overall Returns.
Developments with longer time periods are often evaluated using time-weighted annual
returns, such as internal rates of return4 or net present value calculations.5
The basic question to be addressed is, “Do the anticipated future benefits exceed the expected
future costs?,” or in other words, “Do the expected returns justify the risks incurred?”
An interesting controversy is the role played by the developer’s profit and whether or
not it should be considered a return on investment, or a return on labor, or the cost of doing
business. The point of view of this book is that developers need to earn a profit, which means
that the cost of capital (both debt and equity) is a cost just like the cost of lumber. Therefore,
the present value of the future benefits must exceed the present value of the future costs so that
a minimum developer profit is achieved. If the Net Present Value equals zero (cost = benefits),
then the project would be deemed “not feasible” since the developer’s profit would be zero.
Feasibility study examples

Feasibility studies6 can be very formal and lengthy or relatively short and sweet, depending
on the nature of the property or the interest of the developer.
Formal feasibility study: Greensboro Grove @REDM7

An excellent example of a very formal feasibility study is that of 8350 Leesburg Pike in
Vienna, VA, which is currently in Stage 7, Property Redevelopment. The feasibility study
evaluates the feasibility of redeveloping the 12.8-acre site, which is currently a 157,000ft2
strip shopping center, into a 2.5 millionft2 for mixed-use development.
The proposed redevelopment would be a transit-oriented development that will take full
advantage of multi-modal transportation accessibility options by incorporating residential
(1.5 million ft2), office (700,000 ft2) and retail uses (300,000 ft2).
There will be four parcels on top of two parking structures, built over the course of four
phases. All towers constructed on the parking podiums are centered around the intersection
of Peach Street and Grove Street, and green plazas created by the contiguous park space
throughout the site, as shown in Exhibit 14.2.
The study examines the current and projected market condition for each use, estimates the
direct and indirect development costs of the phase-development schedule, evaluates several
financial scenarios, and even suggests a partnership structure.
The scope and detail of this impressive report represents the “Cadillac” version of
feasibility studies. It was done by a team of real estate graduate students, with the guidance
of numerous professional consultants, for the NAIOP-sponsored Capitol Challenge. Most
developers could not afford nor risk the time and money that this feasibility study would
require in the private sector.
By the way, this study won the NAIOP competition, and the Property Redeveloper is still
evaluating the possibility of undertaking this redevelopment effort.
“Back of the Envelope” feasibility studies

Often, Building Developers will use an abbreviated, yet revealing, format to examine the
preliminary feasibility of a proposed project. In this book, this format is called the “Back of
the Envelope” (BOTE) approach in memory of R.W. Finley, an Oklahoma developer who
I. Acquisition 199
Exhibit 14.2 Greensboro Grove massing study.
was discussed in Chapter 2, and who literally worked out his developments on the back of
used envelopes that he carried in his vest pocket. This BOTE approach compares the
expected Net Operating Income to the Total Development Costs by calculating the “Return
On Total Costs” and then compares this rate to the Overall Capitalization Rate that similar
and completed properties are selling for in the market. The Building Developer compares the
spread, or difference between these two rates, to determine if the expected profit justifies
the risk of undertaking the development.
One and Two Potomac Yard @REDM8

The Back of the Envelope format was used to evaluate the construction of One and Two
Potomac Yard when Crescent first considered building the office building on Land Bay A in
the Arlington Portion of Potomac Yard, as discussed in Chapter 9. Crescent expected a $30
per ft2 rent, a 5% vacancy rate, and an $8.50 per ft2 operating expense, which produced a Net
Operating Income (NOI) of $21.79 per ft2. When the NOI is divided by the expected total
development costs of $198.59 per ft2, Return On Total Costs is 10.97%. If the market Overall
Capitalization Rate (OCR) is 9.25%, then the “spread” of difference is 1.72%. Since the
desired minimum spread was 1.50%, this feasibility analysis would suggest that the building
development will be pursued (see Exhibit 14.3).
However, when Crescent included the rental rates and expected costs associated with the
Environmental Protection Agency pre-lease proposal, the NOI increased from $13.5 million
Exhibit 14.3 One and Two Potomac Yard Back of the Envelope feasibility.
I. Acquisition 201
to $13.98 million, but the expected total development costs increased from $123.4 million to
$163.2 million. Consequently, the Return On Total Costs fell from 10.97% to 8.56%, and the
proposed project was clearly not feasible. This is not an unusual situation as the developers
get more accurate income and cost estimates. When this happens, developers need to “return
to the drawing board” and re-evaluate the three commandments of real estate development:
Know Thy Costs, Know Thy Market, and Know Thy Self.
International Plaza @REDM9

The three-storey International Plaza IV Office project, discussed in Chapter 9, is another
example of the use of the Back of the Envelope feasibility analysis (see Exhibit 14.4). In this
case, the Return on Total Costs was 8.14% and the desired spread was 1.25%, so the required
disposition overall capitalization rate was 6.89%. Luckily, the overall market capitalization rate
is 6.75%, which when deducted from required disposition capitalization rate, indicates a net
disposition capitalization rate of .14%. This would indicate a “go” decision, but in fact, because
the net disposition rate is so small, the developer should go back and check all market and cost
assumptions.
Phipps Tower @REDM10

Crescent Resources, through a series of tax-deferred exchanges, acquired land next to the
prestigious Phipps Shopping Center in the Buckhead area of Atlanta, Georgia, that was
permitted for a 500,000 ft2 office tower (see Exhibit 14.5). Exhibit 14.6 is a collage of
beautiful building renderings that were designed for the site. Unfortunately, the preliminary
feasibility study, using the Back of the Envelope approach, indicated that the project was not
economically feasible. The Return On Total Cost and the market overall capitalization rate
only produced a spread of 1.31%, but the required spread was 1.50% due to the amount of
risk involved. The estimated market value of the land and the direct construction costs were
too high.
b. Underwriting requirements
The underwriting process usually focuses on the ability of the project to attract enough
capital, both debt and equity, so that it can be adequately financed. The basic question to be
answered is, “Can sufficient capital be attracted to this project given the risk and returns of
the development?” The underwriting process requires developers to consider both the
required financial rates of return on capital and the availability of the capital.
The required rates of return on debt capital include interest rates on the following types of
debt capital:
• fixed-rate long term mortgages;

• variable-rate second mortgages;
• variable-rate construction loans;
• variable-rate line-of-credit loans.
Lenders can raise the “effective” interest rate by requiring the borrowers to pay origination
fees or “points.” This is a common practice and should be considered by developers.
Exhibit 14.4 International Plaza IV Back of the Envelope feasibility.
Exhibit 14.5 Phipps Back of the Envelope feasibility.
204 Part III
Exhibit 14.6 Phipps tower site plan, entrance, and tower renderings.
The availability of debt capital is usually determined by the lenders’ specified debt-
coverage ratios and loan-to-value ratios. Also, lenders may require developers to provide
personal guarantees or other credit enhancements.
The required rates of return on equity capital are usually quoted as annual cash-on-cash
rates of return11 or as internal rates of return that include each year’s cashflow, as well as the
anticipated sale proceeds at the end of a specified holding period.12
The amount of available equity capital may be determined by the percentage of equity
capital compared to percentage of debt capital, the expected equity payback period, or the
possibility of preferred returns on specific classes of equity capital.
In the underwriting process, the developer must also identify various sources of capital to
determine their willingness to invest in the project. The sources may include:
• commercial banks;
• life insurance companies;
• pension funds;
• venture capitalists;
• wealthy individuals;
• property sellers.
Underwriting example: Phipps Tower @REDM13

Crescent went to the capital market to see if a joint venture partner could be brought into
the Phipps Tower deal to bear some of the risk. A “joint venture memo” was circulated to
I. Acquisition 205
prospective equity partners that suggested a simple joint venture structure, where Crescent
would contribute the land and the new equity partner would contribute a like amount of cash
to the deal. Proceeds would be split 50/50 until both partners received an 8% cumulative
return and the return of their contributed capital. At that time, Crescent would receive 67%
of the cash proceeds and the equity partner would receive 33%.
c. Contract negotiations
The negotiations between Buying Developers and Selling Developers usually begin with a
nonbinding Letter of Intent (LOI) which sets out the price of the properties being acquired,
as well as the general terms and conditions of the transactions, including a “study period”
that allows Buying Developers to complete their feasibility studies, as well as the under-
writing process. These are non-technical and simply written documents, but they should
capture the areas of agreement, as well as the areas of disagreement, and suggest a basic
timeline for the deal. LOIs can be prepared by either the buyer or the seller. The more formal
purchase contract (or Purchase and Sales Agreement) for a property requires the buyer to
consider many additional factors surrounding the contemplated transaction, as well as a good
faith deposit. The purchase contract defines how the title, control, monies, and associated
risks are transferred from the seller to the buyer.
Contract negotiation examples
Westfields Letter of Intent @REDM14

Crescent prepared a Letter of Intent to begin the negotiations for the acquisition of 101.4
acres in the Westfields Corporate Center. This was a rather complex transaction, but it was
boiled down to three pages of the most critical deal terms, including the seller’s cooperation
to structure a transaction that qualifies as a “tax-deferred, Section 1031 exchange.”
This nonbinding LOI did include one binding provision: the “Stand Still” provision
required the seller to stop marketing the property for sale for 30 days.
West Virginia Land Letter of Intent @REDM15

Acting as a prospective Land Developer, Crescent submitted a draft LOI to buy 1,348 acres
of land in West Virginia. The contemplated transaction was a three-stage purchase of speci-
fied land parcels over five years. It also included a post-closing obligation that would provide
the seller with a percentage of future lot sales, when and if they occurred. The salient terms
of this transaction were reduced to four pages.
Define the rights that are being transferred

The real estate purchase contract must define which ownership rights, out of all of the “bundle
of rights,” are actually being transferred from the sellers to the buyers. It is also important to
define how these rights are being disclosed by the sellers. Buyers would like the sellers
to fully represent and warrant the rights and conditions of the property, while on the other
hand, the sellers would like to sell their property “as is” without any disclosures or guarantees.
This part of the contract is usually highly negotiated, and the buyers and sellers must decide
what kind and what level of risks they can tolerate. The sellers’ positions are often surprising
and revealing to the buyers.
206 Part III
The basic categories of representation and warranties that may be used in real estate
contracts are outlined below.
Status and authority of the seller:
• Seller has the legal authority.

• There are no prohibitions to seller’s authority.
• No other consents are required.
• There are no bankruptcy proceedings.
• The seller is not a foreign person.
Status of the real estate property:
• Ownership and conveyance.

• There are no condemnations.
• There are no violations of applicable law.
• There is no pending litigation.
• There are no existing liens on the property.
• Parties are in possession of the property.
• Access to the property is clear.
• Taxes and assessments have been paid.
• There are no environmental violations.
Operation of the property:
• Tenant leases.
• Operating agreements.
• Books and records.
• Maintenance agreements.
Because of the extensive nature of these representations and warranties, such as the
representation that “there are no violations of federal, state, or local environmental law
or regulations,” the sellers often use qualifying language that includes “to the best of my
knowledge.”
To whom; from whom:
• The contract must clearly define and identify the selling entities, as well as the buying
entities.
• The contract must address if the contract can be transferred or assigned to other parties.
Many times, these entities may change during the contract period.
Pre-closing conditions
The contract must specify what conditions need to be met before the closing will occur, as
well as what happens if these conditions are not met. The contract may require the completion
and approval of inspection reports, property surveys, title insurance with exceptions, and
financing arrangements.
I. Acquisition 207
Examples of pre-closing conditions
A common and recommended condition to close a transaction is the approval by a review
board of some kind. This may be a Board of Directors, an Investment Committee, a Partnership
Review Committee, or an Advisory Board. While this may seem like an additional bureaucratic
hurdle to close a transaction, it is rational and prudent to review the entire transaction in a
considered manner with a documented report. Small development companies may resist this
formality, but their larger competitors will use these boards to protect their owners, investors,
and stakeholders.
Crescent Resources used an Investment Committee to approve small and medium-sized
deals, and large deals had to go to Duke Energy’s Board of Directors. “White Papers” were
prepared for these approvals. The USF&G Insurance Company employed an Investment
Committee to review and approve proposals for equity and debt proposals. These were
simply referred to as “Investment Reports.”
Potomac Yard Acquisition Board Approvals @REDM16

For example, the Potomac Yard acquisition for $122 million required a White Paper approval
from both Crescent’s Investment Committee and Duke’s Board of Directors.
Other Crescent Resources Investment Committee Approvals @REDM17

The acquisition and development of International Plaza IV required the approval of a
relatively simple White Paper. However, the much larger and more complex Phipps Tower
development required a very extensive White Paper for review and approval.
Silo Bend Investment Committee Approval @REDM18

The investment in the 146-acre Silo Bend Industrial Park Development in Tampa, Florida,
was initially approved by USF&G’s Investment Committee as a $14.8 million mortgage on
three existing properties and $11.39 million equity investment in 98.2 acres in undeveloped
land. One year later, USF&G was asked to make a $10.9 million mortgage on two buildings
that were under construction and in which USF&G already had a 25% equity interest. These
were complicated developments and complicated investments, but the transactions were laid
out in a systematic format that allowed the investors to understand the risks and returns of
the acquisition decision.
Greenbrier Tower Acquisition Committee Approval @REDM19

The final approval of the acquisition of two matching, six-storey office towers in Chesapeake,
Virginia, was presented to the Acquisition Committee of a public limited liability company.
The acquisition price was $11,839,000, and the acquisition memo described the transac-
tion, as well as the expected market condition and financial returns. Again, the acquisition
transaction was highly structured, with seller financial guarantees and physical holdbacks,
and there were several post-closing conditions. The acquisition memo lays out the transac-
tion and the future operation in a systematic format to enable the Acquisition Committee to
make judicious and responsible decisions.
208 Part III
Deadlines, milestones, deposits
Every sales contract must clearly define what time constraints are involved and clearly
specify the following:
1 The deadlines and extensions.

2 The milestones that must be met.
3 How the good faith deposits are distributed if the time constraints are not met.
Some of these time constraints may involve a “free look” time period for feasibility studies,
a time period for the buyer or seller to obtain certain permits or government approvals, or
time periods for the seller to reach certain leasing or occupancy thresholds.
Post-closing conditions
Many times, there are contract conditions that extend beyond the closing date. For sellers,
these may include the completion of certain infrastructure improvements such as roads,
sewers, or a storm water management pond. For buyers, these post-closing conditions may
include providing certain performance guarantees to public authorities or to private entities,
as well as possible future financing obligations.
d. Due diligence reviews

Due diligence reviews are usually done after the contract has been executed, but before
closing occurs. (Otherwise buyers may suffer from “over-due” diligence20 or, even worse,
“do-do” diligence!21) The due diligence review must confirm that the assumptions about
future development and property expectations are valid and reasonable. The due diligence
review is a multi-disciplinary exercise that should employ multiple professionals and multiple
“sets of eyes.” In a perfect world, the due diligence review is not conducted by the people who
put the deal together, or who did the original feasibility studies. The due diligence reviews
must include the following areas:
• Legal. Includes surveys, title encumbrances, title insurance exceptions, leases, option
contracts, zoning, and subdivision restrictions.
• Physical. The physical dimensions of the land and improvements, number of units,
structural capacities, soil conditions, environmental issues, building inspections, and
plans and specifications (including “as-built” drawings).
• Financial. Loan commitments, note and mortgage documents, estoppels, letters of
credit, and existing and required bonds.
• Market. Current and future rental rate projections, current and future operating expenses,
projected capital expenditures, market capitalization rates, selling prices, and leasing
and sell-out absorption schedules.
Effective due diligence reviews do not make assumptions; they verify and confirm them.
While limiting assumptions are a common practice by professionals conducting feasibility
studies, no limiting assumptions are allowed in an effective due diligence review. Therefore,
effective due diligence reviews do not allow excuses such as “not enough time,” “didn’t
know the difference,” or “not my field.”
I. Acquisition 209
Effective due diligence reviews confirm that there is a reasonable probability that this
acquisition will meet or exceed buyers’ real estate development expectations and investment
objectives. Ideally, the due diligence review is completed before the good faith deposit
becomes non-refundable.
Due diligence checklist @REDM22

As discussed earlier in this chapter, due diligence reviews are a multi-disciplined evaluation
of the assumptions upon which the acquisition based. While every due diligence review is
unique, Crescent used a 16-page checklist for the physical due diligence review.
Checklists are convenient and dangerous, but they are a start. The acquisition team must
also review the legal, financial, and market assumptions for accuracy, verification, and
completeness.
e. Closing conditions
Prior to closing, all the required conditions to close must be met, such as title insurance,
surveys, reports, studies, and governmental approvals. Also, all the required documents must
have been prepared, reviewed, and executed, such as deeds, notes, mortgages, guarantees,
and closing statements.
Prior to closing, it is imperative that the post-closing obligations for buyers and sellers are
defined, documented, and guaranteed, such as road completions, utility extensions, municipal
proffers, and performance assurances.
Finally, the required capital for closing must be transferred, such as loans to be funded,
equity commitments to be deposited, and existing loans to be repaid. Wiring instructions
(to whom and when the capital is transferred) must be accurate and confirmed. There are
always glitches in the transfer of funds, which is why closings are never scheduled on
Fridays!
Alternative acquisition strategies

Developers may have alternative acquisition strategies to the outright purchase of a property.
The goal is to control the property and to capture the increase in the property’s economic
value during the Real Estate Development Process.
One strategy is a land lease with a purchase option. This strategy allows developers to
control the land without paying the full land price all at once and instead pay an annual
rental fee. Sometimes, long-term land leases (such as 99 years) are considered the same as
purchasing the land, except that the lease payments allow for the developer to effectively
finance the entire land cost. However, the subordination of the land lease to new mortgages
can be very tricky and even prohibited in the lease agreement. A land lease can allow the
lessee (buyer) to sublease the land and make improvements as permitted by the land lease.
However, the lessor (current land owner) maintains ownership, title, and control of the
property, subject to the land lease, while collecting annual rent from the lessee.
A purchase option can be a standalone agreement or included as a provision within a
land lease. The purchase option allows the optionee (the potential buyer) to acquire the
property at an agreed upon price and terms. Options can very complicated and are sometimes
combined with a right-of-first-offer agreement.
210 Part III
Exhibit 14.7 Feasibility schematic.
Seller financing is another strategy for developers to acquire properties with a limited
amount of capital and limited liability exposure. Seller financing is an arrangement between
the seller and purchaser, where the seller accepts a note and mortgage from the purchaser as
part of the sales price. Often the note and mortgage provide for default arrangements that
include a deed in lieu of foreclosure. Seller financing is often referred to as a “purchase
money mortgage.”
Summary
The Acquisition Tasks force developers to look forward to the future and determine whether
or not the three commandments of the Real Estate Development Process are being met:
1 Know Thy Costs.

2 Know Thy Market.
3 Know Thy Self.
As Exhibit 14.7 shows, the Acquisition Tasks require a “top down” and a “bottom up”
decision algorithm. That is, developers’ goals and objectives are used to identify specific
properties for possible acquisition, then the properties’ characteristics and development
plans must be measured against these goals and objectives. Throughout the acquisition
decision process, the developers must continually ask themselves the question, “Can we
really do this?”
I. Acquisition 211
Notes
1 The “cost to create” is defined as the sum of acquisition costs, holding costs, and development costs
that the developer incurs.
2 The “total value created” is defined as the present value of the future benefits that the developer
expects to receive. In real estate, value is further defined as the sum of the present value of annual
benefits and the present value of the reversionary benefits.
3 Marginal value is defined as the total value created, minus the total cost to create that value.
4 The Internal Rate of Return is that rate of discount which will equate the original cost of the
investment to the present value of the expected future benefits.
5 The “net present value” of a project is calculated by subtracting the present value of the cost of the
project from the present value of the benefits of project, where the present values are calculated
using an appropriate risk-adjusted rate of discount.
6 The annual “cash-on-cash return” for equity capital is also referred to as the “equity dividend rate”
by real estate appraisers. It is calculated by dividing the annual cashflow after financing by the
outstanding equity investment.
7 http://realestatedevelopmentmatrix.com/textbook/res/3.9.14_greensboro_grove_report.pdf
8 http://realestatedevelopmentmatrix.com/textbook/res/bote_for_land_bay_a.xls http://realestate
developmentmatrix.com/textbook/res/bay_a_fin_info__may_26.xls
9 http://realestatedevelopmentmatrix.com/textbook/res/bote_international_plaza_four.xls
10 http://realestatedevelopmentmatrix.com/textbook/r0es/phipps_bote.xls
11 The annual “cash-on-cash return” for equity capital is also referred to as the “equity dividend rate”
by real estate appraisers. It is calculated by dividing the annual cashflow after financing by the
outstanding equity investment.
12 The “internal rate of return on equity” is defined as that rate of discount that will equate the present
value of the annual equity cashflows and the equity reversion to the initial equity investment.
13 http://realestatedevelopmentmatrix.com/textbook/res/phipps_tower_memo.pdf
14 http://realestatedevelopmentmatrix.com/textbook/res/westfield_loi.pdf
15 http://realestatedevelopmentmatrix.com/textbook/res/9-4-07Letter_IntentCabin+Mountainclean.
pdf
16 http://realestatedevelopmentmatrix.com/textbook/res/potmomac_yard_acquisition_oct_2000.pdf
17 http://realestatedevelopmentmatrix.com/textbook/res/int._pl._iv_white_paper_10_16.pdf http://
realestatedevelopmentmatrix.com/textbook/res/Phipps+Investment+11-5-07.pdf
18 http://realestatedevelopmentmatrix.com/textbook/res/war_1988_silo_bend.pdf http://realestate
developmentmatrix.com/textbook/res/war_1989_silo_bend_ii.pdf
19 http://realestatedevelopmentmatrix.com/textbook/res/ofc_1988_greenbrier_towersiii.pdf
20 Over-due diligence occurs when the buyers regret their acquisition decision by lamenting, “I wish
I knew then what I know now!”
21 Do-do diligence occurs when the buyers or their team must clean up the messes (or do-dos) that
occur after closing when the due diligence review was not conducted properly and thoroughly.
22 http://realestatedevelopmentmatrix.com/textbook/res/Due+Diligence+Checklist+.pdf
15 II. Financing Tasks
INTRODUCTION
The Financing Tasks are highlighted in the Real Estate Development Matrix in Exhibit 15.1.
While each Stage of the Real Estate of Development Process begins with the Acquisition
Tasks and ends with the Disposition Tasks, the groups of Tasks in between are done simulta-
neously and in no particular order. Thus, while the Financing Tasks are listed second, they are
not necessarily the second most important, nor the second group of Tasks to be completed.
All of the Tasks are related to each other in one way or another.
The Financing Tasks are closely related to the Acquisition Tasks because the property
cannot be acquired unless the required capital is raised for the acquisition. The Financing
Tasks require developers to determine the amount and type of capital required to fund
the initial acquisition, as well as the interim holding costs, the completion of the required
tasks, and the eventual disposition of the development property. Developers then must
determine the most efficient method to raise the required capital and then actually raise the
capital. Finally, the funds must be accurately accounted for. It should be noted that each
Stage of development requires specific Financing Tasks to accommodate the specific critical

II. Financing 213
Tasks and the risks involved, but the following discussion generally applies to all stages of
development.
The Financing Tasks can be divided into three broad categories, each consisting of many
subtasks:
a Financial projections.
b Capital formation and accumulation.
c Financial management and reporting.
a. Financial projections
Developers must estimate the amount and timing of projected capital expenditures and
expenses. This discussion does not differentiate between expenditures and expenses as used
in tax-accounting terms. Rather, these are all uses of funds that must be considered. Financing
and accounting professionals usually compile a financial table called a Sources and Uses of
Funds Statement. Real estate developers must first determine how the funds will be used and
next determine appropriate sources from which to obtain these funds.
Expected capital expenditures

The uses of funds include acquisition costs, hard and soft construction costs, interim holding
costs, and operating costs and expenses. Acquisition costs include the cost to acquire the
property in the first place. This may include land, buildings, licenses, easements, municipal
proffers, and/or contributions to infrastructure improvements. Developers may also need
additional capital to acquire critically important adjacent properties (assemblage).
If physical construction is expected, the developer must estimate both the hard costs
(direct construction costs) and soft costs (indirect construction costs). Also, there will be
interim holding costs between Acquisition and Disposition Stages, such as real estate taxes,
property and liability insurance, as well as the maintenance and repairs of any existing
structures on the property.
During the Building Operation Stage, the developer must continue to pay real estate taxes,
property and liability insurance, and maintenance expenses, such as utilities, common area
maintenance, and other expenses defined in the lease agreements.
Projected income and revenues

Developers must estimate the amount of income or revenues they can reasonably expect
to receive during the Real Estate Development Process. These include sales of subdivided
land parcels, excess land, or the final disposition and sale of the property at the end of the
holding period.
The rental income should be projected from property operations, as well as from interim
land uses. And finally, other income from concessions, royalties, or licenses must be estimated.
Projected annual cashflows before financing

At this point, the stabilized proforma income and expense statements, calculated for use
in direct capitalization models as part of the underwriting review in the Acquisition Tasks,
are not sufficient. The financial projections should be estimated on a yearly basis, at least.
214 Part III
Construction period projections for land development, building development, and building
renovation should be calculated monthly (quarterly at a minimum). Development budgets can
be summarized for the expected holding period only if there are detailed periodic budgets upon
which the summary is based. Monthly projections for construction expenses are necessary
for the estimation of accrued construction period interest. Also, financial reports to lenders
(also known as “draw requests”) during construction will need to show “actual vs. budget”
comparisons on a monthly basis.
The Expected Revenues and the Expected Capital and Expenses are combined into esti-
mates of annual cashflows that are needed for the real estate enterprise to create economic
value. If accurate annual cashflows cannot be estimated, then developers should not commit
to the project. Usually, if the real estate development won’t work out on paper, then it won’t
work out in real life. It is important to note that estimated cashflows are the basis for future
accounting reports.
Projected negative cashflows are fatal if not properly addressed. Negative cashflows in
a development budget are very problematic, and they cannot be ignored. There should be
equity reserves, lines of credit, or working capital reserves to cover them. Remember, devel-
opers make money in the long run and go broke in the short run. If you can’t make your
monthly payments, then you are out of business!
Financing schemes must support and complement the real estate enterprise activities that
are projected above. Too often, developers try to make the development enterprise fit the
available capital sources. This is usually a mistake because the financing scheme or capital
structure must support the real estate enterprise, rather than vice versa. Aggressive lenders
will ignore this axiom in their desire to lend money; however, developers must bear the
consequences of a mismatch. For example, highly levered, short-term loans with variable
interest rates for land acquisition are an unsustainable capital structure. Remember the Great
Recession when developers were unable to refinance their short-term loans and consequently
defaulted on the mortgages and lost their properties in foreclosure!
Negative cashflow before financing and equity contributions must be addressed

As Exhibit 15.2 shows, most real estate development projects have negative operating
cashflows before financing and equity contributions are considered. With the exception of
Exhibit 15.2 Typical cashflow patterns in real estate development.

II. Financing 215
the Building Operations Stage, and possibly the Building Renovation Stage, the only time the
positive cashflows are experienced are at the time of sale(s), which is usually at the end of
the holding period. Debt capital funding and equity capital contributions need to be sufficient
and available to cover these cash shortfalls.
The creation of a development budget may require developers to estimate building costs,
construction schedules, lease-up and sell-out periods, as well as accrue interest. These
tasks are technical in nature, and developers must engage skilled professionals to join their
teams. A Special Skills tab in the Real Estate Development Matrix website includes a more
complete description of these skills. @REDM1
Financial projections examples
Belgate @REDM2
The Belgate Land Development project in Charlotte, North Carolina, is a good example of
how specific, key assumptions drive financial projections.
Belgate is a 164-acre land development at the corner of I-85 and City Boulevard in
Charlotte, North Carolina. The projected sales, holding costs, and development expenditures
are shown on the website.
The construction of the land development improvements and the sales of the finished lots
are expected to occur over a five-year period. Financial projections for land developments
begin with projected sales timing and amounts. The Land Developer expects to sell an inven-
tory of finished lots, and the expected timing of the sales drives the construction schedule of
the infrastructure improvements. In this example, a building lot has been pre-sold to the
Exhibit 15.3 Belgate Land Development.

216 Part III
Exhibit 15.4 Belgate preliminary projections.
Swedish retail firm, IKEA. This is the first land sale that will stimulate the future sales. The
other building lots must be served by roads and utilities before they can be sold, so the physi-
cal construction must begin prior to the expected sales date. These are key assumptions that
drive the financial projections. Also, marketing costs are directly related to the sales events,
and the interim holding costs are determined by the outstanding land balance. The projec-
tions in the example are before any financing considerations, so the Land Developer uses an
internal rate of return on total capital (IRRTC ) as the time-weighted measure of profitability.
The expected IRR TC in this case is 20%, which is considered an acceptable rate of return for
the amount of risk. Essentially, the developers are looking for a spread between the IRR TC
and the developer’s (weighted average) cost of capital. The developers also use a simpler
measure of profitability, the Gross Margin.3 In this case, it is also acceptable, at 15% (see
Exhibit 15.4).
Potomac Yard Land Development @REDM4

The reference proforma in this example illustrates the complex factors that make financial
projections so tricky.
The 300-acre Potomac Yard land development, located in Northern Virginia, is much larger
than Belgate, and the overall development period was expected to be 12 years. However, the
financial projections of the land development must be attempted with the understanding that
there is a tremendous amount of uncertainty in the projections. Essentially, the financial
projections provide the real estate developer with a roadmap to complete the development.5
As shown on the spreadsheet, the analysis begins with the timing of the projected land
sales. Then the construction of the required infrastructure is scheduled prior to the land sales.
The marketing costs occur simultaneously with the land sales, while the holding costs are
determined by the remaining inventory of land that the developer owns. In this case, the
internal rate of return on total capital (IRRTC) is estimated to be 15%. These extensive and
complicated projections are hard to grasp by possible investors, so again a simpler profitability
measure is used. In this case, the Land Developer buys the land for $12.50 per building square
II. Financing 217
foot (BSF), then constructs the infrastructure for $8.50 per BSF, and finally sells the land to
Building Developers for $30 per BSF over a 12-year period. Thus, the Land Developer is
projecting a 33% profit margin. Of course, the detailed financial back-up and solid market
research needs to be completed before these profitability measures are meaningful for
decision-making.
When the 15% IRR TC over the 12-year holing period was compared to the developer’s
weighted-average cost-of-capital of 12%, the Board of Directors approved the acquisition.
Piedmont Town Center @REDM6

The Piedmont Town Center is an example of how the preliminary financial projections are
calculated. Piedmont Town Center is a mixed-use development in Charlotte, North Carolina.
Building developers were evaluating the acquisition and construction of the retail and office
portions of the project using the spreadsheet.
The three-year projections considered the site acquisition (land cost), the construction
costs (hard costs), and sales, marketing and professional costs (soft costs) that were incurred,
as well as the lease-up period and the eventual sale of the office and retail space at the end
of three years. These projections also included the interest on, and the repayment of, the
construction loan. Because of the short development period, the use of time sensitive IRRs
is not particularly meaningful. Often, Building Developers use a simple multiplier analysis
to evaluate the profitability of the project. In this case, when the total cash proceeds after
financing of $64,000 is divided by the total equity investment of $31,000, an equity multiple
of 2.06 is indicated. This means that the Building Developers double their money doing the
development. If the project takes two years, the annual return is approximately 50%, and if
the project takes three years to complete, then the annual return is approximately 33%. In
other words, the 2.0 equity multiplier is deemed an adequate spread for this development.
b. Capital formation and accumulation
Debt vs. equity

Given the risks, returns, and timing of the capital flows of the development, developers must
determine the appropriate capital structure and sources. The capital structure, which is
usually a combination of debt and equity, must support the real estate enterprise. For example,
long-term mortgages with fixed monthly payments need to be supported by long-term leases.
Also, short-term mortgages with variable interest rates and variable payments can only be
sustained for special situations or projects, such as a construction loan for a specific project.
Leverage is defined as the use of debt capital to finance a project. Leverage causes financial
risk, and the higher the leverage (the higher the loan amounts), the greater the financial risk.
Financial risk is defined in two dimensions: first, the required debt payments increase the
variability and the chance of monetary default; and second, the higher loan amount increases
the chance that the loan may exceed a maximum percentage of the property value (the loan-
to-value ratio) and cause a status default of the loan.7 Consequently, the higher the financial
risk, the higher the required interest rate. This is a rule.
Equity capital invested in a real estate development usually does not require fixed
payments (nor distributions of money) by the developer to the equity capital holders, and it
is subordinate to the mortgage loan payment. Therefore, the equity returns (or distributions)
are considered riskier, and equity investors require a higher expected rate of return.
218 Part III
On the other hand, equity capital will reduce the financial risk, but equity is precious and
hard to come by. Equity capital will support more uncertain and variable returns from opera-
tions that are typically referred to as business risk. Therefore, the classic trade off becomes:
higher leverage may increase the equity returns, but it always increases the financial risks
that the equity capital must bear.
Interest rates: fixed rate vs. variable rate

Mortgage loans with fixed interest rates transfer the interest rate risk from the borrower
(developer) to the lender. However, mortgage loans with variable interest rates transfer the
interest rate risk to the borrower (developer). Consequently, lenders view variable rate loans
as less risky; therefore, they usually have lower interest rates than fixed-rate loans.
Variable interest rates can be managed by the borrower (developer) with caps,8 and
floors,9 but this requires special skills, expertise, and diligence on behalf of the borrower.
These risk management techniques are usually used only on the very largest variable-rate
mortgages.
The general public is familiar with real estate mortgages that are long-term, self-amortizing,
fixed-rate, fixed-payment financial instruments, known as conventional home mortgages.
However, in the Real Estate Development Process, these long-term, fixed-rate, fixed-payment
mortgages are only appropriate for debt financing in the Building Operations Stage because
the required stable income is backed by long-term leases.
Mortgage term: long-term vs. short-term

Long term loans are usually considered riskier to the lender because the capital is committed
or invested in the project for a longer period while the shorter-term loans are less risky for
the lenders. The cost differential between long-term and short-term loans is referred to as the
“yield curve.” The most frequently reported yield curve compares the three-month, two-
year, five-year and 30-year U.S. Treasury Department Bonds, which are used as benchmarks
for real estate mortgage rates. The yield curve is always changing, but usually the long-term
loans have higher interest rates than shorter term loans.
Construction loan vs. permanent loan

Exhibit 15.5 compares the features of construction loans and permanent loans. Developers
usually have construction loans during the Land Development, Building Development, and
Building Renovation Stages in the Real Estate Development Process. These construction
loans are usually then converted to, or paid off by, permanent loans when the building moves
into the Building Operations Stage. These loans are very different in many aspects, as
discussed below. Note: these are typical characteristics of the loan categories, but each of
these factors may change or be amended to fit the specific project.
Sources of loans
• Construction loans: provided by commercial banks or savings and loan institutions that
have a specialized Construction Loan Department.
• Permanent loans: provided by insurance companies, pension funds, sovereign wealth
funds, or other long-term investors.
II. Financing 219
Exhibit 15.5 Construction loan vs. permanent loan.
Interest rates
• Construction loans: variable interest rate that accrues during the term.
• Permanent loans: fixed interest rate that is paid currently as it is earned.
Loan amount
• Construction loans: based on observable and verifiable physical improvements.
• Permanent loans: based on loan-to-value and a debt coverage ratios.
Payments
• Construction loans: payments are not made until the loan matures (hopefully the end of
the construction period).
• Permanent loans: payments are paid monthly at a fixed amount that includes an
amortization (repayment) factor.
Loan balance
• Construction loans: the loan balance increases as draws are made and interest accrues
during the loan term.
• Permanent loans: the loan is partially amortized (reduced) over the term of the loan.
220 Part III
Terms
• Construction loans: terms are measured in months and are based on the construction
period and the lease-up (or sell-out) periods.
• Permanent loans: terms are measured in years, usually ten years or more.
• Mini-perm loans are construction loans that convert to permanent loans for two–five
years after the construction is complete.
Guarantees
• Construction loans: require a personal guarantee or a completion guarantee at a minimum.
• Permanent loans: secured only by the property (non-recourse) and limited personal
guarantees, if any.
Funding holdback
• Construction loans: funds are dispersed after inspections in conjunction with a construc-
tion schedule and in accordance with approved plans and specifications.
• Permanent loans: after initial funding, common holdbacks include tenant improvements
and commissions for unleased space, as well as economic earn-outs based on income
thresholds.
Commencement
• Construction loans: commence immediately as construction draws are approved.
• Permanent loans: are forward committed to future performance levels, like construction
completion or lease-up levels.
Tri-party agreements
• Often the developer, the construction lender, and the permanent lender enter into a binding
three-party agreement that commits the permanent lender to fund the permanent loan
when certain conditions or milestones are met. Tri-party agreements are most common
when the Building Developer expects to continue to the Building Operations Stage.
Possible conflicts
When the construction loan is replaced by the permanent loan, three conditions may occur:
1 If the amount of the construction loan equals the permanent mortgage, then the
construction loan is paid off and the developer begins to make monthly payments.
2 If the construction loan is greater than the permanent mortgage, then the developer must
use outside funds to pay off the construction loan. These additional funds may come
from gap mortgages, mezzanine loans,10 or equity contributions.
3 If the construction loan is less than the permanent loan, then the developer may use
the excess funds to establish operating reserves, pay cumulative preferred returns to the
equity partners, repay the equity partners, or distribute the proceeds to the equity
partners.
II. Financing 221
Seller financing alternatives
Developers, especially those in the Land Banking, Land Packaging, and Property Renovation
Stages should look to the sellers as a source of funds to acquire the property. This is particu-
larly appropriate if the property is difficult to finance, or the developers have limited equity
capital sources. There are numerous ways for sellers to provide financing for developers.
Each financing scheme has positive and negative aspects, but developers should be aware
that their legal status and corresponding liability can change dramatically with each scheme.
Purchase money mortgage

The purchase money mortgage occurs when the seller accepts part of the purchase price as
a note from the Buying Developer, along with a mortgage on the property. The Buying
Developer becomes a borrower, and the seller becomes a lender.
Land lease
A land lease can be used to effectively finance 100% of the leased property. The Buying
Developer becomes the lessee (or tenant), and the seller becomes the lessor (or the landlord).
The lease agreement defines the rights and responsibility of each party.
Option agreements
The option agreement can be part of a land lease or a standalone document which gives
buying developers (the optionees) the right to purchase the property from the sellers
(optionor) at a specified time or time period, and at a specified price and terms. The option
price may be fixed, defined, or set formulaically. Often, a first right-of-offer accompanies an
option agreement.
Land contract
A land contract specifies what the buyer’s payments will be and under what circumstances
the title to the property will pass from the seller to the buyer.
Purchase and sale agreements

A purchase and sale agreement can essentially provide long-term financing if the contract
period is several years in duration. In this case, buying developers are usually required to
increase the amount of good faith deposits that are nonrefundable if the transaction is not
consummated.
Equity capital
The required amount of equity capital for a real estate development is basically the difference
between the total uses of funds and the available debt capital. Developers do not necessarily
need to be the source of equity capital; rather it is the developers’ task or responsibility to
raise the required equity capital. Developers may choose to be equity capital contributors,
but the development should be viable without the developers’ equity capital.
222 Part III
Developers usually raise equity capital by contacting various possible equity investors. These
may include past investors, wealthy individuals, pension funds, venture capital firms, cash-
rich companies, or as a last resort, friends and families. The critical factor is to match the equity
investors’ objectives to the real estate enterprise’s expectations. For example, an elderly couple
requiring regular monthly checks to live on would not be a good candidate to be an equity inves-
tor in a Land Banking Stage of development because of the lack of regular, periodic payments.
Equity investors typically invest in real estate developments through some kind of part-
nership agreement(s). These agreements may be general partnerships, limited liability
partnerships, or limited liability companies. These agreements state how and when the equity
capital is contributed to the partnership and under what terms and conditions the equity returns
are distributed to the equity partners. There may be different classes of partners with different
distribution preferences, and there may also be requirements for the partners to contribute
additional funds or make loans to the partnership
Developers should seek out knowledgeable, skilled, and experienced equity partners and
always remember that there is such a thing as “patient money.”
Capital formation and accumulation examples
One and Two Potomac Yard @REDM11

One and Two Potomac Yard, located in Washington, DC, is an excellent example of Financing
Tasks that involve joint venture proposals.
One and Two Potomac Yard are two office towers containing 619,920 rentable square feet
(rft2), of which 405,087 rft2 are pre-leased to the U.S. General Services Administration for
the use of the U.S. Environmental Protection Agency. If the Building Developer were to
invest all of the capital to construct the project ($150 million) and then sell the leased
property at an 8% capitalization rate, the developer would make a net profit of $21.2 million.
Essentially the Building Developer would be building at a Return On Total Costs of 9.3%
and selling at a Market Cap Rate of 8%, or a 1.3% spread.
However, rather than wait 36 months, the Building Developer would prefer to attract a joint
venture partner today, who will provide the required capital for the hard and soft costs and
pay the Building Developer a joint venture fee to receive a percentage of the after-financing
sale proceeds. In this manner, the Building Developer would be minimizing their financial
exposure, accelerating their cash payment, and still retain a percentage of the net proceed
from sale. For example, if the new joint venture partner paid the Building Developer $15.1
million today and provided the capital for the hard and soft costs, then the joint venture
partner would share 70% of the Net Proceeds from the sale. This would give the new joint
venture partner an IRR on Total Capital of 10%. Essentially, the joint venture partner is paying
the Building Developer for the land up front while keeping the building in the deal to construct,
lease, and manage the real estate development.
This joint venture formula could be adjusted, so the joint venture partner could pay less
money for the 70% share, or take a larger share of the proceeds. Building Developers need
to understand the capital needs of the project, as well as the required returns of potential joint
venture investors.
Bent Tree Tower @REDM12

Bent Tree Tower illustrates the mortgage proposal for a mixed-use development in Dallas,
Texas.
II. Financing 223
This an example of a Building Developer who expected to become a Building Operator
after the project was constructed and leased. In Dallas, Texas, he was planning to build a
mixed-use project on land that he already owned. The proposed project included an 11-storey
office building, a two-storey bank building, a one-storey retail building, and a 713-space
above-grade parking garage. He could significantly reduce his construction loan cost (interest
rate and front-end points) if he had a permanent mortgage commitment that would pay
off the construction loan at the end of construction period of 36 months. Consequently, he
negotiated a $41 million mortgage loan commitment with a major insurance company
that would take out (or pay off) the construction loan in 36 months for a one point (1%)
commitment fee and a binding tri-party agreement. The initial funding of the permanent loan
would be subject to loan proceed holdbacks for tenant improvements and leasing commissions
for unleased space. This holdback would be funded as space was leased and built-out, and
leasing commissions were due and payable.
Also, there could be an economic loan proceed holdback if the gross income did not reach
a threshold level of $5.8 million. However, this holdback would be funded on the basis of
$2.94 for every $1 over the threshold.
The Building Developer also provided a master lease that would cover negative cashflows
of the project during the first 30 months of the loan.
As the developer prepared to break ground for the project, he decided that the market
conditions were too overheated, especially with the recent downturn in oil prices. He decided
to forfeit his one point commitment fee and wait for the market to adjust to excess space and
declining demand.
Howell Mill Square @REDM13

The mortgage proposal for a neighborhood shopping center, Howell Mill Square, in Atlanta,
Georgia, is another example of how developers must determine the appropriate capital
structure and sources.
The Building Developer had been constructing neighborhood shopping centers in the
Greater Atlanta area. He usually sold the completed centers to investment groups, for whom
he would provide property management services. However, he had found a great site
(with some fill issues) and had pre-leased the 45,528 ft2 of the 86,060 ft2 total to Kroger
Grocery Company; several small shop retailers had contacted him about the remaining shop
space. His total development costs were $5.54 million, and he could borrow $5.45 million
from a closed-end pension fund that was comprised of forward committing participating
mortgages. He could borrow all of his development costs when he funded the permanent
mortgage. He rationalized that this “debt joint venture” was essentially the same as selling
the completed property to an investment group, except that with the participating mortgage,
he owned the property and would share 45% of the increases in annual income and 50%
of the proceeds for sale. This loan structure would also fund the cost of the excess land that
he would buy.
The permanent loan would take out the construction loan with a binding tri-party
agreement, and the initial funding would be subject to holdbacks for tenant improvements,
leasing commissions, and a gross income threshold.
As the Building Operator, he would master lease the property until the annualized lease
contracts exceeded $685,375.
The loan proposal outlined was approved by the Investment Committee of the closed-end
pension fund, and the center was constructed, leased on schedule and on budget. Ten years
224 Part III
later, the shopping center was refinanced, the participating loan was paid off, and the
additional interest was paid. A happy ending for everyone.
Duke Industrial Project @REDM14

The Duke Industrial Mortgage Refinancing Proposal illustrates another solution to the
problem of how to accumulate capital for real estate development projects.
This example addresses the problem of a major warehouse/industrial developer who
needed to refinance 1,189,214 ft2 of recently constructed properties, located in 15 buildings
in four business parks that included nine warehouses, five office-showrooms, and one single-
storey office building. The proposed financing solution was to divide the portfolio into four
mortgage loans that were cross-collateralized and cross-defaulted. The total loan was divided
as follows:
Nashville $10 million

Indianapolis: Hillsdal $12.8 million
Indianapolis: Park 100 $7.7 million
Cincinnati $22.35 million
Total $52.85 million
Because the portfolio was 87% occupied, there were tenant improvement and leasing
commission holdbacks for unleased, first generation space.
The loan prohibited secondary financing on the collateralized properties, and if an individual
building was sold, the “partial sale clause” required that all proceeds had to be used to pay
down the portfolio loan balance. The loan agreement also provided for a yield maintenance
provision in the event that an entire loan was sold or refinanced.
This is also a good example of a Building Operator creating value by refinancing mortgage
loans and reducing the interest expenses, thereby increasing the after-financing cashflow to
the equity provider.
Hilton Waterfront Hotel @REDM15

The Hilton Waterfront Hotel Mortgage Proposal illustrates other ways to accumulate capital.
The new owners of the Hilton Waterfront Hotel in Annapolis, Maryland, wanted to reno-
vate the 20-year-old hotel and change the hotel franchise to a Marriott Hotel. The Building
Renovators were experienced hotel operators who designed a three-phase renovation plan
that included an asbestos abatement program. After the renovations were complete and
the new Marriott franchise was executed and in place, the Building Renovators agreed to a
$20 million permanent mortgage with a large insurance company. The loan had a “pay and
accrue” interest provision that stated if the minimum required pay rate was less than the
actual interest earned, then the unpaid interest would accrue to the mortgage loan balance.
The loan also included a “minimum yield provision” that provided the lender with an addi-
tional payment in the event that the property was re-financed or sold and the minimum
interest rate was not paid.
Hotel renovation projects are very difficult to execute successfully. This renovation
project has been very successful, and is now an integral part of the historic Annapolis
waterfront.
II. Financing 225
c. Financial management and reporting
Future capital flows, both into and out of the development, must be managed, funded,
distributed, accounted for, and reported in a timely manner. This is where “the rubber meets
the road” in terms of being a credible, reliable, and trustworthy developer. Developers have
fiduciary responsibilities when handling other people’s money. This is a sacred trust which
must be respected.
A general rule for developers is, “Good real estate projects have good accounting; bad real
estate projects have bad accounting!” This rule is based on a high correlation between good
accounting and good performance, and vice versa. Every development should begin with
an accounting package that includes a relevant chart of accounts, and every dollar must be
accounted for.
If there are accounting problems, then there are financial problems which are usually
caused by operational problems. When identified through accurate and timely accounting
reports, these problems can be worked out, worked around, or solved outright, but they can
never be ignored. Good accounting is fundamental to identifying and solving real estate
development problems in a timely manner.
Before a project begins, the developers must determine who will do the following:
• keep the books;

• disburse the funds (pay the bills);
• collect the rents;
• prepare and distribute the required reports.
These people need to be identified, vetted, hired, and monitored. It is imperative to have
correct names, working phone numbers, e-mail addresses, USPS addresses, and physical
addresses.
Every budget and schedule needs to identify who does what, and when. Communication
conventions and protocols need to be established up front to ensure timeliness and minimize
misunderstandings.
There are reports on marketing activity, development progress, and building operations,
as well as revenues and expenses. Regular and accurate reports must be submitted to the
following:
• U.S. Internal Revenue Service (annually).

• State Department of Taxation (annually).
• Local taxing districts and authorities (annually).
• Lenders (defined in the loan documents).
• Equity investors (defined in the partnership agreements, usually semi-annually).
• Asset managers (quarterly).
• Property managers (monthly).
• Certification groups.
• Professional organizations (if applicable).
Annualized budgets must be based on monthly or quarterly reports that compare actual
performance to budgeted expectations as variances. The most accurate, but meaningless,
budgets are those which are done at the end of the year for which they are made. Don’t do
this. Budgeting is a continuous activity. If the initial budgets are inaccurate, they should be
226 Part III
revised and duly noted as revised budgets. Budget reports help set expectations and improve
performance.
Financial management and reporting example
Potomac Yard @REDM16

Potomac Yard is an example of how to allocate land and infrastructure costs for land
development in the budget.
A difficult problem for Land Developers is the allocation of land costs and infrastructure
costs to the building-ready lots, land bays, or building pads. When the individual land bays
are sold, the appropriate cost allocations will establish the profit or gain from the sales. The
allocation methodology used for these costs for the Potomac Yard Land Development
is shown on the website example (note 16). The 12-year financial projections show the
expected income from sales and the corresponding infrastructure costs, and that it will
generate a 15.3% Internal Rate of Return on Total Capital (IRR TC). The IRR TC was used as a
discount rate to allocate the land costs by product type: office, retail, Arlington residential,
and Alexandria residential. These allocations could be used for accounting reports for tax
assessors, investors, and income tax authorities. Several methodologies for cost allocations
were vigorously debated by the accounting department, and this particular methodology was
ultimately not chosen. While there is not a simple “right way” for cost allocations, reporting
consistency is imperative.
Summary
The Financing Tasks require developers to project future capital needs, raise the required
capital for the project, and to report on the status and progress of the Real Estate Development
Process in a timely fashion. All of these responsibilities require professionals with specialized
skills. Consequently, developers must view these Tasks as “people problems” and not just as
“number problems.” Making future predictions of revenues and expenses is a thankless and
unrewarding task. Like weather forecasters, developers are always wrong. However, these
predictions must be made, and their accuracy must be reported. The honesty and integrity of
the developer depends on this. Good developments have good accounting!
It is also imperative that developers match the sources of funds to the uses of funds, so that
the variability of the actual events in the real estate enterprise can be supported by the capital
structure. The creation and maintenance of adequate capital reserves cannot be over-
emphasized. Negative cashflows must be addressed immediately throughout the Real Estate
Development Process.
Notes
1 http://realestatedevelopmentmatrix.com/pages/skills.html
2 http://realestatedevelopmentmatrix.com/textbook/res/Belgate+Proforma+Consolidated+Belk+
Tract+02.20.07.xls
3 The “Gross Margin” is defined as the difference between the total sales and total costs divided by
the total sales.
4 http://realestatedevelopmentmatrix.com/textbook/res/2002e_land_development_model_concept_
plan.xls
5 This old saying is appropriate for Land Developers, especially with large projects, “If you don’t
know where you are going, any road will get you there.”
II. Financing 227
6 http://realestatedevelopmentmatrix.com/textbook/res/Piedmont+Example+2.xls
7 A monetary default of a loan, like missing a mortgage payment, can be cured by making the
required payments and penalties. However, a status default of a loan, like exceeding a maximum
loan-to-value ratio, is much more difficult to cure because the borrower must reduce the outstanding
loan amount to comply with the loan-to-value ratio.
8 Interest Rate Caps are a loan provision in an adjustable rate mortgage that limits the increase in the
rate of interest at each anniversary date of the rate change.
9 Interest Rate Floors are a loan provision in an adjustable rate mortgage that limits the decrease in
the rate of interest at each anniversary date of the rate change.
10 Mezzanine Loans cover the gap between the first mortgage debt on the property and the equity
investment. This is not a secured mortgage on the property, but is secured by the investors’
equity partnership ownership of the property. William Brueggeman and Jeffrey Fisher, Real
Finance and Investments, McGraw Hill, 5th Edition, p. 424.
11 http://realestatedevelopmentmatrix.com/textbook/res/just_the_facts_mar_19_clarified.xls
12 http://realestatedevelopmentmatrix.com/textbook/res/ofc._1984_bent_tree.pdf
13 http://realestatedevelopmentmatrix.com/textbook/res/ret._1984_howell_mill_square.pdf
14 http://realestatedevelopmentmatrix.com/textbook/res/duke_industrial_portfolio.pdf
15 http://realestatedevelopmentmatrix.com/textbook/res/annapolis_waterfront_hotel.pdf
16 http://realestatedevelopmentmatrix.com/textbook/res/dbk_potomac_yard_land_valuation_
analysis_11-20-02.xls
16 III. Market Analysis and Marketing
Strategies Tasks
INTRODUCTION
The Market Analysis and Marketing Strategies Tasks are critically important and must be
done in conjunction with the other Tasks by the marketing team (see Exhibit 16.1). As
always, each Stage of development begins with Task Group I. (Acquisitions) and ends with
Task Group VIII. (Disposition). The Task Groups II. through VII. are done simultaneously
as they are all related to each other. The Acquisition Tasks included a market feasibility
study, but now developers must determine what do to, when do to it, and who should do it.
The Market Analysis and Marketing Strategies Tasks begin at the site level, expand to the
broader real estate markets, then focus on the smaller submarkets, and finally narrow down
to competitive properties. The overriding question is, “How do developers exploit or capture
the perceived market opportunities?”
The Market Analysis and Marketing Strategies Tasks are sometimes confusing because
developers in a given Stage of development must sell the opportunity to developers in the
next Stage of development. However, both sets of developers need to understand the needs
of the end-users in the Building Operations Stage.
Market Analysis and Marketing Strategies Tasks can be divided into five categories that
include many subtasks.

III. Market Analysis & Marketing Strategies 229
a Conduct site-level strategies.
• Determine what land uses should be developed on the site.
• Determine when the land uses should be brought to market.
• Determine how and by whom the land uses should be brought to market.
b Analyze current and future market conditions.
• Real estate cycles.
• Current market conditions.
• Future market conditions.
c Analyze competitive properties.
• Key characteristics.
• Ranking characteristics.
• Weighted-ranking characteristics.
d Determine promotional and advertising programs.
e Market forecasting strategies.
James Graaskamp, in his ULI monograph, Fundamentals of Real Estate Development, refers
to marketing as the “key to development.”1 This monograph is recommended to all develop-
ers and students of real estate development as essential reading. Graaskamp’s commentary
and insights are as fresh and relevant today as they were 30 years ago.
a. Conduct site level strategies
What is the highest and best use?

The “highest and best use” of a site is an anachronistic concept that is carved in the history
of site valuation analysis. The nineteenth century concept holds the use that produces the
“highest profit” to the land owner is by definition the “best use” for society. This concept was
refined in the last century to mean that the highest and best use of a site use must be physically
possible, legally permissible, financial viable, and produce the highest profit from reasonable
and probable alternative uses.2
Graaskamp suggested that the developer should determine the “most fitting and probable
use” while “recognizing strong constraints imposed by current political factors, real estate
technology, the personalities and talents responsible, the money market, and short-term sol-
vency pressures on consumer, producer, and public infrastructure.”3 Clearly, developers must
evaluate and determine the use, or set of uses, that can reasonably be developed considering
the dynamic and uncertain decision-making environment. The most robust use(s) is that
which can withstand the biggest and most dramatic changes in the environment and still be an
economically viable real estate development that can complete each of the critical Tasks.
When should the land use be brought to market?

Developers must determine when the land use should be brought to the market and then
evaluate the timeline of development. When developers begin their respective Stage of
development and acquire the site, they must estimate two time periods: first, how long will
it take to accomplish the tasks and create the economic value in this Stage; and second, how
long will it take until the end-user will be ready to occupy and operate the property?
230 Part III
For example, Land Developers must determine how long it will take to produce the
building lots for the Building Developers, but they also must be cognizant of how long it will
be until Building Developers can construct the improvements, so the Building Operators can
have the end-users occupy the building. If the end-users (tenants or owner-occupants) are not
ready to occupy the building for six years, then Land Developers have a realistic chance of
selling the finished building sites to the Building Developers. However, if the end-users need
to occupy the space immediately, Land Developers cannot expect this to be a real opportunity
for the Building Developers.
Therefore, all developers must look to the end-users’ occupancy timetable to determine
the effective demand for their products.
How, and by whom, should the land uses be brought to market?

Developers must be prepared to market the property from the moment that they acquire the
site, even if active sales and leasing activities are several months or years away. Developers
must evaluate several options to determine who the best marketing teams are for the devel-
opment: that is, who can best find buyers or tenants, negotiate contracts, and close contracts
in a timely and cost-effective manner. There are several options to be analyzed.
In-house marketing and sales teams

Developers must determine if they are going to use in-house personnel, outside companies,
or a combination of both to market the property. It takes time and effort to build an in-house
marketing team, and the size of the project must support this team. Existing in-house teams
may not be objective in their market analysis in order to keep their jobs; they may not have
sufficient market knowledge or contacts to effectively market the property; and finally the
in-house teams may not have marketed this type of product before.
Outside marketing and sales teams

Outside marketing and sales teams are usually real estate brokerage companies. These firms
must be evaluated in terms of effectiveness, availability, and reliability, as well as the exist-
ence of possible conflicts of interest. Outside marketing firms usually have a broader market
knowledge and more extensive market contacts than inside firms. They are usually more
objective in their market analysis since they do not want to waste their time and energies on
marginal products or weak markets. However, they may have other clients with timetables
that conflict with the developer’s expectations.
In-house and outside marketing combination teams

Often, developers may have marketing people on their teams who are responsible for culti-
vating and maintaining good relationships with outside marketing firms. This combination
of inside and outside teams can be based on informal understandings or very formal listing
agreements. With combination teams, the compensation agreements must be fair to all parties
without causing friction or creating conflicts of interest. These relationships require open
communication without violating confidentiality agreements or creating misunderstandings
among the teams. Inside and outside combination teams can be very productive, effectively
providing developers with the best of both worlds, but they can be tricky to manage.
Examples of site level marketing strategies
Potomac Yard: residential bidders @REDM4

This Arlington Residential Project is a good example of a Land Developer determining what
to sell and when at Potomac Yard (see Exhibit 16.2). When the office market softened after
the September 11 terrorists’ attacks in 2001, Crescent decided to change its development
schedule and develop the residential land bays in the Arlington portion of Potomac Yard to
the following maximum building densities:
Land Bay D East: 428,368 ft2

Land Bay E East: 365,731 ft2
Land Bay F East and West: 500,000 ft2
Total residential: 1,294,099 ft2
The development plan was to construct all of the infrastructure for Arlington, so all of the
land bays could be sold. In order to understand the land development needs of the new
uses and the timetable associated with their building development, Crescent had to deter-
mine how to market four land bays to Building Developers who could build and market
residential products that could be rental apartments or residential condominiums. In addi-
tion, the amount of space could not be sold or developed all at once without overwhelming
the market. Finally, Crescent knew that the Building Developers would want Crescent
Exhibit 16.2 Arlington residential land bays.

232 Part III
to restrict the marketing of other land bays until their projects were leased, occupied, and
stabilized. Faced with these marketing decisions, Crescent prepared a due diligence package
for the residential land bays and then solicited Letters of Intent from interested Building
Developers.
The market response was overwhelming: 68 Building Developers registered for the due
diligence package and signed confidentiality agreements. The potential buyers were asked to
submit a non-binding Letter of Intent (LOI) in 60 days that outlined which land bays they
would like to buy and what type of product (condos or rentals) they intended to build. The
potential Building Developers were asked to submit a price, closing schedule, and post-
closing conditions.
The top eight LOIs are summarized in the matrix presented in the referenced hyperlink.
After reviewing and evaluating the LOIs, Crescent decided to select TCR as the Building
Developer of choice. TCR offered to buy all three land bays over a four-year period at a
competitive price. TCR would build all rental units. Dealing with one Building Developer,
with whom the Land Developer had done several earlier deals, substantially reduced the
administrative and coordination problems, as well as the “execution risk.”5
However, when Crescent and TCR began to negotiate a binding sales contract, the
contemplated deal quickly fell apart. At this point, Crescent began negotiations with Camden
for a rental apartment development on Land Bay D East and with Comstock for a residential
condominium development on Land Bay F East and West. These negotiations resulted in
binding contracts that closed on June 11, 2004, and December 25, 2015, respectively.
Westfields Corporate Park: NGA Letter of Intent @REDM6

The Westfields Corporate Park project is an example of a Building Developer who proposed
major site level strategies to one end-user for a real estate development project.
When Crescent acquired the 101-acre site in the Westfields Corporate Park, the develop-
ment plan was to build, lease, and sell a series of mid-rise office buildings. However, when
the National Geospatial Intelligence Agency (NGA) disclosed its plans to consolidate its
Northern Virginia operations into a single area, Crescent proposed a major development to
the NGA through its broker, Millennium Realty Advisors. The proposal is presented on the
companion website. The proposal outlined the following options:
1 Sell the 101-acre site to NGA with the right to develop the 1.2 million ft2 project for $44
million.
2 Sell the 101-acre site to NGA without the right to develop the 1.2 million ft2 project for
$55 million.
3 Develop the 1.2 million ft2 project on a turnkey basis and lease it to NGA for 20 years at
an annual net rental rate equal to 11% of total development costs.
The NGA responded that it was very interested in the third option and asked Crescent to
prepare a site plan that met its space and security needs. Crescent prepared a site plan that
satisfied the Level V security requirements, as well as its current and future office needs. See
Exhibit 16.3, NGA site plan.
After several meetings with NGA and incurring extensive design and architectural
expense, Crescent was informed that the NGA had decided to stay where it was. Essentially,
Crescent was used as a negotiating strawman by the NGA to negotiate a better deal at its
current location.7
Exhibit 16.3 NGA site plan.
b. Analyze current and future market conditions
Read and listen

The best way to determine the current and future market conditions is for developers to read,
read, and read everything they can, such as:
• national and regional publications (newspapers, magazines);

• local newsletters (online discussions of the regional and local economic conditions);
• online market surveys that are produced by national and regional brokerage firms, as
well as market research firms.
However, it is also important for developers to network with local human beings such as:
• real estate agents;

• business and civic leaders;
• politicians and government officials.
Real estate market cycles @REDM8

Real estate markets follow a predictable cyclical pattern; however, it is very difficult to
accurately predict the length and turning points in the cycle. To complicate matters, different
cities and different product types within those cities may be at different points in the real
estate development cycle.
234 Part III
The best reports of the real estate development cycles are produced by Glenn Mueller
and his firm, Dividend Capital. These reports are produced quarterly and are highly recom-
mended. The graphical analysis in these reports demonstrates the pattern of the cycle and the
characteristics of each part of the cycle. The reports present existing market conditions, as
well as predicted future market conditions. The reports are non-technical and readily grasped
by professionals. “The cycle forecast analyzes occupancy movements in five property types
in more than 50 Metropolitan Statistical Areas (MSAs).”9
Market cycle analysis

As shown in Exhibit 16.4, Mueller’s Market Cycle Forecast presents the cyclical nature of
real estate in four quadrants:
• Phase I – Recovery is characterized by declining vacancies, but no new construction.

• Phase II – Expansion is the period when vacancy continues to decline, but new
construction is added to the supply.
• Phase III – Hypersupply occurs when the market becomes oversaturated with a
product type due to a surplus of new construction, causing vacancies to increase.
• Phase IV – Recession represents a recession period brought on by more completions of
the new construction products and a continuing increase of vacancies resulting from the
Hypersupply in Phase III. If the graph were expanded horizontally, the line would
continue back into the Phase I quadrant and the cycle would start again.
The large, open dot on the cycle graphs indicates when existing rents justify new construction.
Existing market cycle analysis by city

Exhibit 16.5 shows the existing market cycle conditions for all product types in the 50 largest
cities in the United States.
Exhibit 16.4 Mueller’s Market Cycle Forecast.

Exhibit 16.5 Existing market cycle conditions.
Future market analysis

Exhibit 16.6 demonstrates how the real estate market cycle varies by city and by product
type. It is important for developers to appreciate these variances to understand the current
and future market cycle. Like the law of gravity, the law of real estate market cycles cannot
be denied or ignored.
Regional economic analysis

Generally, real estate markets are much more responsive to changes in regional economic
conditions than to changes in the broader national and international markets. Clearly,
the local employment rates are more important than the national unemployment rates
in terms of demand for local housing or retail services. Regional economists and geogra-
phers perform economic base analysis to describe local economies and predict how they
will perform in the future: “Tell me your industries, and I will tell you your future,” say the
economic geographers.
In economic base analysis, “location quotients” are calculated for each local industrial
sector by comparing the percentage of the local labor market in the industry to the percent-
age of the national labor market in that industry. If the location quotient is greater than one
(the local percentage is higher than the national percentage), then that industry is said to
be an “export” industry, rather than a “service” industry. The future economic forecasts
of the export industries are used to predict the future of the local economies. The theory
holds that the export industries bring money into the local economy by selling goods and
services outside the local economy (selling cars, for example), which is then spent locally by
consuming goods and services produced by the service industries (grocery stores, for
example). For instance, the future economy of Detroit is tied to the automobile industry, while
236 Part III
Exhibit 16.6 Future market analysis, industrial.

Source: Mueller, 2017
the future economy of Las Vegas is tied to the entertainment and hospitality industry as Las
Vegas sells entertainment to visitors from outside of Las Vegas.
The industry forecasts are then converted to jobs, which are then converted to households,
which are then converted to a demand for office space, retail stores, houses, and apartments.
Clearly, these industry forecasts can be very wrong and overwhelmed by national and
international events, as evidenced by the Great Recession and the collapse of the banking
industry (nationally and internationally).
Also, delineating local markets can also be tricky. For example, the Washington, DC,
market is part of the greater Metropolitan Washington Market, which is part of the Baltimore-
Washington Metropolitan Area, which is part of the Boston-Washington megalopolis.
For product-type analysis, start big and work into smaller submarkets
As shown in Exhibit 16.7, the market analysis should begin at the larger metropolitan level
(Greater Washington, DC, metropolitan area) and then reduce to smaller submarket analysis
(Northern Virginia). Sometimes, these submarkets need to be further reduced to even smaller
sub-submarkets (Fairfax County).
The product analysis should include key economic indicators for the past five years. It is
important to know where the market has been, to determine where the market is going.
(Remember the real estate cycles.) Key indicators include:
• existing inventory;
• occupancy rates;
• occupied space;
• annual absorption;
• rental rates;
• sales prices;
• capitalization rates.
Exhibit 16.8 demonstrates the key economic indicators for industrial/flex space in Fairfax
County, Virginia. However, even though information about what has been happening in
the market is readily available, predicting future market conditions is still very difficult.
Forecasting future job growth and corresponding household creation is important on the
demand side of the analysis.
On the supply side, the projects that are under construction are readily observable and
called “the pipeline.” These projects (unless abandoned) will usually be put in service over
the next three years. But the projects that are planned (and sometimes permitted) may or may
not be started, and therefore they may or may not be future competition.
Property type analysis: regional

Location: Fairfax County, VA
Market: Industrial/flex space
Exhibit 16.9 demonstrates the projections for three and seven years in the future. Any future
predication or forecast will be wrong, so developers must determine if they can live with
deteriorating market conditions or improving market conditions—for example, an increasing
job growth projection is very good for the construction and sale of industrial and flex
buildings. However, this improving demand may be met with ruinous competition as several
large multi-phase projects could start in the near future.
Exhibit 16.7 Start big and work into smaller submarkets.

238 Part III
Exhibit 16.8 Estimating market absorption and rental rates.
Exhibit 16.9 Market forecast.
c. Analyze competitive properties

Once the submarket is determined, an analysis of competitive properties must be performed.
To do this, choose three to five properties that match, or are very close to, the characteristics
of the proposed property (i.e. product type, size, location, user, and year built). The more
similar the competitive properties are to the proposed project, the more accurate the analysis
should be. However, it is often difficult to find a large sample group without leaving the
submarket boundaries. It is also important to note the age of the data for the competitive
properties. For example, if a competitive property was last sold at a cap rate of 9%, but the
sale was 15 years ago, that data may not be useful for the analysis.
Exhibit 16.10 Competitive property analysis.
Competitive characteristics
The characteristics of the proposed project should be compared to its competitors based
on the characteristics that the market participants use to evaluate the property in the future.
The following matrix is an example of competitive property comparisons.
Exhibit 16.10 is an example of a ranking system that uses seven characteristics and a scale
of 1–5 so that a perfect score would be 35. The percentage of the individual property score
(out of the most possible points) gives an idea of the market attractiveness, compared to the
others, as well as the proposed property.
Weighted-ranking competitive characteristics

The analysis above shows a ranking based on all characteristics being of equal importance.
However, the analysis can be performed with a weighted average based on the importance of
each characteristic. For example, proximity to local transportation may be more important
than window views or shared conference rooms. The weighted average and rank among
characteristics should be based on current market trends of tenants and users, or individual
preferences if finding a space for a specific tenant/use.
d. Determine promotional and advertising programs
Determine to whom the development should be promoted and advertised

Developers must determine who will ultimately buy the property, who will rent the property,
and who will influence the buyers’ and renters’ decisions. These people are the target audience
240 Part III
for the promotion and advertising efforts. They must be identified and have their needs evalu-
ated. It is important that budgets must be estimated before the advertising and promotional
firms are engaged. Advertising and promotional firms may offer more flexible fee structures
or a-la-carte services to match budget constraints. While the lavish best-in-class market-
ing packages are tempting, a keen eye on these soft costs is needed to ensure the marketing
objective is met without costly extras.
In-house and outside marketing professionals usually have an acute sense of how to
approach the target buyers, renters, and persons of influence. Often, they will have individual
contacts and third-party referrals with references. Experienced developers will have their
own contacts and referrals from past business deals.
Another aspect of promotion and advertising that should not be overlooked are affinity
groups. These affinity groups can be professional, social, political, or charitable. If their support
is important, then the outreach should begin immediately, usually on a personal basis.
The timing of the public promotional and advertising campaign should be carefully
planned to coincide with project milestones, seasonal holidays, and other neighborhood
developments (either complementary or adverse).
Determine the sales pitch and who should make it

The advertising and promotion of every real estate development project needs a consistent
theme that focuses on the significant features of the project and why it is important to the
audience. The message or pitch needs to be easily understood and presented. The timing of
the completion of the real estate development should also be included in the pitch.
The pitch should explain how the development will meet the prospects’ needs, as well as
explaining what the prospect should do—the “next steps” so to speak.
General property promotion to the community and neighborhood

The general promotion to the community and neighborhood should explain how the real
estate development will improve their lives and the lives of their neighbors. Some possible
advantages of the development could be the creation of new jobs, better transportation systems
or improvements, and public amenities such as parks, walking paths, or recreation areas.
Specific property promotion to motivated and capable buyers/renters

The specific advantages that the development will provide for the prospective buyers and
renters must be emphasized, regardless of how obvious they are. For example, prospective
companies can have expansion opportunities while their employees can enjoy improved
working conditions, shorter commutes, and affordable and accessible childcare. Developers
may want to emphasize how “green certified buildings” will provide healthy working
environments and how new floor plans will increase work efficiency and foster better
communication.
Determine the appropriate marketing mix

The appropriate “marketing mix”10 for the development should contain a combination of
promotional events and materials, electronic advertising, as well as site visits and tours.
Promotional events
Promotional events are fun and productive only if they are well planned and well executed.
Hiring external event planners and caterers is a must. Examples of promotional events
include:
• ground breaking;
• ribbon cutting;
• award presentations;
• holiday celebrations.
Promotional materials @REDM11

Promotional materials must be tasteful, useful, and well identified with the project. Examples
include:
• brochures;
• space planning aids;
• give-aways;
• banners.
When Crescent acquired the 101-acre site in the Westfields Corporate Park, it prepared a
three-page brochure to advertise and promote the first office building that it proposed
to build.
This brochure includes an architect’s rendering of Commonwealth Centre One, along with
the basic building specifications. This advertising piece was used mostly as a “leave behind”
after the developer or leasing agents visited a prospective tenant.
Another example of promotional materials is to have the building tenant prepare a
promotional brochure. The U.S. Environmental Protection Agency prepared a brochure that
promoted its occupancy in a new green office building. The four-page brochure, “Sustainable
Buildings and the EPA: One and Two Potomac Yard,” described 12 green building features
and highlighted seven building achievements.
The brochure also discussed the challenges of building a LEED-certified, speculative
office building. The last paragraph emphasized that thanks to a team of eight LEED
Accredited Professionals working together, “The building was able to attain the sustainable
attributes (described) in this report while maintaining reasonable costs and schedules.” Of
course, the brochure was printed on 100% post-consumer, processed chlorine-free recycled
paper, with vegetable oil-based inks! All things considered, the best endorsement of a
successful building development comes from satisfied and happy building users.
Electronic advertising
Electronic advertising can be incredibly efficient and informative, as well as ineffective and
expensive. Electronic advertising must be specifically targeted to the project and the potential
user, rather than as demonstrations of the programmers’ prowess. Electronic advertising
examples include:
• social media sites;

• websites;
242 Part III
• e-mail solicitations;
• blogs;
• videos.
Site visits and tours

Site visits and tours are the best way to promote a project, if they are well planned, safe, and
interesting. Also, these events must not be dependent on weather conditions because it will
rain, snow, or sleet. Examples of site visits and tours include:
• hosting industry events;

• neighborhood open houses;
• historical or cultural tours.
e. Market forecasting strategies

Estimating future market conditions, like financial projections and weather forecasts, is a
thankless and unrewarding exercise because the market predictions are always wrong, one
way or another. The old adage about market forecasts is, “If you are making predictions,
make lots of them, and if you are ever right, never let them forget it!”
Of course, there are “good mistakes” that lead to a more successful project and “bad mistakes”
that lead to negative results. Examples of good mistakes are underestimating rents or sales
prices, or overestimating acquisition costs, development costs, or sell-out or lease-up periods.
On the other hand, examples of bad mistakes are overestimating rents or sales prices, or
underestimating selling or leasing costs, acquisition costs, development costs, or sell-out
or lease-up periods.
However, it is important to note the following:
• Making lots of “good mistakes” means that developers will systematically underestimate
the profitability of the project and consequently will always be the low bidder for a new
project.
• Making lots of “bad mistakes” will mean that developers will systematically overestimate
the profitability of a project and will consequently pay too much for it and eventually go
broke.
Therefore, developers need to make their “best guesses” of the future events and then
evaluate the consequences of being wrong. This type of forecasting future market conditions
is called “scenario analysis.” Scenario analysis requires developers to make pessimistic, as
well as optimistic, assumptions about future market conditions. Optimistic scenarios will
make developers smile, but they don’t cause worries. However, pessimistic scenarios should
be taken very seriously as they will indicate the level of risk in the project. If market
conditions deteriorate, developers need to determine what can be done to avoid disastrous
loan defaults, negative cashflows, or bankruptcy.
Summary
The Market Analysis and Marketing Strategies Tasks require skilled and knowledgeable
market analysts. Developers need to reach out to professionals outside of their company to
participate in the market analysis and strategy and to be part of the marketing team. The
overwhelming abundance of data in our electronic and connected marketplace forces devel-
opers to critically analyze relevant trends and emerging market changes. The Market Analysis
and Marketing Strategies Tasks are performed continuously throughout the Real Estate
Development Process. The results of these tasks affect every other set of development Tasks.
Notes
1 Graaskamp, James A. Fundamentals of Real Estate Development, Washington, DC: ULI–The
Urban Land Institute, 1981. p. 23.
2 Boyce, Byrl, ed. Real Estate Terminology. Cambridge, MA: Ballinger Publishing Co., 1975.
3 Graaskamp, James A. Fundamentals of Real Estate Development, Washington, DC: ULI–The
Urban Land Institute, 1981. p. 11.
4 http://realestatedevelopmentmatrix.com/textbook/res/arl._res_loi_sum_8_bidders.xls
5 The “execution risk” refers to the possibility that the Building Developers cannot accomplish the
necessary tasks for a successful project. In other words, they can’t do what’s got to be done!
6 http://realestatedevelopmentmatrix.com/textbook/res/NGA+letter+of+Intent.pdf
7 Sometimes you get the bear; sometimes the bear gets you!
8 http://realestatedevelopmentmatrix.com/textbook/res/Mueller+-+Black+Creek+-+2nd+Quarter+
2018+Market+Cycle+Forecast.pdf
9 http://realestatedevelopmentmatrix.com/textbook/res/Mueller+-+Black+Creek+-+2nd+Quarter+
2017+Market+Cycle+Forecast.pdf
10 Marketing mix is a foundational concept in market theory and practice that emphasizes the
appropriate combination of four to eight Ps: product, people, promotion, place, process, people,
physical elements, and performance.
11 Westfields brochure: http://realestatedevelopmentmatrix.com/textbook/res/Westfields+Marketing+
Brochure.pdf and EPA brochure: http://realestatedevelopmentmatrix.com/textbook/res/20121105
161247660.pdf
17 IV. Environmental Issues
INTRODUCTION
Environmental Issues is the fourth group of developmental Tasks in the Real Estate
Development Matrix (see Exhibit 17.1). Remember, the Task order is arbitrary except that the
Acquisition Tasks are done first and the Disposition Tasks are done last. Otherwise, the Tasks
may be completed in any order. Environmental Issues may be addressed as a condition to
close the purchase contract, before financing is approved, or as part of a marketing strategy.
They may be done simultaneously, or in conjunction with the approval and permitting process.
However, they are always addressed before the actual construction of the new physical
improvements are begun on the site.
Any discussion of environmental issues can quickly devolve into a political, moral, or
religious discussion since there are so many environmental buzzwords that are poorly defined
and generally misunderstood. Sixty percent of Americans like to think of themselves as “envi-
ronmentalists,” as environmentalism is the most popular political affiliation. However,
environmental discussions usually involve terms like “sustainability,” “green buildings,”
“global warming” (aka climate change), “infrastructure” (both physical and social), and
“public-private” partnerships. Often, these terms are reduced to articles of faith, e.g., “I don’t
believe in that.”

IV. Environmental Issues 245
For real estate developers, these terms and issues are part of their business landscape and
economic reality. Developers ignore these issues at their peril—they should understand what
these issues are and how to deal with them. Of course, each Stage of development presents
these issues differently, but they cannot be ignored.
This is also a set of Tasks that requires experienced professionals. Environmental laws
are very confusing because most of the environmental restrictions for real estate are defined
by administrative regulations, which have the same effect as laws.1 Today, developers can
hire environmental engineers and environmental scientists who have specialized degrees in
environmental issues. This field is growing rapidly, and the need for qualified and credentialed
experts is tremendous.
The simple definition of sustainability as “the ability to continue a defined behavior
forever,” gets murky when it is modified to be “environmental sustainability.” John Elkington
first defined the “triple bottom line” as a way to define environmental sustainability.2 He
incorporated the three Ps of a holistic sustainability approach: People, Planet, and Profit.
A real estate development project should satisfy each of these categories to be sustainable.
First, an economic profit is necessary for any business decisions. Beyond the original bottom
line, adding in the concern for people includes the benefits to the neighborhood and the
surrounding community. Also, when people think about sustainability, they often think of
environment in terms of the “Planet.” This takes into account environmental protection and
conservation and analyzes the entire life cycle of a real estate development project from
construction, materials, uses, and then redevelopment or destruction. This concept is shown
in Exhibit 17.2 in the Venn diagram.
Exhibit 17.2 Triple bottom line.

246 Part III
Many real estate development firms have embraced the sustainability movement, and
Oaktree Development LLC3 has added a fourth “P,” for Partnership.4 Oaktree believes that
this partnership is required between the developer, governing associations, and the commu-
nity. Oaktree has also developed its “guiding principles for smart growth” in terms of the
following criteria for prospective developments:
• sense of place;
• walkability;
• community collaboration;
• transit-oriented;
• mixed-use;
• choice of housing;
• compact design;
• green design.
Whether or not Oaktree Development LLC is correct, it provides a leadership role in dealing
with environmental issues.
As noted above, the discussion of environmental issues is complicated and multifaceted. In
this chapter, the discussion of environmental issues is divided into four categories of Tasks:
1 Phase I, II, and II environmental site assessments.

2 Certifications.
3 Atmospheric, surface, and subsurface conditions.
4 Cultural and historical conditions.
a. Phase I, II, and III environmental site assessments

Environmental site assessments are an important part of risk management for developers,
and usually they are addressed in the Acquisition Tasks. Phase I reports should indicate if
Phase II testing is required, and the results of the Phase II tests determine the necessary
Phase III action (see Exhibit 17.3).
Exhibit 17.3 Environmental site assessments.

Phase I environmental site assessment
A Phase I environmental site assessment summarizes the environmental conditions found on
the site by environmental professionals, who review the existing public records of the site
and the adjacent land uses, visit the site, interview persons who have had past involvement
with the site, and prepare a very complete report of their findings and conclusions.5 A Phase
I environmental site assessment should be conducted before any property is acquired by the
developers. This should be part of the due diligence review and a condition for closing.
Public records review

The public records review should determine if the current or past uses of the property could
have caused environmental damage on the site. The public records for adjacent land uses are
also reviewed in terms of possible environmental contamination. This review also involves
historical aerial photos, as well as records by local fire and police departments, and water and
sewer authorities.
Site visits
Physical, on-site inspections are critical to determine if the current buildings, improvements,
and land conditions could have a negative environmental effect on the property. The site
boundaries are usually verified and photos are taken to document the visit. Adjacent proper-
ties may also be inspected if deemed necessary. There is no testing or sampling during the
Phase I site visit.
Personal interviews
The environmental inspectors attempt to interview anyone who may have information about
the historical land uses on the site. These people may include present and past owners,
property managers, and tenants. If possible, persons familiar with the adjacent land holders
are also interviewed, along with various governmental regulators.
The Environmental Site Assessment Report6

The Phase I Environmental Site Assessment Report is very formally prepared and written. The
report includes a summary of the documentation review, the scope of services, the relevant
findings and opinions, the critical data gaps (if any), and a conclusion of the recognized envi-
ronmental conditions on the site.7 A sample of a Phase I environmental site assessment can be
found on the companion website.
Phase II environmental site assessment

If the Phase I Environmental Site Assessment Report indicates the existence or high
probability of pollution or contamination on the site, developers should commission a Phase
II Environmental Site Assessment Report. “Contamination” and “pollution” are politically
charged terms. In fact, all water and soils are contaminated or polluted with some kind of
chemical constituents. The real issue is the level of contamination compared to specific
thresholds or levels, which are deemed to be dangerous or hazardous. Initially, the Phase II
248 Part III
issues are limited to verify the existence and extent of the environmental conditions. If the
contamination exists above the predetermined thresholds, then a more complete study is
undertaken, which usually involves hydrological or soil issues.
Hydrological issues
The hydrological issues are usually undertaken to determine ground water characteristics. The
constituent chemicals are compared to various levels and thresholds to evaluate the need for
remediation or additional monitoring.
Soil issues
Investigating soil issues attempts to determine the chemical makeup of the soil, to find out if
there are significant amounts of contaminants that will require remediation or monitoring, or
that might create land use limitations.8
Phase II environmental site assessments are commissioned by developers to evaluate
the extent of the contaminated substances. Almost always, this type of analysis helps to
reduce the risks of the site because the actual knowledge of what environmental conditions
are present helps to add clarity and understanding to what can be a very delicate situation.
Land Packagers will do Phase II studies so that the public discussion of approvals needed
takes place in a more rational and less hysterical manner. Land Developers will carry out
environmental studies to allay the fears and anxieties of community leaders, as well as
potential Building Developers.
Phase II issues are all somewhat unique, as they are determined by the type and extent of
contamination or pollution. Usually, these issues will recommend a course of action for the
developer.
Phase III environmental site assessment 9

Phase III environmental site assessment determines what remediation is necessary, and
what benchmarks will indicate when the actual remediation efforts are successful. At the
end of the Phase III remediation program, developers apply for a “no further action” letter
from the appropriate regulatory authority—usually the state Environmental Protection
Agency.
Once this letter is in hand, the environmental site assessment process is deemed complete,
with certification that the hazard is no longer present, or in some cases, may be monitored
and contained.
On page eight of a “no further action letter” from the Ohio EPA, the magic words appear:
On the basis of this information and my direct involvement throughout the voluntary
action at the Property, I have determined that this Property meets the applicable standards
under the Ohio Environmental Protection Agency’s VAP. Accordingly, there is no
further action required at the Property.10
It should be noted that the above paragraph is surrounded by 21 pages of limiting conditions
and caveats.
Phase I, II, and III environmental site assessments focus on problem areas where
environmental laws or regulations may have been, or may be, violated. Phase I issues are a
necessary part of any real estate acquisition. However, Phase II and Phase III issues may
be necessary and require technical expertise, political savvy, and objective problem-solving.
b. Certifications
Environmental or sustainability building certifications are very popular among private build-
ing users (tenants), regulatory agencies, and governmental building users such as the General
Services Administration (GSA) and the U.S. Department of Defense. However, many private
developers have been skeptical about the validity of, or need for, these certifications—but
the participants in the broad real estate market have generally embraced them. Environmental
certifications have become the market standard for many types of property, especially new
office buildings. Environment certification for buildings and land developments are becom-
ing part of the Real Estate Development Process in the 21st century. Complying with these
certifications can help developers find synergies and greater efficiencies within a develop-
ment. The certifications force developers in one Stage of development to think about the
eventual building users in other Stages of the development process. Land Developers must
be keenly aware of the green building certification requirements of the Building Developer,
and the Building Developer must fully appreciate the property management requirements in
the Building Operations Stage. Generally, green certified buildings are developed in a more
thoughtful manner than non-certified buildings.
In some municipalities, specific green certifications are required, and sometimes the
local codes have raised even higher standards than the third-party certifications. Many devel-
opers have complained that it is improper to have political lobbyist organizations like
the United States Green Building Council (USGBC) provide required government certifica-
tions. This argument has led to some municipalities setting their own environmental ratings.
This murky process is here to stay, so developers in every Stage need to become knowledge-
able about the environmental certification game and learn how to participate in one way
or another.
Below are four groups that are actively promoting environmental certification programs
for commercial building:
• United States Green Building Council’s Leadership in Energy and Environmental

Design (LEED)11
• U.S. Department of Energy and the U.S. Environmental Protection Agency’s Energy
Star Program12
• Building Owners and Managers Association International’s BOMA 360 Performance
Program13
• Green Globe Certification Program14
It is important to keep up with the times and to stay current, as the designations and
certification requirements are always changing. These organizations both compete with and
are complementary to each other.
The costs and benefits of environmental certification programs are always debated,
and there have been many issues that have attempted to quantify the costs and benefits. The
major costs of environmental certifications appear to be in planning and documentation.
The discipline to plan ahead and to think through the environmental consequences
of the building design and operation is sometimes painful, but almost always beneficial.
250 Part III
Also, the certifying organizations require reports to be submitted to document the plans for,
and construction of, the improvements. The biggest cost is doing the first set of submissions
for a property because subsequent building submissions are very similar.
The actual additional costs of designing, engineering, and building environmentally
certified buildings have been reduced to almost zero because of the widespread acceptance
of the green building technologies and products. Architects and engineers no longer charge
a premium for green building designs, and building product companies now provide an
extensive inventory of pre-approved building products.
Several statistical issues have demonstrated the correlation between property values and
green building certifications, but the specific increase in value due solely to the green building
certification has been hard to tease out of the data—so far. In addition, there is widespread
anecdotal evidence of increased productivity in green buildings. However, green building
occupants are very reluctant to provide statistical evidence.
Environmental certification example @REDM15
EPA lease requirements for LEED certification
A good example of the complexities of the environmental certification process is Crescent’s

lease with the General Services Administration (GSA) for the U.S. Environmental Protection
Agency, which required the building to have a USGBC LEED-NC Silver rating or the gross
rent would be reduced by 10%! Consequently, the development team dedicated itself to
obtaining the Silver Rating. Their efforts to achieve the Silver Rating were documented on a
point-by-point basis.
To be sure that the Silver Rating was achieved (failure was not an option), the team
attempted to get more than enough points for Silver, and in the end achieved a LEED Gold
certification instead. This project became the largest LEED Gold speculative office building
at the time.
Furthermore, the USGBC commissioned the Center for Housing Innovation at the
University of Oregon to prepare a case study of the project that examined the various
perspectives and insights of the assorted team members.
As the notoriety of One and Two Potomac Yard’s LEED-NC Gold rating spread in the
Washington, DC, region, three LEED AP professionals prepared a presentation that explained
the challenges and lessons learned in the leasing of a green building to the GSA. They
represented the developer (Crescent Resources), the general contractor (Davis Construction),
and the green building consultant (Sustainable Design) in their presentation.
The LEED-NC rating required all tenant finishes to meet the LEED standards. Potential
tenants had to be informed of this requirement, as well the lease language. These specifica-
tions were viewed as onerous by the leasing agents and prospective tenants. Consequently, the
Building Operators (JP Morgan), who purchased the building before completion, decided to
suspend all leasing efforts until after the LEED-NC certification was awarded. Because of this
competitive disadvantage, or quirk, in the rating system, the USGBC added two new LEED
designations: “core and shell,” and “commercial interiors.” These designations allowed the
Building Developer to construct a LEED certified building shell, and then transfer the tenant
improvement requirements to the Building Operators, who could provide green interior space
as the lessees specified.
c. Atmospheric, surface, and subsurface environmental conditions
The Phase I, II, and III environmental studies, as well as the green certifications discussed
earlier in this chapter, deal mostly with regulatory approvals and public opinion. However,
the physical site conditions discussed below will determine what can be placed on a site and
how it can be developed. Developers need awareness, knowledge, and appreciation of these
conditions—the sooner the better.
These environmental concerns are based on the site’s specific conditions, regional environ-
mental conditions, and, of course, adjacent properties. The list below provides some examples
for each of the three most common categories that are examined for possible contamination,
pollution, and structural concerns.
Atmospheric conditions
Atmospheric examples can be thought of as “above-ground and non- surface” issues.
• Sunlight or heat issues are often looked at as a “heat island effect.” This occurs around
large, paved parking lots and black tar roofs that absorb the heat from the sun, rather
than reflect it back into the atmosphere. Some solutions to this include shaded parking
areas, semi-permeable surfaces, white colored roofs, and vegetative green roofs. Of
course, lots of sunlight can provide opportunities for on-site solar energy production.
• Wind issues occur in highly developed areas (i.e. New York City) where the wind
cannot easily go around buildings and instead creates very windy pathways to direct
the wind around the many buildings instead of pushing directly on the flat edges. Wind
can become a real issue during construction. For example, the newly constructed
World Trade Center in New York City encountered serious and dangerous issues when
installing windows on the upper floors; the wind gusts had to be closely monitored, and
work would stop if the wind was too strong for accurate installation. On the other hand,
plenty of wind can provide opportunities for on-site wind turbines
• Air pollution is a concern in highly industrialized areas, or areas with dense populations
and exceptional amounts of vehicular traffic. This results in high levels of toxic emis-
sions and exhausts entering the atmosphere and creating poor air quality conditions. Los
Angeles and Beijing are examples of cities with major air pollution problems. Of course,
properties located downwind of older sanitary water treatment plants or paper mills can
experience unpleasant odors every day.
• Hurricanes, tornadoes, and storms of dust, rain, or sand are generally predictable. The
design and construction of buildings and infrastructure in affected areas must be able to
accommodate their occurrence and minimize possible damage.
Surface conditions
Surface environmental issues may include the following:
• Flood plains create unique circumstances for construction and site uses. Sometimes,
water must be pumped out to excavate the foundation. One common use of flood plains
is athletic fields: they require large, flat, grassy areas that are able to flood without major
impacts on the use. Local governments vary widely on the appropriate use for land areas
in flood plains. The delineation of flood plains is done by the U.S. Federal Emergency
252 Part III
Management Agency, but the allowable uses in flood plains are usually determined
locally.
• Streams and wetlands usually require a level of preservation and conservation for the
ecosystem in the area. Wetlands are heavily regulated, and each site must be evaluated by
local and state governmental agencies to determine if it meets regulations established
by state and federal authorities. The United States has a series of Clean Water Acts
that started in 1972 and that have been expanded and clarified ever since. The federal
legislation gave the authority to protect the “waters of the United States” to the U.S.
Environmental Protection Agency, and this agency in turn has empowered the U.S Army
Corps of Engineers and states’ Departments of Environmental Protection. The enforce-
ment of these laws and regulations has been very controversial as the definition of the
“waters of the United States” has been interpreted very broadly by these agencies. Federal
court rulings have attempted to restrict the definition and actions of the agencies, but the
revised regulations continue to expand the government authority. These federal and state
agencies also determine setbacks from the stream banks for the construction of man-
made improvements. Developers need to recognize the vagueness of these regulations
and the aggressiveness of their enforcement to avoid prolonged and costly encounters
with these federal and state agencies.
• Forestation may include both removal of trees or the selective timbering on the site.
Usually, developers are required to plant new trees on-site or to plant additional trees
off-site to compensate for the loss of trees during development. Many municipalities
have enacted special shade tree ordinances to further restrict on-site tree removal.
• Ground cover, when removed from the site, may cause soil erosion, siltation, and/or
downstream flooding. Erosion control fencing and storm water management ponds
are critical in reducing the negative environmental consequences of removing ground
cover. In addition, the installation of impermeable surfaces such as roofs, parking lots,
or roads can help mitigate the water run-off conditions caused by the removal of ground
cover.
Subsurface conditions
Subsurface environmental issues may include:
• Underground water levels, or the water table (in a similar way to flood plains), cause
issues for the construction of foundations, basements, road bases, and storm water
run-off that must be addressed prior to construction.
• Soil compaction conditionals including “uncontrolled fill,” or dumping, must be dealt
with to avoid dangerous foundation and settling issues. Filled in areas for building sites,
roads, or parking lots need to be systematically compacted to specified threshold levels
to avoid future settling problems.
• Geological strata conditions may determine where buildings are placed and how
foundations are constructed. The removal of various rock formations will need special
treatment for safe and efficient excavation. In swampy areas, the developers will need
to know the depth of a stable soil formation for pile excavation.
• Subsurface contamination from prior land uses, which are commonly caused by old or
leaking underground storage tanks, usually must be removed. Also, adjacent land uses
can cause underground soil contamination as the regulated constituents flow across
property lines. These conditions usually require some government agency involvement.
• Earthquake prone locations must be dealt with carefully and conservatively as this
environmental risk can be reduced through appropriate construction techniques. There
are usually state or municipal requirements for new construction in earthquake prone
areas.
Subsurface conditions example: soil contamination @REDM16

The land development of Potomac Yard is a good example of a project that faced subsurface
environmental issues. Potomac Yard was severely affected by two types of subsurface condi-
tions: a layer of cinder ballast that was used in old rail track beds, and sporadic contaminated
soils that existed to some extent throughout the site. The cinder ballast problem was addressed
by trying to find alternative uses for the cinder ballast that ranged from burying the material
under the road, to hauling it off-site for daily cover at sanitary landfill operations. Several
landfills in the Washington area were interested in the cinder ballast, and one eventually
agreed to haul the 70,000 yd3 of material off-site at the same rate as “clean fill.” This is a
good example of finding creative alternatives and uses for “bad dirt.”
When the Land Developer sold Land Bay F in Arlington to Comstock, the Building
Developers, Comstock had the soil tested prior to closing. Four out of ten drilling samples
contained soil with constituent levels that exceeded government thresholds. Consequently,
Comstock announced that 40% of the soil that needed to be excavated for parking and
foundations was contaminated and it demanded a price adjustment. Crescent had additional
soil samples drilled, and the results showed virtually no contamination. This a good example
of the sampling variance and inconsistency in soil testing. Crescent analyzed the numerous
contamination scenarios and the cost of dealing with various levels of soil contamination.
Based on this analysis, Crescent proposed that, rather than a price adjustment, Crescent
would take all of the excavated dirt from Land Bay F at a rate of $9.75 per yd3. Essentially,
Comstock would treat all dirt as “clean,” and Crescent would deal with any and all soil
contamination issues. Crescent’s Soil Management Plan provided for all excavated dirt to be
dumped nearby, tested for contamination levels, and then to be treated accordingly. It turned
out that less than 3% of the dirt was contaminated and hauled off-site, so 97% was hauled to
the Alexandria portion of Potomac Yard to be used as clean fill.
d. Cultural and historical conditions

Beyond the ecological environment, cultural and historical environments are important
aspects for developers to consider when creating a development plan. No longer are cultural
and historical importance determined in the eye of the beholder. Now every major city and
state has an Office of Historical Preservation that must determine the significance of the
site and the effect of the proposed use on the cultural and historical aspects of the communi-
ties. Sites may have been locations of historical events or hold cultural importance for
communities. Cemeteries or old burial grounds are extremely problematic because of the
lack of historical records and the dearth of living relatives for consultation.
It is important to include a history of the site in a proposal for a new real estate development
to maintain amicable neighborhood relations and ensure the approval of the development on
that site. In some cases, however, cultural and historical events may prohibit any development
on a site: these may include battlefields, archeological sites, or locations of historic events.
Local resources including historians, anthropologists, and neighborhood activist groups
can provide information on the site and the significance of previous uses, if any.
254 Part III
Summary
Environmental Issues Tasks in the Real Estate Development Process must be dealt with
head-on, rather than avoided or obscured. In our information society, the facts will always
be revealed. Developers need to be leaders, rather than respondents, in identifying and
addressing environmental concerns. The community, lenders, investors, and business associ-
ates should view developers as pragmatic and thoughtful leaders in protecting our natural,
cultural, and historic environment. Because of the long-term consequences of developers’
decisions, they are the natural leaders in the preservation and conservation of our natural
resources.
Developers need to understand all sides of the environmental issues facing the proposed
development and strive to find pragmatic solutions or compromises to the various stakeholder
positions. This can be very difficult when some stakeholders resort to name-calling and
personal attacks. Developers must remember to attack the problems and not the people.
No one will win the arguments about environmental issues, so a workable compromise is
the main goal. Environmental issues will not go away, even after a compromise solution is
reached, so developers must be constantly vigilant for alternative solutions and new issues.
Notes
1 The best readable reference for environmental laws and regulation is: Roger W. Finley and David
A. Forbes. Environmental Law in a Nutshell. Eighth Edition. Thompson West. St Paul. MN., 2010.
ISBN Number: 978-0-314-17720-9. The ultimate reference for environmental laws and regulations
is: James B. Witkin, Editor. Environmental Aspects of Real Estate and Commercial Transactions,
Fourth Edition. ABA Publishing, Chicago, Illinois. 2011. ISBN: 978-1-61632-911-2.
2 Elkington, J., Cannibals with Forks: The Triple Bottom Line of 21st Century Business, Capstone,
1997.
3 www.oakdev.com
4 From a presentation given by Chryse Gibson at Smart Growth America’s Leadership Summit,
Washington, DC., 2015.
5 http://ublog.naiglobal.com/blog/2011/03/29/what-is-a-phase-1-environmental-site-assessment/
6 www.heicorporation.com/Sample-Phase-I.php
7 A sample of a Phase I Environmental Site Assessment can be found at: www.heicorporation.com/
Sample-Phase-I.php
8 www.aaienvcorp.com/phaseii.html
9 www.gaea.ca/public/ASTM_Phase_II_Example.pdf
10 http://epa.ohio.gov/portals/30/sabr/docs/a_training/Master%20NFA%20Letter%20HANDOUT.
pdf page 8
11 http://leed.usgbc.org/leed.html?gclid=CLzh-_zbpMoCFcGRHwodjY0Img
12 www.energystar.gov/
13 www.boma.org/awards/360-program/Pages/default.aspx
14 www.thegbi.org/green-globes-certification/
15 http://realestatedevelopmentmatrix.com/textbook/res/3._the_greening_of_one_and_two_potomac_
yard_v2.pdf. http://realestatedevelopmentmatrix.com/textbook/res/case_study_one_and_two_
potomac_yard.pdf. http://realestatedevelopmentmatrix.com/textbook/res/2._green_leasing_to_a_
government_tenant_-_potomac_yard.pdf http://realestatedevelopmentmatrix.com/textbook/res/PY+-
+Green+TI-Section+C-draft2-010505.pdf
16 http://realestatedevelopmentmatrix.com/textbook/res/cinder_ballast_use_options.pdf http://realestate
developmentmatrix.com/textbook/res/land_bay_f_dirt_analysis_.xls http://realestatedevelopment
matrix.com/textbook/res/land_bay_f_dirt_memo.pdf
18 V. Approvals and Permits Tasks
INTRODUCTION
The Real Estate Development Matrix in Exhibit 18.1 highlights the Approval and Permits
Tasks in the context of the other groups of Tasks. While each Stage of the Real Estate
Development Process starts with the Acquisition Tasks and ends with the Disposition
Tasks, the other tasks are done almost simultaneously because they are all related to each
other. One could argue that Approvals and Permits should not be a separate group of Tasks
because they are such an integral part of the other Tasks, and all the other Tasks require some
approvals and permits in one way or another. However, obtaining the required approvals and
permits in a timely and cost-efficient manner requires special talents and skills. Unfortunately,
if the developer cannot obtain the necessary permits and approvals, the project cannot
continue to the next Stage of development, and the anticipated increase in economic value
never occurs.
What kind of approvals and permits? @REDM1

Real estate development is a highly regulated process that requires government, as well as
private, approvals and permits. An excellent checklist of all of the permits and approvals

256 Part III
that are necessary to acquire, develop, operate, or sell a parcel of real estate in Boston,
Massachusetts, was compiled by Charles Schilke, JD.
This extensive, but not quite exhaustive, list dramatically illustrates the extent to which
real estate is regulated at all levels of government: federal, state, and municipal. While
specific for Boston, a list of similar approvals and permits can be compiled for everywhere
else in the U.S. A brief look at the major categories of approvals makes the point:
1 Building Codes
2 Subdivisions
3 Water Supply
4 Water Discharges
5 Regulated Substances
6 Air Discharges
7 Site Work
8 Wetlands
9 Coastal Zone Management
10 State Environmental Policies
11 State Permits
12 Municipal Laws & Regulations
13 Federal Laws
Often, the Approvals and Permits Tasks are broken down into four categories. The first three
Tasks are philosophical in nature, but they are necessary to achieve the fourth, which is to
actually obtain the required permits and approvals. Successful developers are either very
skilled at getting the necessary approvals and permits for their Stage of development, or they
hire very skilled professionals to achieve these Tasks.
a Respect the natural tension in the approvals and permits process.

b Communicate with understanding.
c Expect and prepare for the worst.
d Obtain the required approvals and permits.
a. Respect the natural tension in the approvals and permits process

Developers must realize that there is a “natural tension” in the approval and permitting process
that can be used positively or negatively by developers. Developers must not take it person-
ally. The natural tension is necessary for the resolution of the permit and approval requests.
There are several layers of natural tension: between public agencies and private businesses;
between different layers of governments, e.g., federal, state, regional, and local; between
departments within a government; and between private land owners and their neighbors.
Between private and public ownership rights

There seems to be a “public vs. private” mentality that pervades the entire approval process.
Some people believe that the more the governmental agencies can get from the private
sector, the better off the public sector is. This mindset creates a “zero sum game” where there
must be winners and losers. Generally, it is not a very productive strategy for obtaining
approvals or permits.
V. Approvals and Permits 257
Developers need to redefine this process in terms of a “win-win” strategy, so that both
sides can get what they need. There may be ideological issues involved that developers must
transcend. Rather than becoming “martyrs for the cause,” developers need a pragmatic view
that focuses on obtaining the necessary approvals and permits.
Between federal, state, regional, and local governments @REDM2

The private sector assumes that there is a hierarchy of power so that the federal government
supersedes the state government, the state government supersedes the regional govern-
ment, and so on. However, all levels of government have complex relationships that
determine various roles and authority (real or perceived), so developers cannot get drawn
into situations of defending one governmental jurisdiction over another.
For example, the District of Columbia and the United States Government constantly
contest who has authority to do what in this federal city. The DC/Federal Government
Memorandum of Understanding (MOU) that was agreed upon for the Armed Forces
Retirement Home (AFRH) was written “solely for the unique circumstances” of the AFRH.
The MOU outlined a hybrid planning-zoning process between the National Capital Planning
Commission and the District of Columbia Office of Planning. This process was not to be
considered precedent setting, but it was a way to resolve these long-standing conflicts on a
case-by-case basis.
These governmental disputes and conflicts have been going on for a long time, and develop-
ers can become “fresh meat” to be fought over. However, there are laws and regulations that
must be respected by all parties, at all levels. Developers need to keep the process professional,
non-partisan, objective, and focused on the outcome.
Between various departments and commissions within a government

In local government, especially, the various departments and commissions can have different
agendas and points of view when it comes to approving real estate development of any kind.
The “classic battles” are between the planning department and the public works depart-
ment. Planners look at how neighborhoods should behave, while the public works department
looks at how the neighborhood will be maintained in real life. Consider the following
examples:
• Planners like streets and alleys to be narrow for neighborhood cohesion while the public
works departments want broad streets with wide turning radiuses, so the snow plows,
street cleaners, and maintenance equipment can do their jobs.
• Aesthetically-minded planners prefer down-oriented and task-focused street lighting
while the security-minded public works departments prefer street lights that brighten up
the whole area (including the night skies).
• Planners abhor buildings that are set back from property lines while public works
departments like buildings that have front yards and entrances for easy emergency
access.
Well-intentioned projects from parks and recreation departments can also be opposed by
the public works department because of the construction issues and ongoing maintenance
responsibilities. These conflicts revolve around:
258 Part III
• maintaining the parking lots, paths, trails, restroom and pavilions;
• setting and enforcing the hours of operation;
• providing night lighting for the public’s safety.
At the risk of overgeneralizing, historical commissions and environmental commissions

usually have conflicts with everyone. Economic development departments usually present
themselves as friends of developers, and consequently they are also at odds with most other
municipal departments. Be careful of their “help.”
Between adjacent land users and neighbors

Good neighborhood relations are important, but sometimes neighbors may object to, or find
offensive, legal land uses that are permitted by the existing zoning laws. Some neighbors
may object to parks or recreational areas; duplexes, fourplexes, or multi-family apartments;
group homes for disabled persons; or gathering places for day workers.
Sometimes, land use issues arise because of vagueness or undefined terms in the zoning
code. For example, neighbors may object to on-street parking restrictions, or the lack of on-
street parking restrictions, the number of unrelated persons in a household, or the definition of
a “family” in a single-family residence.
Proposed zoning changes may be opposed by well-intentioned neighbors, as well as by
no-growth advocates. Neighbors who support a development but “Not In My Back Yard” are
well known as NIMBYs. Also, no-growth zealots who may join any land use protest
are known as “Not On Planet Earth” or NOPEs. No-growth advocates will grasp any oppor-
tunity to stop new developments or changes in their environments, but developers must tread
lightly and attempt to ferret out their real intentions.
Finally, some neighborhood groups may oppose any development unless concessions
or contributions are made to their favorite cause. For example, affordable housing or low-
income housing advocates routinely campaign for contributions from all new developments,
even if the land use is non-residential.
Real estate is a public good

Every Stage of the Real Estate Development Process requires some kind of governmental,
quasi-governmental, or private approvals and/or permits. Even the most passive real estate
developers (Land Bankers and Property Redevelopers) face the need to have permits for land
uses and approvals for any kind of operation.
Real estate developers must remember that real estate is a public good. From a pragmatic
point of view, James Graaskamp contended that the developers own property to the extent
that they can defend their rights: that is, developers can improve their property to the
extent that laws and regulations allow them to do so.
Developers must realize that the community and the various governments believe that
they control what happens to, and with, the developers’ properties. This is not a debatable
issue for the individual developers. This is where industry groups like NAIOP,3 Urban Land
Institute,4 or the National Association of Realtors5 are valuable as advocates for broad issues
involving real estate development, operation, and ownership, e.g., defining the “Waters of
the United States.”
Conflicting government approvals example @REDM6
A great example of overlapping and conflicting government approvals is the real case study
that was presented by a Building Developer to a Johns Hopkins graduate real estate class on
June 15, 2016. The Building Developer had negotiated a 100% pre-lease on a to-be-built,
71,000 ft2 office building on land that the developer already owned. The building development
was approved by the Township in 2000, and the approval was good for ten years.
Because of the Great Recession, in July 2010 the state extended the expiration of any
municipal permit or approval that would have expired at any time during the period from
January 1, 2009 to July 2, 2013. A subsequent act by the state amended the date to July 2,
2016. The Building Developer thought that all he had to do was to pull a building permit at
the Township offices.
However, the State Department of Environmental Protection (DEP) informed the developer
that his National Pollutant Discharge Elimination System (NPDES) approvals and permits had
expired. While these approvals were given by the DEP, they were given on behalf of the
Federal Government and, consequently, were not subject to the state’s Permit Extension Act.
Any development on the property would need to comply with the state’s new storm water
management regulations. This would cost the developer an additional $725,000 of site work.
Unfortunately for the developer, the Township had recently made revisions to the road
extension requirements that would cost him another $400,000 for off-site improvements.
Finally, the Township had recently passed a “steep slope” ordinance that would affect all
building permits issued after July 2, 2016. The new ordinance would reduce the allowed
building size from 71,000 ft2 to 35,000 ft2.
The Building Developer’s dilemma was clear: should he absorb the additional $1,125,000
in development costs and pull a permit to save the 71,000 ft2 building plan and try to
re-negotiate a better pre-lease deal, or walk away from the deal?
The Building Developer reported that he had received his building permit prior to the July
2 deadline and had re-negotiated a slightly better pre-lease. The risk of the lower expected
return on costs was considered better than losing almost 50% of the value of the potential
building development.
b. Communicate with understanding

When an All-Pro NFL offensive lineman was once asked how he prepared for the game on
Sunday, he replied, “I know that I am going to take a beating, and I can’t fight back, so from
Thursday to Sunday I just think, ‘Passive’!” Developers don’t have to think like the offensive
lineman, but they also don’t want to “fight back” in the approval and permitting process.
Don’t fight; make friends

No one is going away. It may be hard to remember, but people will continue to come to work
every day and be part of our world, like it or not. If developers can’t be friendly and gracious,
then they shouldn’t go for approvals or permits. In this case, they should have another person
who is knowledgeable and skilled in the permitting process apply for and respond to this
Task. Most people (both private and public employees) prefer a positive and gracious
business environment, rather than an angry and confrontational one.
Developers and their team members need to learn about the government employees as
persons: their interests, their families, and their backgrounds. It is important to find areas of
260 Part III
common interest. It is also important to learn people’s names and titles (get their business
cards). Remember: never trash talk their co-workers.
Finally, developers should not brag about their political connections. Political connections
must be used discreetly and discerningly.
Find areas of agreement

It is important for developers to understand their needs, but it is more important to understand
the needs of others in the permitting and approval process. The government employees are
not there just to say “no.” Find out what they think their jobs are, and find a way to help them
do their jobs better. Mary Kay, the legendary cosmetic mogul and entrepreneur, said that
everyone has an invisible sign on their chest that says, “Make me feel important!”
Finally, developers cannot carry a grudge. Every meeting must start fresh. Respect is a
two-way street that must be practiced every day.
Structure workable compromises

Successful developers understand that win-win solutions are imperative to obtain their approv-
als and permits quickly and efficiently. Compromised solutions are good, while outright
victories don’t last. There will always be another meeting to re-trade the deal.
In a speech at the ULI annual meeting in Denver, Alan Simpson, the retired U.S. Senator
from Wyoming, said that, “anyone who cannot compromise on issues without compromising
his character should not be in politics, nor should he be married!” This goes for real estate
developers, too.
Find timely resolutions

Developers should know that “time wounds all deals.” Albert Einstein once said, “The most
powerful force in the world is compound interest.”7 A long-fought battle to get an approval
or permission is probably a folly and a temporary victory at best. In reality, negotiations are
never over, so find a solution that works and then work to amend it as the development
progresses.
c. Expect and prepare for the worst
Understand the approval process

It is imperative that developers understand the approval process or hire someone who does.
In this case, ignorance is not bliss; it is a curse. There are lawyers, engineers, planners, and
consultants who know the territory and the terrain. They are invaluable.
The “city hall” team must do their homework and find out the history of land use decisions
in the desired area. They must determine who the developers are that have already been
granted the approvals that are needed for the project, as well as who has been denied the
desired approvals. Precedents are important and educational.
Developers must know the people who are involved with the approval process as
individuals. While not taking the approvals and permits process personally, developers must
appreciate that real people are involved. They must accept who people are and not try to
change them, or pass judgment on them.
It is imperative to understand who actually makes the approval/permit decisions and who
influences the decisions. Hiring lobbyists to influence the influencers in the approval process
is tricky business; proceed at your own risk. Because goodwill can be quickly used up, don’t
waste it.
Most municipalities have a graphic example that demonstrates the required steps in the
process for a land subdivision approval. Exhibit 18.2 illustrates a very simple subdivision
approval process for a rural township. However, this simplicity is misleading because of the
hidden approvals that are required at each step in the process. For example, the “preliminary
subdivision approval” requires approval by the state Department of Environmental Protection
of the sanitary sewer system specified for the site.
The schematic diagram in Exhibit 18.3 depicts the complicated subdivision approval
process for an urban county. Note, the authors superimposed the stars in the diagram, so the
beginning and ending of the process could be more easily identified. This intimidating
diagram is very helpful for developers trying to negotiate the approval process. This county
actually has a good reputation for being “developer friendly.”
Developers should remember that real people (with families, friends, and emotions),
administer the above subdivision process. These people make decisions and usually want to
do a good job. Developers who become impatient with, or irritated by, these processes should
not participate. Rather, someone else on their team should lead the effort for this Task.
Knowing when to “hold ’em,” and when to “fold ’em” is critical. A well-made argument
will stand the test of time, so don’t give up too quickly. On the other hand, “beating a dead
horse” indicates a lack of character and judgment; try not to do this.
Expect prior agreements or understandings to be retracted or contested

The private and public sectors have different ethical systems when it comes to making a
deal. The private sector believes that a “deal’s a deal,” and that persons of integrity will stick
by their deal. However, the public sector believes that a “deal’s a deal” only if it will stand
up to public (and political) scrutiny. Consequently, when the public sector decides to change
an agreement that the private sector thinks was already made and finalized, the public sector
considers this good or responsible government, while the private sector considers this a
breach of good faith and trust.
Expect confidential information to be made public

Private developers may be surprised that information that was given or disclosed in confi-
dence at a “working meeting” with a municipal staff is readily disclosed as public informa-
tion by the public sector. The public sector’s ability to keep information private is limited
by Freedom of Information Laws or Open Meeting Laws. These different points of view can
lead to misunderstandings, distrust, and suspicion. Smart developers will understand the
phenomenon and act accordingly.
Address social and community problems that the developer cannot solve
Developers may be asked to address social issues such as affordable housing on a commercial
tract of ground, or to address problems of poverty, education, and recreational facilities, even
though the project is small in size and commercial in nature. Sometimes, developers may
be asked to address community-wide environmental pollution, storm water management, or
Exhibit 18.2 Simple township subdivision process.
Exhibit 18.3 Complex county subdivision process.
264 Part III
traffic congestion, even if the project has little connection to these problems. Developers
must find a way to empathize with these problems and their effect on citizens, while keeping
the discussion focused on the subject project and how it will improve the lives of everyone
in the community.
Well-meaning and well-intentioned citizens may express points of view that are heartfelt
and sincere, but not economically or financial feasible. However, these citizens’ concerns
cannot be cavalierly dismissed or rejected out-of-hand by developers. Sometimes, further
discussions with citizens on a personal level outside of the public meeting can help to
clarify issues or understand concerns. However, sometimes developers can inadvertently get
caught up in political issues (or elections) that are not part of the Real Estate Development
Process. Developers can become “collateral damage,” so to speak. Again, this is all tricky
business.
Appreciate the perceived realities of various stakeholders

Developers need to recognize the co-existence of “multiple realities.” Even though develop-
ers may clearly and articulately describe their vision of the real estate project, other stake-
holders may describe an entirely different vision of the proposed project. Which vision
is true and real? They both are. Developers need to accept the existence of these multiple
realities.
Reject illegal, inappropriate, and questionable offers in the name of

“finding a solution”
Developers are recognized as business leaders who are asking their community for help.
Unfortunately, some despicable characters may attempt to exploit this situation for personal
gain, and sometimes at the edge of or outside of the law. Throughout the entire approval and
permission process, developers must maintain their personal integrity and good citizenship.
Developers need to be examples of the best of the community, regardless of personal or
unfair attacks by others.
Willard G. Rouse III is a great example of personal integrity and responsible citizenship.
Bill Rouse was the developer of the huge Penn Landing waterfront project in downtown
Philadelphia. In 1986, a local mobster attempted to extort $1 million from Rouse to guarantee
the passage of two bills by the City Council that would provide funding for the project.
Rouse immediately went to the U.S. Attorney’s office, and the FBI inserted an undercover
agent into the discussions with the mobster. Three weeks later the mobsters were arrested,
and eventually three city councilmen and two congressmen were convicted of bribery and
corruption charges!
Bill Rouse was a man of unquestionable character and integrity. He has set a high bar for
other real estate developers. His company, Rouse and Associates, became Liberty Property
Trust, one of the largest real estate investment trusts in the United States.
d. Obtain the required approvals and permits

In every Stage, there are the required approvals and permits needed to construct, operate,
improve, or modify the property during the development. Developers must not only
determine what approvals and permits are necessary, but they must also acquire these
approvals and permits in a timely and cost-effective manner. The approvals may be at the
federal, state, or municipal level, and they also may be from regional authorities or private
individuals or organizations.
The list of governmental authorities and departments below demonstrates the extent of the
approval and permitting process, as well as the overlap of jurisdictional authority at all levels
of government. Each bulleted agency can be found in the Schilke’s checklist8 mentioned
previously. However, every municipality, county, and state has its own set of specific approv-
als and permits. Developers must engage good legal, political, and technical professionals to
decipher and then to obtain the required permits and approvals.
Federal approvals
• Interstate Highway Commission

• Environmental Protection Agency
• Department of Defense
• Department of Homeland Security
• Department of Interior
• United States Postal Service
• Department of Transportation
• Internal Revenue Service
• Fish and Game Commission
• Army Corps of Engineers
State approvals
• Department of Environmental Protection

• Highway Department
• Fish and Game Commission
• Consumer Protection Agency
• State Department of Taxation
• State Real Estate Commission
• Department of Natural Resources
• Department of Health
• State Zoning Codes
• State Historical Association
Regional approvals
• Water Authorities
• Transportation Authorities
• Airport Authorities
• Sanitation Authorities
• Councils of Governments
Municipals approvals
• Zoning Boards
• Public Works Departments
• Fire Department
266 Part III
• Code Enforcement Department
• Sanitation Departments
• Parks and Recreation
• Local Historical Association
Private approvals
• Deed restrictions in subdivision agreements

• Easements and rights-of-way
• Privately owned utilities:
○ Electric
○ Gas
○ Communications
○ Recycling and garbage
Examples of permitting and approval process @REDM9

The Potomac Yard Case Study mentioned in Part II is an excellent example of zoning
ordinances that permit and regulate future development. The zoning ordinances that were
negotiated by the Land Packager determined what the Land Developers, Building Developers,
and Building Operators could do and the conditions under which they could do it. Both
Alexandria and Arlington passed zoning ordinances that included allowable densities and
Urban Design Guidelines. The Alexandria Coordinated Development District (CDD) ordi-
nance specified an approved master plan and an alternative master plan. The alternative
master plan could be chosen by the City if it approved and partially funded a new Monroe
Avenue Bridge in the future. The CDD had 38 conditions that had to be met.
Arlington’s Phased Development Site Plan (PDSP) ordinance had an approved master
plan provided that 40 acres were given to the County and the densities on the transferred land
were transferred to the remaining 44 acres. Otherwise the PDSP zoning would not be vested.
The CDD and the PDSP required the developers to establish a Transportation Master Plan
(TMP) and specified what these plans included and how they would be funded in the future
as development progressed. Ironically, neither TMP was required to coordinate or cooperate
with the other.
Arlington’s PDSP required the Land Developer to create a Public Art Concept Plan10 that
was approved by the Art and Planning Commissions, as well as the County Board before any
land bays could be sold.
Unlike many master plans that are revised constantly over time, both Alexandria’s CDD
and Arlington’s PDSP have remained intact since they were passed in 1999 and 2000. Both
municipalities credit this outcome to stable and committed political leadership.
Storm Water Management at Piedmont Town Center @REDM11

A $125 million mixed-used development in Charlotte, North Carolina, Piedmont Town
Center included 400,000 ft2 of office, a 2,000 space car parking structure, 100,000 ft2 of
retail, and 180 residential units on 11 acres of land. While Crescent had pre-leased half of the
office space, it had to re-zone the property to a MUDD (Mixed Use Development District)
that allowed for more flexibility and density, but also gave the municipality more control
over the design and infrastructure improvements. A signature roundabout at the front
entrance was endorsed by the planning department, but was objected to by the fire department
until a compromise solution was reached. Crescent was able to deal with neighborhood
objections by preserving a grove of old oak trees as a green buffer, and incorporating
wetlands and storm water management ponds into a neighborhood park. The pre-lease agree-
ment required office occupancy in two years, so Crescent and its development team were
under significant pressure to reach agreements, to obtain permits, and to construct the project
in record time. The construction team included 20 managers, 1,000 workers, and 12 cranes!
This project is discussed again in Chapter 21.
Permit Purgatory @REDM12

“Permit Purgatory” is a non-technical article that discusses the problems associated with
repairing older homes in Arlington County, Virginia. Homeowners are Building Operators in
the Real Estate Development Process, and they must obtain all of the permits and approvals
that professional Building Operators need. Several case studies focus on the need to obtain
approvals from the Arlington Board of Zoning Approvals (BZA) before building permits can
be obtained. As zoning laws are updated over time, existing properties can inadvertently
become “non-conforming uses.” Half of the detached housing units in Arlington are esti-
mated to be non-conforming. Minimum lot size requirements are especially problematic.
Using minimum lot size regulations, municipalities effectively zone out modest or afforda-
ble housing which is torn down and replaced with McMansions on several consolidated lots.
Ironically, most homeowners don’t understand that obtaining permits and approvals to repair
or replace parts of their homes is a public process.
Summary
The Approvals and Permits Tasks require developers to be politically astute, as well as to
understand the requisite permitting and approval processes. Idealistic developers can become
antagonistic towards the public-sector approvals and permits if they insist on making value
judgments about the permits and approvals such as “right or wrong,” “fair or unfair,” or
“good or bad.” Successful developers take a pragmatic approach to these processes, so that
the necessary approvals and permits can be obtained in a timely manner.
Recognizing that most of the population views real estate development as a regulated
process, developers need to find ways to meet both the public’s desire for regulation and the
private market’s need for expediency. Developers must embrace the “sweet art of compro-
mise,” so that the Real Estate Development Process is cast as a win-win proposition, rather
than a win-lose situation.
The Approvals and Permits Tasks bring into sharp focus the problems caused by overlap-
ping governmental authorities who often have competing political agendas. Well-meaning
developers can easily get played as unwitting pawns in interjurisdictional squabbles between
governmental agencies.
Finally, developers must respect the interconnectedness of the myriad of approvals and
permits required in all Stages of development. Federal legislation empowers federal agencies,
who in turn empower state agencies, who in turn require local municipalities to enforce the
federal regulations!
Developers may believe it is more efficient to “ask for forgiveness than to beg for
permission,” but they do so at their own peril. Ignorance or naiveté is not an effective defense
for violating laws and regulations.
268 Part III
Successful developers need to obtain the required approvals and permits in a cost effective
and timely manner, and they must strive to remain on good terms with the regulators,
with whom they must work. There will always be another project that requires additional
permits and approvals. Developers need to embrace approvers and the regulators as impor-
tant partners on the development team who will share in the glory of a successful project!
“Please” and “thank-you” are the most important words to accomplish the Approvals and
Permits Tasks.
Notes
1 http://realestatedevelopmentmatrix.com/textbook/res/master_real_estate_permitting_checklist.pdf
2 http://realestatedevelopmentmatrix.com/textbook/res/afrh_mou_dc_and_usa.pdf
3 NAIOP, A Commercial Real Estate Organization www.naiop.org/
4 Urban Land Institute: http://uli.org/
5 National Association of Realtors: www.nar.realtor/
6 http://realestatedevelopmentmatrix.com/textbook/res/Hopkins+Building+Case+Study-+
Additional+Information.pdf
7 There is no proof that Einstein ever really said this, since the quote became public several decades
after his death. However, maybe he could have said it . . . if he were a real estate developer.
10 http://realestatedevelopmentmatrix.com/textbook/res/potomac_yard_public_art_concept_plan_.
pdf
11 http://realestatedevelopmentmatrix.com/textbook/res/Piedmont+Town+Center+Article.pdf
12 http://realestatedevelopmentmatrix.com/textbook/res/Permit+Purgatory.pdf
19 VI. Physical Improvements Tasks
INTRODUCTION
Exhibit 19.1 highlights the Physical Improvement Tasks in the context of the Real Estate
Development Matrix. As noted earlier, these groups of Tasks are not accomplished in any
particular order except that the Acquisition Tasks are done first and the Disposition Tasks are
done last in each Stage of development. In fact, the Physical Improvement Tasks are done in
conjunction and simultaneously with the other Task groups.
In the Real Estate Development Matrix, physical improvements are defined as existing or
planned improvements that can be seen, touched, heard, or smelled—both on or off the site.
These improvements may be horizontal (roads, sewers, utilities) or vertical (buildings,
towers, storage facilities), and they may be privately owned (building) or publicly owned
(streets). Finally, they may be located within the site (buildings) or off-site (parks and
recreation areas). To clarify, a change of the site’s zoning may be an improvement because it
adds value to the site, but it is not a physical improvement for the purposes of this discussion.
Zoning changes would be in the Approval and Permits Task Group.
The Physical Improvements Tasks require developers to determine what improvements
(public or private; horizontal or vertical) need to be planned, designed, engineered, and
constructed. With that determination, developers must be able to plan, design, engineer

270 Part III
and/or construct these improvements in a timely, efficient, and cost-effective manner with
the objective of adding value to the development. Once constructed, the existing physical
improvements must be maintained, repaired, or renovated during their economic lives.
The general public commonly perceives real estate development as the actual construction
of buildings. However, the building construction is usually the easiest part of the real estate
development process, especially if the design and engineering of the improvements are done
correctly. The thesis of this Task group is that physical improvements must exist twice: first,
they must exist in the minds of the developers; and second, they must exist physically—
constructed to become part of our built environment.1
A brief review of the Stages of development and the Physical Improvement Tasks may be
helpful.
1 Land Banking. Maintain the existing improvements and conceptualize possible future
improvements.
2 Land Packaging. Design a conceptual master plan for future improvements.
3 Land Development. Design, engineer, and construct the horizontal and public area
improvements.
4 Building Development. Design, engineer, and construct the vertical improvements.
5 Building Operations. Maintain and repair the existing improvements.
6 Building Renovation. Design, engineer, and construct the repairs and replacements
needed to renovate the property.
7 Property Redevelopment. Maintain, demolish, repair, and replace existing improvements
and provide for public safety during the redevelopment period.
The Physical Improvement Tasks closely follow the Stages of development and can be
divided into four categories of subtasks:
a Planning and Design

• What physical improvements are needed and what do they look like?
b Engineering
• Can these improvements be built with existing materials and technologies?
c Construction
• Can these improvements be built in a timely and cost-effective manner?
d Maintenance
• Once built, can these improvements be effectively maintained throughout their
expected economic life?
a. Planning and design

Physical improvements must exist first in the minds and imagination of the planners and
architects. The conceptualization of projects that don’t yet exist is a special talent—a talent
that some planners and architects can use more than others. Land planning and building
design services are often provided by firms that specialize in these “big picture” and high
level conceptual activities. When building designers are used, developers often hire another
architectural firm to provide working drawings that show details behind the design. Usually
VI. Physical Improvements 271
referred to as “architects-of-record,” these firms prepare the bid and construction drawings,
help developers obtain building permits,2 and administer the construction contracts.
Consequently, developers’ design teams include design architects and architects-of-record,
as well as land planners, landscape architects, and transportation planners. The team’s goal is
to determine if the desired, permitted, or required improvements can be built on or in the
space allocated for those improvements, i.e., can you put ten pounds of sugar in a five-pound
bag? This is a critical exercise that architects and planners sometimes call Feasibility Studies.
This exercise is often done in conjunction with developers’ engineering teams, as discussed
in the next part of this chapter.
This is also the time when the sustainability3 challenges and green building requirements
should be considered and incorporated into the big picture. Innovation and technology are
important factors in the planning and design phase.
Along with the planning and innovative design features, developers must determine if the
desired improvements will be acceptable in the marketplace, both now and in the future. It
is amazing how every decade of new construction can be characterized by certain architec-
tural clichés. Timeless design is rare, even though the structures commonly have a physical
life of 100 years!
Pictures of existing, but similar, improvements are helpful aids for developers, government
officials, and end-users, to visualize the proposed improvements. Case studies of existing,
similar improvements are also useful planning tools. But perhaps the most effective and most
enjoyable way to evaluate proposed improvements, is to take field trips to see and experience
actual projects that have been built and are currently in use. Ideally these are located in exotic
locations or world-famous urban central business districts, but probably they are not.
The last step in this subtask is to determine if the talents of the requisite planners and
architects are available to the developers. Not all architects and planners are created
equal, and architecture is a personal service business, like it or not. It is important that the
architects and planners who will lead the design teams have the time availability to do so.
Often, these projects will require several years of planning and administration to complete,
and the best people will have the most commitments. Also, developers must be comfort-
able that the lead architects and the planners have adequate staff to do the work, meet the
schedules, and produce the documents. A small firm with a capable, talented, and available
staff can get the job done, but it can also quickly become overcommitted, sometimes inad-
vertently. Developers need to have a good working relationship with their architectural and
planning teams so that expectations and deadlines are met.
Examples of planning and design

The design vision and standards for proposed mixed-use projects are often memorialized
in the zoning ordinances by including Urban Design Guidelines.4 For example, the Potomac
Yard project is a great example of Physical Improvements in the Land Packaging Stage. The
project, located in two municipalities, was defined by two different zoning ordinances,
which included two very different sets of Urban Design Guidelines. Both sets of guidelines
were written by the same architecture firm, Cooper Robertson and Partners, and are presented
in the same format. They are organized around six topics:
• Site analysis.
• Urban design principles.
• Development guidelines.
272 Part III
• Building guidelines.
• Landscape guidelines.
• Illustrative drawings.
The Urban Design Guidelines are extremely thoughtful and well written, and very detailed.
While the purpose of the guidelines is to clarify what the language in the ordinance means,
they are often interpreted very differently by various stakeholders when the Land Developers
or Building Developers submit their plans for building permits. Thus, the public discussion
begins all over again. Sometimes, the master plans in the zoning ordinance represent a
ceasefire in the stakeholder battles, rather than a representation of the community’s consensus
opinion. The newly hired director of planning at Alexandria informed the Potomac Yard
Land Developers that Urban Design Guidelines represented the maximum development
density, rather than the actual density, which she felt should be much less than the densities
specified in the ordinance and guidelines.
However, Urban Design Guidelines are usually very helpful to both the stakeholders and
developers to visualize the future development of the project. These guidelines are instrumen-
tal in getting the architects and engineers on the same page as the developers, and permitting
and approval authorities. But real estate, as a public good, is subject to changing political
environments, and the interpretation of the guidelines can change over time.
b. Engineering
The professional space occupied by architects and engineers can be confusing and over-
lapping. Differentiating between these two professions can be difficult. For the best results,
the architects and engineers must work together closely and respect one another’s work. The
real estate developer needs the engineers to determine if the planned or designed improve-
ments can be built in an attractive, timely, and cost-effective manner: the most beautifully
designed improvements may be virtually impossible to engineer and construct. For example,
office buildings in Dubai or Kuwait City are excellent examples of beautifully designed
structures that were a nightmare to engineer and construct. Clearly these beautiful (and
mostly unoccupied) buildings support the old adage that, “anything can be built with enough
money and enough time!” Developers must ensure that the designed and engineered improve-
ments will be acceptable to government agencies, end-users, and lenders, as well as perform-
ing economically and efficiently. Developers must balance the perceived benefits of
innovation and technology with the end-users’ ability to enjoy and maintain the space.
Developers must also determine if the planned or designed improvements can be engi-
neered to meet the current and future standards for sustainability and safety. Sustainable and
green buildings must begin with the appropriate design and engineering considerations.
Sustainability considerations usually involve tying the new building systems into existing
public infrastructure systems, such as water and sewer systems, and power grids. This is also
the most important step in the green building process. Architects and engineers must work
together with the building contractors and operators to use appropriate technologies with
human-friendly operation. For example, green roofs may look beautiful on paper, but they
can become a nightmare to construct and maintain if they are designed or engineered incor-
rectly. Refitting sustainable and green systems is much less efficient than constructing these
new systems from the beginning of the development process.
Healthy building and life safety systems must also be engineered from the beginning.
Again, refitting buildings to meet new health and safety standards is neither effective nor
efficient. Public safety considerations have become much more complicated since the terror-
ists’ attacks on September 11, 2001. Relatively simple security features such as the ingress and
egress of people and automobiles can be accommodated relatively easily when planned
and engineered correctly. However, they are extremely difficult and costly to accommodate
after the structures have been built. The accommodation of bicycles, electric cars, and autono-
mous vehicles are similarly easy to construct new, but expensive to retro-fit afterward.
c. Construction
Developers must determine if the improvements can be built on time and on budget; this
determination is made in conjunction with their general contractor. General contractors
should have a track record of constructing the desired improvements, as well as a cadre
of subcontractors with whom they have worked for many years. The positive relationship
between the general contractor and the subcontractors is the reason why the developer hires
a particular general contractor, rather than trying to coordinate and construct the improvements
themselves. Subcontractors are the key to determining if the project can be built on time and
on budget.
While architects and engineers can be helpful in determining construction costs and sched-
ules, the best source of this information comes from general contractors, who in turn rely on
their subcontractors. Developers can engage general contractors to provide pre-construction
services that are outside of the traditional bidding process. If the general contractor wins the
eventual contract, the pre-construction services are usually included in the overall bid prices,
but if another contractor wins the bid, then the developer usually pays or reimburses the
unsuccessful contractor directly for these services. These pre-construction services are so
critical to the developer that sometimes two or more general contractors are employed. Clark
Construction, the largest privately owned general building contractor in the United States,
offers cost estimation and scheduling services, as well as pre-construction services5:
• BIM coordination and implementation.

• Cashflow projections.
• Constructability reviews.
• Contractors’ scope coordination.
• Cost estimating and budgeting.
• Early start package development.
• Feasibility studies.
• LEED evaluation, score sheet development budget pricing.
• Life cycle cost analysis.
• Long lead item identification and procurement.
• Option pricing.
• Planning and programming.
• Project specific safety planning.
• Schedule development.
• Site investigations/existing conditions’ analysis.
• Site logistics planning.
• Small/minority business outreach.
• Subcontractor procurement.
• Systems analysis and selection.
• Value engineering.
274 Part III
Construction cost estimation @REDM6
Construction cost budgets are part of the overall development budget. Usually referred to as
“hard costs,” or direct construction cost, these costs are incurred in a predictable manner
over the construction period in the form of an S-curve, or cumulative probability distribution.
The Educational S-Curve Calculator is a handy method for estimating monthly construction
expenditures.
International Plaza IV is a good example of a preliminary development budget used in a
preliminary feasibility study, or the “Back of the Envelope” method. Before construction
actually begins, the timing of the construction costs is estimated using an S-curve, and the
estimates are the basis of the construction loan balance and accrued interest, as demonstrated
in the International Plaza IV Building Development Model @REDM7.
Developers need to understand that construction costs and time schedules cannot be
overestimated. General contractors and subcontractors are the best sources of this information.
With the assistance of the general and subcontractors, developers can usually produce a
good construction budget. However, the overall development budget must also include indi-
rect construction costs, or “soft costs,” which are much more difficult to estimate. Experienced
developers have historical references to begin the soft cost estimates, but new and inexperi-
enced developers must rely on their own research and help from experienced developers.
Each Stage of the Real Estate Development Process has its own set of development costs
that must be considered. One good example of this difference in budgets is the land develop-
ment of Crown Farm, which is very different from the building development budget for
Commonwealth Center. Development budgets are the basis for all financial reporting as
the actual costs incurred are compared to the estimated amounts. For example, the One and
Two Potomac Yard development budget shows the actual versus budgeted costs, as well
as the remaining costs to be incurred. Regardless of the developer’s background, a keen
understanding of development budgets and reporting are essential for survival.
Finally, developers should beware of cutting-edge technologies like new curtain wall
systems because sometimes these can be “bleeding edge” as the glitches are worked out. It’s
better to take the second bite from the apple, so to speak, and wait until these technologies
become more proven.
Example of cutting edge technology: Potomac Yard trunk sewer @REDM8

Unfortunately, in the Potomac Yard land development example, the master plan zoning
ordinance (CDD) required the Land Developers of the Alexandria Potomac Yard to use
trenchless technology to construct the required two-mile trunk sewer under Old Town
Alexandria. This micro-tunneling construction technique had never been used in an urban
area before. (It was mainly used to tunnel under rivers, highways, or harbors.) While the
Potomac Yard Trunk Sewer Project was successful, it had several exciting moments as
the development team and Alexandria residents discovered the implications of using this
new technology. These experiences are recorded on a video that was made to document this
project (see note 8).
General contractors and subcontractors

Land, Building, and Renovation Developers must evaluate the overall capacity of the general
contractor chosen to undertake the project by determining what other jobs the contractor has
underway, or to what other jobs the contractor has been committed. The capacities of the
general contractors are limited not only by the availability of their subcontractors, but also
by the availability of their own crews (project managers, superintendents, and foremen).
Superior general contractors are also superior team builders. They often take a leadership
role in defining business relationships, reporting protocols, and outlining conflict resolution
procedures. Developers can learn a lot by observing and working with the team-building
skills that the general contractors can provide.
Developers should also be concerned about the construction seasons (winter, spring,
summer, or fall) and weather conditions. Construction can be an outdoor sport, and the
weather patterns are predictable. Common sense is imperative.
Developers must determine if the necessary materials are available and affordable. While
local availability of materials is critical, general availability is determined by global resource
markets. Developers should be keenly aware of global shortages and surpluses.9
Finally, the developer must evaluate the availability of building systems that are
manufactured off-site, for example:
• pre-cast concrete structures;

• solar panels;
• roof systems;
• curtain wall systems;
• HVAC equipment.
Traditional or fast-track options: Design-Bid-Build vs. Design-Build
Design-Bid-Build model
This traditional Design-Bid-Build process (as seen in Exhibit 19.2) is very comfortable
for developers who are uncertain about the final building outcome, or who the eventual
users/occupants will be. Developers employ the architect to guide and assist them
throughout the design and bid process for the contemplated improvements. The architect
then acts on the developers’ behalf to prepare and distribute the bid packages to qualified
general contractors, and helps to evaluate the bids and negotiate the eventual contract.
Exhibit 19.2 Traditional Design-Bid-Build model.

276 Part III
Developers then execute a separate contract with the successful bidder to construct those
improvements. The architect continues to represent the developers and administers the
contract as construction occurs.
The Design-Bid-Build option has several advantages, as well as disadvantages10:
ADVANTAGES
• Competitive equity and fairness.

• High quality design.
• Reasonable price certainty based on market forces with reduced unknowns.
• Acceptable strategy in terms of public accountability and transparency.
• Well-known procedure and proven approach.
• Flexibility: changes are easy to arrange with limited effect on value.
DISADVANTAGES
• This strategy is potentially open to abuse, resulting in less certainty.

• The overall construction time frame may be longer than the design-build option.
• There is no buildability or constructability input from contractor.11
• The strategy can lead to adversarial relationships between the parties.
• This approach is not fully promoted by all stakeholders.
Design-Build model
The Design-Build approach, illustrated in Exhibit 19.3, has become much more common
over the last two decades as the developers have a better sense of the final building outcome,
and the needs of the eventual building users have become more predictable. Essentially,
developers employ a Design-Build team that consists of an architect and a general contractor:
this is usually done with one contract. The developer, architect, and contractor work closely
Exhibit 19.3 Design-Build model.

together to design and review the proposed project, even while the construction of the project
is underway.
The developers and their Design-Build team must have a clear understanding and common
agreement on the final building outcomes. This relationship requires a high degree of trust
among the parties. Of course, this process shortens the overall construction period since
the bidding and re-bidding stages are eliminated. Many developers have suggested that the
most effective Design-Build teams are led by the building contractor, rather than the archi-
tects, since the contractors are more experienced in completing the improvements in a timely
manner.
The Design-Build option also has several advantages and disadvantages:12
ADVANTAGES
• The developer deals with only one construction company and therefore inherent
buildability is achieved.
• A higher level of price certainty is achieved before construction commences, provided
the developer’s requirements are adequately specified and changes are not made.
• The total time of the project is reduced due to overlapping activities.
• There are fewer overall uncertainties in the process.
DISADVANTAGES
• There are only a limited number of firms offering design-build services, so there is
limited competition.
• The developer has to commit to a building before a detailed design is completed.
• Design-Build firms can be a mixed bag of talents, composed of weak and strong
elements.
• There is no design oversight unless separate consultants are appointed for that purpose
by the developer.
• Preparing an adequate project description can be difficult.
• There are difficulties in comparing bids, as each design, program, and cost varies.
• Design liability is limited by the standard contract.
• Changes to the scope of the project can be expensive.
d. Maintenance
Developers in all Stages should determine how the constructed improvements will be
operated and maintained in good working order over the life cycle of the improvements.
While the Building Operators actually execute the maintenance and repair programs,
the Land Packagers, Land Developers, and Building Developers must be cognizant of the
challenges of maintaining physical improvements and operating systems as they are being
planned, designed, engineered, and constructed. The Building Operators and the Building
Renovators must determine the most cost-effective program for adequately maintaining the
improvements over their economic lives. This program is critical for the successful operation
of the buildings and their ancillary surrounding structures and support systems.
Publicly owned buildings are the best examples of “design, build, and forget.” It seems that
the political systems like to build new facilities, but abhor the costs of properly maintaining
them. Examples of 20-year-old courthouses, penitentiaries, and municipal office buildings
278 Part III
that are functionally obsolete and physically deteriorating are all too common. Finger-pointing
for blame is substituted for rational and well-funded maintenance programs.
Privately owned buildings, as well, need a well-established and well-funded maintenance
plan. Also, experienced and well-trained building engineers are critical since highly technical
operating systems usually have excellent monitoring systems, but a person must be tasked to
monitor those monitors.
Green roof systems are another example of well-intentioned building systems that fail
because of poor maintenance programs due to the lack of knowledge, lack of awareness, or
lack of concern for the green roof.
Developers must determine if the appropriate vendors are available to maintain and
operate the improvements over their life cycles. Developers must be aware of and appreciate
the following:
• Experienced and credible outside vendors are the key to well-maintained building
systems.
• Maintenance schedules with outside vendors can ensure that regular servicing occurs
(and gets paid for, too).
• Green building cleaning systems can be challenging and may require new people, with
new training, using new technologies.
Building Operators must establish appropriate financial reserves for future repairs and/or
replacements. Building systems have physical lives that must be respected, and economic
lives that can be calculated. Cash reserves should be established for major systems, such as:
• roofs;
• parking lots;
• wall systems (exterior and interior);
• landscaping;
• sprinkler systems (fire prevention systems).
Also, a specified and funded monetary reserve for replacements can be used as collateral for
working capital loans for specific projects, but these reserves should be established and
funded periodically throughout the lives of the improvements.
Warranties and guarantees that are part of the initial cost of the building systems
should be saved, monitored, and kept in force. These will force the Building Operators
to install appropriate and timely maintenance programs, often using outside vendors and
inspectors.
However, purchasing or renewing warranties and guarantees on existing building systems
may be more problematic. A thoughtful and well-executed maintenance system may be
much more cost effective than buying additional warranties or guarantees.
Summary
Physical improvements that are seen, heard, smelled, or touched are different from regulatory
or legal improvements that only exist on paper, even though they too can add value to the
property. The Physical Improvements Tasks are based on the premise that in the Real Estate
Development Process, the constructed physical improvements must exist twice: first in
the minds of the developers, architects, and engineers; and secondly, they must exist in the
physical world where they must be properly maintained and repaired throughout their
economic lives.
Developers must recognize that planners, architects and engineers have different
specialties and expertise which are sometimes hard to describe or differentiate. Consequently,
assembling a team of architects, planners, and engineers to provide the vision, imagination,
and physics is difficult and challenging at best. These professional groups must work
together in an iterative and collaborative fashion, so the physical improvements can exist in
developers’ minds before they attempt to construct them. Working through a development
project on paper is a necessary condition for a successfully constructed project.
When contractors and subcontractors are brought into this complex team and actual
construction begins, the time pressure makes for volatile and unstable situations. To handle
these situations, developers may employ many different strategies to manage and define
these relationships. While there is no right way to do this, inexperienced or passive developers
can find an infinite variety of wrong ways!
The constructed physical improvements must be properly maintained, repaired, and
operated to provide the expected service and benefits throughout their economic lives. In a
technological and digital world, trained and educated service providers are imperative. Also,
the need for cash reserves to fund major repairs and replacements cannot be overemphasized.
When a colleague recently changed careers from being a Land Developer to becoming a
Building Developer, he observed, “Vertical construction is much easier than horizontal
construction especially if the architects and engineers do their jobs right!” Clearly, the
Physical Improvements Tasks require a well-balanced, capable, and experienced team of
professionals from multiple disciplines.
Notes
1 In social science, the term “built environment” refers to the man-made surroundings that provide
the setting for human activity, ranging in scale from buildings and parks or green space, to
neighborhoods and cities, that can often include their supporting infrastructure, such as water
supply or energy networks. Built environment: Wikipedia https://en.wikipedia.org/wiki/Built_
environment
2 The “architect-of-record” is officially defined as the architect whose name appears on the building
permit.
3 Sustainable Development meets the needs of the present population without compromising the
ability of the future generations to meet their needs.
4 http://realestatedevelopmentmatrix.com/textbook/res/PotomacYardDesignGuidelines+Arligton.
pdf and http://realestatedevelopmentmatrix.com/textbook/res/PotomacYardUrbanDesignGuidelines
Alexandria.pdf
5 https://www.clarkconstruction.com/our-work/expertise/preconstruction
6 http://realestatedevelopmentmatrix.com/textbook/res/construction_draws_24months_modified.
xlsx http://realestatedevelopmentmatrix.com/textbook/res/Crown+Land+Development+Budget.
xls http://realestatedevelopmentmatrix.com/textbook/res/Commonwealth+Center+One++Develop
ment+budget.xls. http://realestatedevelopmentmatrix.com/textbook/res/land_bay__a_budget_
reconcilliation_june_26_06.xls
7 http://realestatedevelopmentmatrix.com/textbook/res/bote_international_plaza_four.xls
8 https://www.youtube.com/watch?v=-7Y5Iy_T33Y&feature=youtu.be
9 A good review of the global material markets is presented in NAIOP’s Development Magazine,
Summer 2015: “Construction Materials Price Trends” Ken Simonson, chief economist, Associated
General Contractors of America www.naiop.org/en/Magazine/2015/Summer-2015/Business-Trends/
Construction-Materials-Price-Trends.aspx
10 Reed, Richard and Sims, Sally, Property Development, Sixth Edition. Routledge Taylor and Francis
Group, New York, 2015. p. 193.
280 Part III
11 “Constructability or buildability is a project management technique to review construction pro-
cesses from start to finish during pre-construction phase. It is to identify obstacles before a project
is actually built, to reduce or prevent errors, delays, and cost overruns.” Constructability: Wikipedia
https://en.wikipedia.org/wiki/Constructability
12 Reed, Richard and Sims, Sally. Property Development, Sixth Edition. Routledge Taylor & Francis
Group, New York, 2015. p. 196
20 VII. Transportation and
Accessibility Tasks
INTRODUCTION
Transportation and Accessibility Tasks, as shown in Exhibit 20.1, create and address a
special category of improvements because they are moving and dynamic systems that feature
human and physical interactions. These Tasks also require developers to consider on-site and
off-site improvements that need special public approvals and permits. To successfully com-
plete these Tasks, developers need the skills of specialized planners, specialized engineers,
and specialized contractors, as well as sophisticated political skills. Today, it is popular to
discuss major transit-oriented developments in urban areas, but it is important to understand
that all developments (large and small) must focus on both transportation and accessibility
systems to be successful.
The Transportation and Accessibility Tasks require developers to determine not only what
transportation systems (public and private) the space users (tenants, customers, suppliers) will
use to get to the property, but also to determine how tenants, customers, visitors, and suppliers
will get around the site once they have arrived. In some cases, the off-site transportation
systems (and in all cases the on-site accessibility systems), must be designed, engineered,
constructed, and maintained.

282 Part III
The nature of the Transportation and Accessibility Tasks vary in each Stage of development,
as well as by product type. Also, Transportation and Accessibility Tasks are intricately
related to the other development Task groups.
Location. Location. Location.

The old saying is, “There are three determinants of real estate value: location, location, and
location!” This clever ditty disguises the real nature of location in the determination of
past, present, and future real estate values. “Location” is a relative term so that a property’s
location is always changing.1 While longitude and latitude measures of a property indicate a
property’s location relative to the earth’s equator or the Greenwich Prime Meridian, it means
nothing in terms of the economic value of the property.
More importantly, a property’s location is determined by its distance from key economic
activities. These are called its linkages. The importance of these activities depends on the use
of the site. For example, the important linkages for a residential lot would be the distance to
schools, shopping, or employment centers. Similarly, important linkages for a retail center
would be the distance to population centers or residential neighborhoods, or the distance to
other competitive retail centers.
These linkages beg the question, “How do you measure distance?” Of course, distance can
be measured in many ways: mileage, time, or cost. The distance between two economic activi-
ties can be measured directly “as the crow flies,” or by the distance that a car would travel
between the activities. Distance can be measured by travel time, and this time would be further
qualified by the mode of travel (car, subway, or bike?) and the time of day (late night or rush
hour). Finally, distance can be measured by the cost of traveling between the two activities.
These costs can include direct costs, such as tolls or fares, or by an allowance for direct costs
such as gasoline for cars and indirect costs such as vehicle depreciation or insurance. The
Internal Revenue Service is famous for its mileage allowance for the cost of automotive travel.
Since there are usually several employment centers, shopping districts, or residential areas
in an urban area, linkages to these areas is often defined using an accessibility index, which
can be used for various economic activities and is usually calculated by weighting the
distance from the subject property to the activity, by the size of the activity relative to all
other activities. This is getting a little too complicated, but it makes the point that location is
a relative concept that is constantly changing.
For the purpose of this discussion, transportation Tasks refer to the off-site issues of
getting people, goods, and services to the site, while accessibility Tasks refer to the issues
involved with moving people, goods, and services around the site and within the buildings
once they have arrived. These tasks can be divided into four categories:
a. Off-site transportation
• Determine what transportation systems (public and private) that space users,
tenants, customers, and suppliers will use to get to the property.
• Evaluate the possibilities of improving or modifying these systems to enhance the
location of the property and thereby increase the value of the property and proposed
improvements.
b. On-site accessibility
• Determine how tenants, customers, and suppliers will get around on the site and
within the buildings once they have reached it.
• Design, engineer, construct, and maintain these accessibility improvements.
VII. Transportation and Accessibility 283
c. On- and off-site construction
• Determine who has the responsibility to design, engineer, construct, and fund the
required improvements: the private developer or a public authority.
d. On- and off-site maintenance
• Determine who is responsible for the maintenance and repair and eventual
replacement of the required improvements: developer, public authority, or tenant.
a. Off-site transportation
Evaluate the existing transportation systems available to bring people and

goods to the property.
Developers must evaluate all available and contemplated transportation systems to bring
people, goods, and services to the property. The fact is, that customers, visitors, tenants, and
vendors will use several modes of transportation rather than just one, so this Task can be
quite complex. Here is an incomplete list of transportation systems that developers should
evaluate: private or public.
Streets
Streets are the most common method for cars, trucks and buses to reach a site. However, the
ownership and control of these streets can be confusing and overlapping. This is especially true
if developers would like to (or must) improve these streets. Private streets are subject to control
by public authorities and public streets may be municipality, county, state, and/or federally
owned or regulated. Developers must understand the ownership and control of these streets in
order to determine what can, and what should, be done to enhance the value of the site. For
example, a thoroughfare may be a municipal street and also a state highway. Consequently,
both governmental entities must be contacted for permission to make any improvements.
Streets usually have some time type of pedestrian walkways, and some streets include
bicycle lanes as well. The requirements for these sidewalks and lanes can be complicated,
but they must be understood before making any improvements to the streets.
Highways
Highways are usually streets that allow for higher speeds and more liberal truck use. They
may have limited access points or signaled intersections with restricted curb cuts or access
points. County, state, or federal ownership may be involved. Usually, these authorities have
protocols and procedures for controlling, regulating, or maintaining these highways. The
federal Interstate Highway Commission, with its limited access interstate highways, trumps
the other jurisdictions when it comes to controlling and regulating its rights-of-way, exits,
and roadways.
Bus routes
Bus routes, especially in urban areas, can be a critical transportation system for employees
and customers to get to the site. Bus routes are always being evaluated and modified, and
many times there are different bus systems using the same stops or access points.
284 Part III
Dedicated transit systems
Dedicated transit systems such as subways, heavy rail, light rail, or rubber-tire transit-
vehicles are critical people movers in urban areas because they are very expensive to build
and maintain. However, they are very efficient in terms of ride time and user fees for
customers and employees. Unfortunately, they are usually multi-jurisdictional so that the
financing, construction, operation, and maintenance of these systems are always topics of
constant political debate. Most of the successful transit-oriented developments are built
around dedicated transit systems, often including two or more modes of transportation.
Industrial rail systems

Industrial rail systems are very different to heavy rail people movers and require specialized
access points (rail sidings) with specialized equipment. Existing rail systems are readily
identifiable, but the restriction on the use of these systems can be complicated because of
federal commissions and privately-owned rail cars.
Seaports
Seaports, like railroad yards and airports, are controlled and regulated by a myriad of govern-
ment agencies who work closely with private companies. These are very technical operational
facilities that are quite different from our romantic notions of seaports. Developers who
rely on seaport-oriented transportation systems need to appreciate the technical and political
complexities, as well as the international dimensions of these logistical systems.
Air transportation
Air transport systems usually revolve around airports and the other complementary transit
systems like highways and railways. Passenger airlines and commercial air transport compa-
nies are critical for the success of these systems, since the designation of an airport as an
operational hub for the company has significant impact on the use and economic viability of
the airport. Gaining or losing a hub designation is critical for airports and all of the commer-
cial activities associated with them. The post-9/11 security initiative taken by the Federal
Government has further complicated the construction, financing, operation, and maintenance
of air transportation systems.
Intermodal hubs
Intermodal hubs are the industrial/commercial equivalent of the residential/commercial
transit-oriented developments. Successful intermodal hubs bring together highway, rail, sea,
or air transportations in order to efficiently handle and distribute goods among these systems.
This type of mixed-use development requires a special kind of public-private partnership to
be viable.
Trails and paths

Trails and paths for pedestrians and bicycles are becoming very popular commuter transit
ways, as well as recreational opportunities. Many times these paths and trails are not directly
associated with a specific highway or other transit systems, which can be problematic in
terms of their maintenance and regulation. Parks and recreation authorities have historically
controlled these systems, but as their use as commuter routes has increased, many problems
have arisen. During and after a recent snow storm in the Washington, DC, area, the National
Park Service decided not to plow the pedestrian and bike paths, but rather to focus on the
streets and parking lots for automobiles. Literally thousands of bicycle commuters were
stranded and could not get to work. The National Park Service is now re-evaluating this
maintenance strategy.
Determine what changes or improvements to those systems are required to

improve bringing goods and people to the site.
There are very traditional improvements that may be necessary for the development of a site;
these would include curb cuts to highways or pipe culverts across drainage ditches. However,
other desired improvements can be very expensive, time consuming, and politically charged.
These improvements may include bridges across streams, access roads to limited access
highways, or even new bus or transit stations.
New rail sidings may be important to provide efficient access to airports via private streets.
Developers must assess the potential added value of these improvements, compared to the
time and money necessary to bring them into being.
Road extensions may be more expensive than path or trail extensions, but the political
complexities of extending paths or trails—or even gaining access to them—may be over-
whelming. Consequently, road extensions that include sidewalks and bike paths may be the
most efficient choice.
Evaluate the impact of emerging disruptive technologies.

Emerging technologies may have a very significant impact on future transportation systems.
The post-9/11 security initiatives and the rapid development of online retail shopping are
already affecting our transportation systems. However, there are several new and potentially
disruptive technologies that must be at least considered because they impact how people,
goods, and services get to and from the site.
• Prototypes of driverless or autonomous vehicles have already been developed, and their
safety and cost efficiency are being evaluated by private vendors and public regulators.
Driverless vehicles would have a dramatic impact on the need for parking facilities, as
well as highway safety. Trucking companies and taxi operators would need to redefine
their need for human drivers.
• Airborne drones are rapidly improving, and their commercial use to move goods (and
people, too) has been proposed. The impact of drones on shipping/receiving facilities
would be enormous.
• The millennium generation has embraced ride sharing and is being credited for the
rapid development of technologies that provide taxi services (Uber or Lyft), car sharing
(Cars-To-Go) and bike sharing (Citi Bike)—for example, a new DC development is
adding a ride share waiting room to its lobby. These may be attitudinal changes that
are supported by technology. Also, these technologies may be critical in solving the
last-mile issues that have plagued the traditional transit systems for years.
286 Part III
Evaluate if the desired changes or improvements can be permitted, designed,
and constructed in a timely and cost-effective manner.
Transportation changes and physical improvements are expensive and require numerous
political approvals. Proposed transit lines or even stations make take decades to be approved
and funded. Even then, the actual construction time of the improvements may be another
decade as rights-of-way are obtained, environmental impact studies are completed, contracts
are let out for bid, and numerous lawsuits are resolved. The requisite public-private partner-
ships may fray or unravel as new political leaders redefine the needs of the community and
their political constituencies.
When physical construction actually begins, especially in urban areas, numerous schedul-
ing accommodations are required so that normal life routines, such as rush hour traffic, can
continue in the affected neighborhoods. Mother Nature will also dictate the construction
schedule. Finally, the world-wide commodity markets will affect the price and availability of
building materials.
At some point, developers must reduce their expectations and ask themselves, “Are
there small accommodations to the existing transportation systems that can help get goods,
services, and people to the site?”
Transportation systems require visionary planning, but private developers must deal with
monthly expenses, contractual time constraints, and changing market conditions. Successful
developers must be both visionary and pragmatic when it comes to changing or improving
transportation systems.
b. On-site accessibility
Determine how goods, services, and people will access their destination once they arrive
on site.
The accessibility dilemma may be summarized by the old saying, “A good location, but
hard to get to.” The on-site accessibility issues are related to the mode of transportation that
brought the goods, services, or people to the site in the first place. Trucks will need a place
to stop or park; service providers will need a place to unload and do what they need to do;
people will need a way to walk to the buildings from their cars, bus stops, or transit stations.
These accessibility points or paths need to be appropriately designed and clearly visible.
Unobstructed paths and informative signage systems are key to moving people and vehicles
around a site to the appropriate building entrance locations. Entrance doors for people,
loading docks for trucks, and convenient parking areas for service providers must be well
marked and easy to approach.
Once inside a building, another set of accessibility challenges comes into play. Entrance
lobbies must have readable directories, and the location of escalators and elevators should be
readily apparent. Security considerations are also important, and the various levels of secu-
rity procedures must be customer-friendly, so to speak. Sign-in logs, bag checks, metal
detectors, and card readers should be obvious and convenient to persons entering the build-
ing. If necessary, designated receptionists or uniformed security personnel may ease the
screening procedures. Secure waiting areas in the lobbies may also be appropriate if visitors
need to be escorted to their destinations.
The American with Disabilities Act (ADA) dictated the requirements for the basic
accessibility facilities and prohibited barriers for disabled people. These are a good start. The
people using buildings should be comfortable moving about, regardless of their physical or
mental abilities. Developers must strike a balance between the ease of movement and the
need for security.
Here are some imaginative scenarios to help the developer evaluate the accessibility needs
of the building tenants:
• Assume you are a new employee, how will you get to your workplace?
• Assume you are a FedEx driver, how will you deliver your packages?
• Assume you are an important client, how will you find your service provider?
• Assume you are a terrorist, how will you cause harm to the workers or property?
• Assume you are wheelchair-bound, how will you get to your job?
• Assume you don’t speak English, how will you find your way around?
• Assume you are elderly and can’t see very well, how will you find your parking spot?2
Determine if roads, trails, walkways, elevators, escalators, and storage areas are
adequate to handle the expected traffic among and within buildings.
Developers must plan for the expected movement of people and vehicles not only around a
building, but also among buildings if this is a multi-building development. Parking lots or
structures may provide convenient access to a particular building, but they may become an
inadvertent pedestrian barrier to others. Dedicated pedestrian walkways (elevated or on-
grade) are important for tenant satisfaction as well as safety. Retail developers are especially
keen on the shopper’s experience—both from car to store, and between stores—and they
usually set the best examples of accessibility on a site. Mixed-use projects can provide chal-
lenging on-site accessibility features as the timing and needs of the various users can be very
different. Apartment users may be leaving the property when office users are entering the
property, while retail users may have a different schedule altogether.
Holidays, special events, and extreme weather conditions will stymie the best accessibility
plans, so flexibility is imperative for workable accessibility systems.
Determine the priorities of accessible activities.

Developers and their teams must balance the daily needs of the building users with life-
safety issues. Everyone must get to work, use the restrooms, and take a break or two. Here
are some daily needs that must be addressed.
• Vehicle parking. • Restrooms and feeding areas.

• Building entrances. • Child care facilities.
• Trash removal. • Dining and lunch areas/facilities.
• Mail and freight deliveries. • Recreational facilities.
• Suite entrances. • Bike storage.
• Emergency access ways. • Vehicle charging stations.
• Life-safety facilities and systems.
Determine if these accessibility improvements can be designed and constructed

in a timely and cost-effective manner.
Well-intentioned accessibility improvements may be extremely expensive, such as moving
sidewalks or enclosed or underground passageways between buildings. Developers must
288 Part III
balance the convenience with the cost to build these improvements. However, life-safety
issues must come first. Rather than put people at risk of injury, the project should be delayed
until cost-effective and safe accessibility improvements can be built and maintained.
Airpark West infrastructure @REDM3

In 2001, Crescent acquired a 61-acre parcel which it intended to develop as a warehouse/
industrial park—AirPark West—adjacent to the Charlotte Douglas International Airport. This
real estate development is a good illustration of some the Transportation and Accessibility
Tasks just discussed. Phase I of the required infrastructure was installed when the first ware-
house was constructed. When the second building was proposed, Charlotte insisted that all
of the remaining infrastructure be constructed, rather than just an extension of the Airpark
West Drive. Consequently, Crescent had to construct an additional 2,200 linear feet of
roadway, as well as the wet and dry utilities, for an additional cost of $1,070,000. This is a
good example of how the municipality’s concern for public safety and completed water and
sewer lines trumped the Land Developer’s desire for efficiency. Effectively, the developer
brought two additional building sites to the market ahead of schedule.
c. On- and off-site construction

Most transportation improvements are constructed off-site, while most accessibility improve-
ments are constructed on-site. The off-site construction of transportation improvements is
much more complex, time-consuming, and expensive than on-site construction of accessi-
bility improvements. However, even though their integration may take decades to occur, the
off-site construction and the on-site construction must eventually be tied together.
Determine required public approvals and permits.
Off-site approvals and permits

Approvals and permits for off-site improvement transportation improvements are the hardest
to get. While the improvements must be constructed to meet “government specifications,”
there can be numerous overlapping governmental jurisdictions, each with its own specifica-
tions and approval process. For example, road improvements may be governed by federal,
state, or municipal authorities depending on the location or use of the new roads. Also,
regional airport and transportation authorities have requirements that may overlay state and
local authorities.
The approval of federal and state environmental agencies will be necessary if an
Environmental Impact Study is required for construction of the off-site improvements. Finally,
off-site transportation improvements may impact existing recreational facilities, paths, or trails
so that state and local parks and recreational authorities must also approve the improvements.
On-site approvals and permits

Many times, the on-site transportation improvements, such as roads and bridges, are con-
structed on privately owned land, but the expectation is that the developer will donate,
gift, or deed over the improvements to the municipality or state so that the new public owners
will maintain the improvements going forward. In this case, the improvements must be built
to government specifications, so the authorities will accept the improvements and the future
maintenance liabilities.
Even if the streets and roads are built on-site on privately owned land, private approvals
may be necessary. Future users, such as prospective tenants, may have the right to confirm
that the improvements are built to pre-approved specifications to handle the transportation
needs of the tenants and their vendors and customers.
Land Developers who construct roads that serve multiple building sites and users must be
sensitive to existing development agreements or subdivision restrictions that limit or impair
the accessibility to each site.
Evaluate if transportation/accessibility improvements can be built on time

and on budget.
Building contractors who are capable of, and specialize in, constructing transportation and
accessibility improvements have limited capacity and availability during the building season,
which is constrained by weather conditions, as well as timing considerations such as rush
hour traffic or other transportation vehicles like trains.
Finally, government-specified transportation improvements can be very costly. Thus,
the developer must solicit competitive bids from qualified contractors who can deliver the
finished improvements on time and on budget.
Determine if the necessary building materials are available and affordable.

Transportation and accessibility improvements require huge amounts of materials that are
traded on the world-wide commodity markets. Consequently, the developer must be aware
of the availability of such materials as cement, steel, and asphalt (oil). During a world-wide
recession, material availability is not a problem. However, a world-wide economic boom can
cause devastating shortages of critical materials.
Evaluate the availability of public funding sources to finance roads, terminals,

walkways, or other transportation improvements.
The construction of transportation improvements is often done in the form of public-private
partnerships. The private sector (or developer) usually takes the construction risks while the
public sector (the governmental authority) provides access to free or low-cost capital.
The availability of the federal, state, or local grants usually require a public partner of some
sort. For example, the public partner could be a municipality, redevelopment authority, or a
utility company.
Another source of low-cost capital may be low-interest loans through various federal,
state, or local authorities. In some areas, the local government may authorize low-cost
infrastructure loans or bonds for special purpose entities, and in other areas, tax incremental
financing (TIF) schemes may be used to pay off infrastructure loans over time.
Nonprofit corporations or charitable foundations may also provide grants or low-cost
loans for specific recreational improvements, such as trails or paths.
Belgate infrastructure construction @REDM4

Crescent Resources approached the City of Charlotte with a plan to extend City Boulevard
from Exit 43 on Interstate 85 to U.S. route 29 (Tryon Street) in order develop a 186-acre site
that Crescent had obtained in a land swap.
290 Part III
As the Land Packager, Crescent had prepared a master plan for the entire site, and was
negotiating a pre-sale of the corner lot to a major retailer. The master plan also included an
internal road, Ikea Parkway, that would connect the extended City Boulevard to McCullough
Drive.
Crescent and Charlotte were able negotiate a public-private agreement that would combine
a previously negotiated Utility Agreement and an Enhanced Infrastructure Agreement.
The Agreement stipulated that the City would pay $3,678,000 of the expected total cost
of $5,753,000 of the road and utility extension. However, this agreement was subject to
Crescent obtaining its pending re-zoning application.
d. On- and off-site maintenance

The efficient maintenance and operation of Transportation and Accessibility improvements
should not be problematic, but it is—for the same reasons that the permitting and construc-
tion of these improvements is so difficult. Overlapping governmental authorities, outside
weather conditions, and limited financial resources can make maintenance and operation
very challenging.
Determine how the constructed transportation and accessibility improvements

will be maintained and operated in good working order over their life cycles.
Developer-owned facilities like elevators, escalators, security systems, and parking control
equipment are the easiest improvements to maintain with the use of outside vendors and
established maintenance schedules. Of course, the failure to maintain these facilities will
have dramatic results, such as unhappy tenants, higher operating costs, and dangerous safety
issues.
Tenant-owned facilities become more problematic since the maintenance responsibilities
may not be clearly articulated in the lease agreements. Special security systems and unique
tenant facilities, such as drive-up banking windows or trash disposal facilities, can cause
problems for other tenants if they not working or maintained properly. Developers may
be responsible for maintaining the parking lots, but the extra time and effort to maintain
the tenants’ facilities will cause additional expenses that may not be properly assigned to the
tenant or landlord.
Government owned or leased facilities can be very challenging to maintain properly
because of changing staffing, funding, and priorities. The maintenance costs of govern-
ment owned or leased transportation and accessibility facilities can be very high because of
unreasonable expectations or over-reaching lease specifications.
Sidewalks, alleys, and loading areas that may be officially owned by the municipality
must be maintained by the developer to stabilize the value of the privately-owned property.
Example of the dedication of roads and utilities to the municipality @REDM5

Usually, when Land Developers construct roadways and utilities on private land, they expect
to dedicate these roads and utilities to the municipality. At Arlington Potomac Yard, Crescent
dedicated 8.4 acres of land to Arlington County for the roads and utilities that were constructed
according to the County’s standards and inspected and accepted by the County engineers.
At the same time that the land was conveyed to the county, Crescent terminated all of the
temporary easements that were granted and used during construction. At the time of dedication,
the County assumed all responsibility for the continued maintenance of the roads and utilities.
Of course, Crescent posted several performance bonds to guarantee that the improvements
would function as planned!
Identify the appropriate vendors available to maintain and operate the

transportation and accessibility improvements.
Building Operators must identify and contract with credible vendors to operate and maintain
the transportation and accessibility improvements. For example, parking facility operators
must not only keep the traffic control equippment running properly, they must also be able
to deal with a late-night crisis or bad weather problems. Snow removal must be included or
integrated with the parking operations. Invariably, big snow storms cause additional problems
that complicate the timely removal of the snow.
Elevator and escalator maintenance is another area for reliable and credible vendors who
are skilled, knowledgeable, and responsive. This equipment must operate in a manner so that
the users never have to worry about their safety.
Security system personnel must deal with highly technical equipment, as well as highly
sensitive humans who expect security systems to operate flawlessly. This can be particularly
difficult if there are multiple security systems and agencies in the same facility. Of course,
these security systems and protocols must be coordinated with the municipal first responders
like police, firefighters, and emergency medical technicians.
Establish appropriate reserves for future repairs and/or replacement.

Transportation and accessibility improvements will eventually wear out and must be replaced
or renovated. At that time, cash reserves should be available to fund the cost of these replace-
ments. Unfortunately, these cash reserves are seldom established in a meaningful way.
Parking lots, sidewalks, and pathways can be maintained for many years past their replace-
ment time, but operating equipment usually needs to be replaced. If cash reserves are not
established, then developers should have readily available lines of credit.
As noted above, Land Developers provide fiduciary or surety bonds, as well as performance
bonds, to the municipality that takes ownership of public roads and traffic equipment.
However, these bonds are for a specified period of time, and claims against them can be
delayed and frustrating.
Clearly define and assign maintenance responsibilities.

A well-operating property maintenance plan clearly assigns responsibility for the tasks
to the vendors to perform the work in a timely manner. Property owners’ associations are
usually responsible for assigning maintenance tasks in large developments with multiple
owners. Building Operators are responsible for clearly defining who does what, especially in
emergencies.
Snow and ice must be removed from parking areas as well as the vehicular entrances
to the site; it must also be removed from sidewalks and pedestrian and bicycle pathways to
the site, and from the building entrances. The assigned vendors must be able to do all of the
required work, not just the areas that their snowplows can reach.
Maintenance and operational responsibilities must be assigned for security systems, fire
prevention systems, and traffic control systems. These assigned tasks must address normal
292 Part III
operations, as well as emergency operations. It is important to determine who will reset the
systems after an emergency situation occurs and determine how and when the building
operations will return to normal.
Define and distribute emergency plans.

Building and project emergency plans must be developed and integrated into municipal
and regional emergency plans. These emergency plans must address the appropriate use of
alarm systems, escape routes, assembly areas, and safe places. Safety equipment should be
identified and human floor monitors should be recruited and trained.
These emergency plans must deal with the common dilemmas that affect an area, like
power outages or fire and smoke emergencies. Plans should also address:
• earthquakes;
• floods;
• hurricanes;
• tornadoes;
• terrorist attacks;
• active shooters.
Not only should the emergency plans be developed, they need to be distributed and commu-
nicated to the building occupants, as well as police and fire departments and other first
responders. Finally, the emergency plans should address how lives and businesses can return
to normal once the crisis has been averted or handled.
Summary
The Transportation and Accessibility Tasks are defined somewhat uniquely in the Real Estate
Development Matrix. The Transportation Tasks refer to the analysis, construction, and main-
tenance of the systems that move people, goods and services to the site. The Accessibility
Tasks refer to the analysis, construction and maintenance of the systems that enable people,
goods and services to move around to their final destinations once they have arrived at the site.
The mantra that the three determinants of real estate value are “location, location, and
location” is simple and usually true. However, the rest of the story is that a property’s loca-
tion is always relative to other economic activities, so as transportation and accessibility
systems change, the property’s location changes as well. Also, the distance from the site to
other points of interests can be measured in numerous ways, such as mileage, time, or cost.
Every property that is developed must address Transportation and Accessibility Tasks, not
just those in the popular transit-oriented developments. What makes these Tasks especially
challenging is that they require a plethora of permits and approvals by numerous governmental
authorities with overlapping jurisdictions.
Off-site transportation and accessibility improvements present particularly knotty approval
and permitting processes that can take years (or decades) to obtain. Also, the off-site improve-
ments are usually not entirely financed with private funds. Governmental sponsored loans,
bonds, or grants are often required, which usually involve some type of public-private
partnership agreements.
To complete these Tasks successfully, developers must also work with a set of planners,
architects, engineers, and contractors who are different from the physical improvements
team. Finally, the Transportation and Accessibility Tasks must be constructed and maintained
in the context of other schedules, such as rush hour traffic, train and bus schedules, and
unpredictable weather conditions.
The Transportations and Accessibility Tasks may be overwhelming, such as transit
improvements in large mixed-use developments, or relatively small, such as curb cuts for
a small retail project, but their completion is critical for the success of all real estate
development projects.
Notes
1 This relative concept is reminiscent of the old Henny Youngman joke, “The guy says, ‘How’s your
wife?’ I says, ‘Compared to what?’”
2 The real question should be, “Assume you are an elderly person and can’t see very well, should you
be driving a car?”
3 http://realestatedevelopmentmatrix.com/textbook/res/apw_infrastructure_white_paper_and_
exhibits_1-4.pdf
4 http://realestatedevelopmentmatrix.com/textbook/res/City+Blvd+IBM+aerial.pdf http://realestate
developmentmatrix.com/textbook/res/City+Blvd+Land+Plan+6-12-07.pdf http://realestate
developmentmatrix.com/textbook/res/Belgate+City+Infrastructure+Dev+Agr+5-21-07.pdf
5 http://realestatedevelopmentmatrix.com/textbook/res/PY++North+Tract+Transfer+Potomac_
Deed_Dedication_Termination+-+Copy.pdf
21 VIII. Sales and Disposition Tasks
INTRODUCTION
Each Stage of the Real Estate Development Process begins with the Acquisition Tasks and
ends with the Sales and Disposition Tasks as illustrated in Exhibit 21.1. The six other groups
of Tasks are basically accomplished simultaneously as developers attempt to create value in
a particular Stage of development. Again, it is important to note that the order of the eight
Task categories in the Matrix are arbitrary except that developers must always begin each
stage with the Acquisition Tasks and end with the Sales and Disposition Tasks.
Basically, the Acquisition Tasks and the Sales and Disposition Tasks are two sides of the
same coin. It all depends upon one’s perspective. The Selling Developers must look at
the opportunities that they have created through the eyes of the developer buying the property
to better understand the value they have created. They must appreciate the challenges facing
Buying Developers.
Many developers say that they can undertake several Stages of development to create
additional value when the property is eventually sold. However, it is good practice and
discipline for developers to determine how much value has been created at the end of each
Stage, and then to evaluate the Tasks that must be accomplished in the next Stage of
development. Smart developers know that the skills required to accomplish the Tasks in one

VIII. Sales & Disposition 295
Stage of development are different from the skills required to accomplish the Tasks in the
next Stage of development.
In summary, even if developers assume that they will continue on to the next Stage of
development, they must seriously evaluate:
• What value has been created (or lost) in this particular Stage?
• What skills are required in the next Stage of development?
• What is the fiduciary responsibility to investors and team members by going forward to
the next Stage?
The Sales and Disposition Tasks can be broken down into five subtasks that must be
undertaken:
a. Complete the seller’s due diligence.

b. Market the property for sale.
c. Negotiate and execute a Sales Contract.
d. Close the sales transaction.
Complete the seller’s due diligence

Developers who are selling the property must first prepare a Seller’s Due Diligence Package,
which will eventually be used as the Offering Memorandum that is presented to potential
buyers. Developers start with the Due Diligence Review that their team completed when the
property was initially acquired. This due diligence material must be expanded to clearly
address four questions for Buying Developer:
• What do we have?
• What is it worth?
• Who wants to buy it?
• How do we affect a sale?
What do we have?
The property must be described physically, legally, and economically. The physical
description of the property should include the size and shape of the land area, as well as
all of the actual and planned physical improvements to the site. These materials should
include surveys, photographs, environmental studies, geo-technical reports, as well as plans
and specifications for existing improvements and designs for planned improvements.
Of particular importance are the ingress and egress points to the site and the adjacent
land uses.
The legal description of the property should start with the title and survey showing
boundaries, as well as all easements and rights-of-way affecting the property. The legal
description should include the current zoning and any deed restrictions or subdivision
regulations that may impact the use and future development of the property. Height restric-
tions and required building setbacks should also be mentioned if appropriate. The Selling
Developer must disclose any and all obligations or liabilities that the Buying Developer must
accept going forward, such as land leases, options, or first rights of refusal.
296 Part III
A rent roll summarizing all existing leases on the property should be prepared, and the
Selling Developer should be ready to provide copies of leases if the sale of the property
proceeds to a binding contract with appropriate confidentiality provisions.
The economic description will, of course, include the rent roll, economic measures such
as the allowable Floor Area Ratio (FAR) of the site, as well as the net developable land area
that is not impacted by environmental conditions (wetlands) or easements, and rights-of-
way. Also, buildings should be described in terms of the net rentable area and the net useable
area. The Selling Developer should also list any benefits such as royalties from oil and gas
drilling, existing permits for current land uses, and legal licenses and permits that are being
sold with the property.
What is it worth?
Selling Developers attempt to estimate the market value of the property while recognizing
the usual conditions of the “market value” definition.1 Selling Developers must also appreci-
ate that not all of these conditions will be met if and when the property is sold. In any
event, the three approaches to value estimation used by appraisers should be employed to
estimate the value of the property: the Sales Comparison Approach, the Cost Approach, and
the Income Approach.
The Sales Comparison Approach requires that the subject property be compared to
other recent sales or comparable sales of real estate properties to estimate its market value.
A Unit of Comparison is usually employed to simplify this process. Units of Comparison
may include the price per acre, the price per ft2 of building, or the Gross Income Multiplier.
This approach to value estimation is most appropriate in a very active market.
The Cost Approach determines the market value by estimating the cost to build improve-
ments new and then deducting the amount of accrued depreciation. This approach to value
estimation is most appropriate when the improvements are new and there is very little, if any,
accrued depreciation. This approach also assumes that land value can be estimated separately
from the building improvements, and it is valued using the Sales Comparison approach.
The Income Approach to estimate market value determines the present value of the
future benefits accruing to the owner of the property. The projected annual and reversionary2
benefits are converted to a present value (or today’s market value) using either a direct capi-
talization model or a discounted cash flow model. While the accurate prediction of future
benefits is critical in this process, the selection of the appropriate capitalization rates or the
risk-adjusted rates of discount are the keys to accurate estimates.
The above approaches are the classic methods to estimate the market value of the property
that will be sold. The market value is an objective or normative value estimate that represents
the consensus of the market participants under a hypothetical set of conditions. In reality, the
Selling Developers must estimate the lowest sales price that they are willing to accept that
meets their investment objectives (the seller’s investment value.) Similarly, the sellers will
need to find a buyer whose investment value is greater than or equal to the seller’s investment
value. Investment values are very subjective and reflect the price and unique terms and
conditions that are associated with the transaction.
Who wants to buy it?

At the time that they acquired the property, Selling Developers should have been thinking
about who the likely buyers of the improved property are. Possible buyers may include active
investors in the capital markets who represent “capital in search of an opportunity.” Building
Developers, Building Operators, and Building Renovators should identify possible “space
users” who would like to occupy the property as owner-operators. They would represent
“users in search of a site.” Finally, the most-likely buyers would be real estate developers who
are ready to begin the next Stage of real estate development:
• For Land Bankers, the most likely buyers would be Land Packagers;
• For Land Packagers, the most likely buyers would be Land Developers;
• For Land Developers, the most likely buyers would be Building Developers;
• For Building Developers, the most likely buyers would be Building Operators;
• For Building Operators, the most likely buyers would be other Building Operators or
Building Renovators;
• For Building Renovators, the most likely buyers would be Building Operators or
Property Redevelopers;
• For Property Redevelopers, the most likely buyers would be Land Packagers.
How do we affect a sale?

Selling Developers must determine what price and set of terms and conditions would be
the most attractive to the expected buyers. In other words, sellers must put themselves in the
mindset of the possible buyers to imagine what would motivate the potential buyers into
action. The old adage is, “If one side sets the price, thes other side sets the terms. A deal can
be made every time!”
Usually, the seller begins with an asking price. This suggested purchase price is really the
most money the seller can expect for the property. However, it cannot be so exorbitant that
it appears the that seller is not in touch with the current market conditions and, therefore,
not a reasonable market participant with whom to work. Sometimes, the seller may complete
the Seller’s Due Diligence Package, and then use parts of it to solicit offers from potential
buyers. However, it is important that the seller’s team has a reasonable expectation about
what the price will be.
Selling Developers should also consider the terms and conditions that can be offered
along with the asking price. The terms and conditions may include various inducements
that the seller could offer such as warranties, guarantees, seller financing arrangements,
options on future sales opportunities (such as Phase II and Phase III), or restrictions on future
competition (such as no additional sales for 36 months).
The seller should also determine what post-closing obligations are appropriate to include
in the sale agreements. These may include: the installation of landscaping when the weather
permits if it cannot be completed before closing; the completion of the parking lot’s top
surface until the tenant move-ins are completed; or the remediation of certain environmental
conditions that will not be finished at the time of closing.
Once the Selling Developer completes this Due Diligence Package, then the marketing
strategy must be addressed.
Market the property for sale

After completing the Seller Due Diligence Study, the developer is ready to address the
second Task, which is to develop the appropriate marketing strategy for the property.
The Selling Developer must address and answer the following questions:
298 Part III
• How should the property be presented to potential, qualified buyers?
• What is the appropriate pricing strategy?
• Are there seller-financing possibilities?
• What risks is the Selling Developer willing to retain?
• How will competitive buyers be treated?
How should the property be presented to potential, qualified buyers?

Once potential and qualified buyers have been identified, there are a number of ways that
Selling Developers can approach them and present the property. If the Selling Developer has
identified a small number of possible buyers, then a targeted approach should be used. Each
potential buyer should be evaluated in terms of personal relationships, past business experi-
ences, or mutual friends or acquaintances. The presentation should be tailored to address
specific motivating factors or specific property characteristics that would appeal to the buyer.
On the other hand, if there are numerous possible buyers or the buyers haven’t been
personally identified, then the Selling Developer should take a broader approach to marketing
the property. Clearly, a market strategy should include printed and electronic brochures and
advertisements, as well as a number of promotional events. The use of social media should
be included as well.
Selling Developers must address the need to use licensed brokers and to pay commissions.
There are a host listing arrangements that can be employed, but probably the most difficult
issue is how to treat third party or “outside” brokers fairly, especially if there are “inside”
brokers (brokers who are directly employed by the Selling Developer). Many times, a Selling
Developer will have marketing employees whose mission is to work closely with the outside
brokerage community.
Selling Developers must also set up a timeline or a schedule for the marketing process.
When does the seller expect the potential buyers to respond to the seller’s offer, and when can
the seller respond to the buyer’s offer? If there are several buyers, the timing expectations
should be very clear so the buyers feel that they are being treated fairly and their offers are
not being “shopped” to other competitors. Sellers may have a terms’ sheet or Letter of Intent
that they expect the buyers to use as the format for their responses. In any event, sellers must
be ready to promptly reply to offers, questions, and clarifications. Finally, sellers should
evaluate their ability to consummate a sale. Many times, the seller has a board of directors or
an Investment Committee that must approve the sale. If so, there are procedures and timing
considerations that must be respected.
What is an appropriate pricing strategy?

Selling Developers should start the marketing process with an asking price or a solicitation
of offers for the property. The asking price and the solicitation for offers should also include
suggested or acceptable conditions of sale. While there will be plenty of negotiations after
a buyer submits an offer, the suggested terms of the sale will ensure that that the buyer’s
expectations match the seller’s expectations. Sellers should also suggest their timeline to
reach an executed contract, as well as the timing expectations acceptable in the contract
itself, such as the duration of the free-look period, or the length of time from the end of the
due diligence period until the actual closing of the transaction.
The initial offering memorandum from the seller should also address how much of the
property is for sale. For example, the seller should clearly specify if the entire property is for
sale or only a certain portion of the property. If the property is being sold in phases, the seller
should clarify how the sale of future phases will be handled. The seller should state if the
buyer can obtain an option to buy future portions of the property or at least a right of first
offer when additional phases become available for sale.
Are there seller-financing possibilities?

Selling Developers should investigate the possibility of providing financing to the buyer as
an inducement to purchase the property, especially at a higher price. First of all, the seller
must evaluate existing financing options available for the purchase of the property. The
existing financing options may limit what the Selling Developer can do because there
may be pre-payment prohibitions or penalty provisions. In addition, there may be personal
guarantees or personal performance provisions that must be dealt with. Finally, the existing
financing may be transferable to the new buyer under certain conditions. Seller financing
options may be necessary because the new buyer has limited credit capabilities or because
the property may not be readily financed through the use of conventional lenders. In these
situations, Selling Developers may consider providing financing, also known as a purchase
money mortgage, as part of the sale. Other reasons for the seller to provide financing may
include the following:
• A shorter time period to close the transaction,

• An attractive interest rate for the seller,
• Continued control of the property through mortgage provisions,
• Control of the buyer’s business future activities through promissory note provisions,
• A higher sales price.
Selling Developers should investigate possible provisions in a purchase money mortgage to

prepare for the purchase discussions and negotiations. These provisions should include:
• Maximum loan amount,

• Fixed or variable interest rate,
• Term of the loan,
• Amortization period,
• Subordination provisions,
• Personal guarantees or credit enhancements.
An alternative to a purchase money mortgage may be a land contract that provides for
periodic payments to the seller during the contract period and then for the title to transfer to
the buyers at the end of the contract period. The land contract is usually for a long period of
time and may have other conditions for the title to transfer to the buyer. The land contract is
similar to a purchase money mortgage except that the seller remains the owner of record, so
the title does not have to be contested in the event of a buyer who defaults on the payments.
There are no legal foreclosure procedures and requirements.
If there are multiple phases in the development project, the seller may want to provide the
buyer with options to buy the subsequent phases of the project. The option agreement must
clearly state the terms of the option to buy, which must include the option price, the option
period, the price of the option, and the extension provisions if any.
300 Part III
What risks are the Selling Developers willing to retain?
Prior to marketing the property, Selling Developers should evaluate what risks they are
willing will to accept as part of the contemplated transaction and how those risks will be
priced. The most common risks are obtaining governmental approvals or permits. The buyer
may want the closing on the property to be delayed or contingent upon the attainment of a
site plan approval or a building permit. The seller may also need to guarantee the completion
of certain common area improvements that are required by the site plan or zoning approvals.
In addition, there may be certain environmental tests, approved remediation plans, or actual
remediation activities that need to be done prior to closing. Sometimes these risks can be
transferred to the buyer with seller guarantees, price adjustments, or at-risk escrow deposits.
How will competitive buyers be treated?

When there are multiple buyers and Selling Developers expect to continue in business, Selling
Developers should determine how the losing bidders will be treated. Selling Developers want
to maintain good relations with non-winning buyers, so they will be potential buyers for
the next real estate development project. However, successful buyers may want Selling
Developers to put competitive restrictions on non-winning buyers until the actual buyer
achieves a certain occupancy level or for a specific time period. These are delicate situations
and should be considered carefully and sensitively.
Negotiate and execute a sales contract

After Selling Developers have completed the due diligence package and marketed the prop-
erty to potential buyers, the next Task is to negotiate and execute a Sales Contract. The Sales
Contract has main three parts:3
1 Price and terms,

2 Conditions to close (pre-closing conditions),
3 Post-closing conditions.
Ironically, the hard work of negotiating a sales contract is done with a Letter of Intent that
is non-binding and non-technical. Written in plain English, the Letter of Intent essentially
“gets the deal on the table,” so the seller and buyer can discuss the areas of agreement, as
well as the areas of natural tension that require further discussion. The Letter of Intent is
given to the seller’s and buyer’s attorneys to reduce the agreement to a legally binding
contract. Sometimes the most difficult part of the Letter of Intent is the accurate description
of the property involved.
Letter of Intent example: Westfield sale by Crescent @REDM4

In 2005 through a commercial real estate broker, Crescent received an offer to sell the
101-acre Westfield property for $38.9 million in the form of a 3-page Letter of Intent in
2005. (In Chapter 14, Crescent’s 2001 LOI to purchase the property for $26.5 million was
reviewed.) Even though the offering price appeared low, Crescent was very interested in
the offer because the timeline for closing the transaction was very aggressive: 3 days to a
contract, then a 35-day due diligence period, and then closing 30 days later. The Buyers were
creditable investors, so of course, a condition to close included the approval of the Buyer’s
Executive Committee. There were no other unusual pre-conditions to close or post-closing
conditions.
Price and terms

The price of the property can be defined as all cash at closing or a cash down payment and a
purchase money mortgage if seller financing is involved. The price of the buyer’s option
to purchase additional property is usually part of the required cash at closing. Also, the
buyer’s right of first offer may also be included as part of the option agreement.
As mentioned earlier in this chapter, the Disposition Tasks are very similar to the
Acquisition Tasks except from a different point of view. For example, the sellers’ preference
is to sell the property as-is without any representation or warranties given to the buyers.
However, the buyers would like to purchase a fully represented property along with a grocery
list of warranties and guaranties from the sellers.
Representations and warranties can be divided into three broad categories: the status of
the seller, the status of the property, and the operation of the property.5 Sellers are asked to
represent and warrant that they have the legal authority to sell the property and that there are
no other prohibitions on the sale. Sellers must also clarify if there are other consents needed
for the sale and state that there are no bankruptcy proceedings pending.
The status of the real property involves statements of the ownership of the property and
that there are no liens or litigation cases involving the property. Probably the most difficult
representation that the seller is asked to make is that there are no violations of any federal, state,
or municipal environmental laws or regulations. Of course, it is not possible for the seller to
make this statement with complete integrity, so the clause, “To the best of my knowledge”
usually precedes this statement.
The operating of the property is usually represented by the sellers agreeing to disclose the
leases, operating agreements, books and records, and maintenance schedules.
Conditions to close
The sales contract addresses what conditions must be met prior to the closing of the transac-
tions. Again, the different perspectives of the sellers and the buyers are all important. This is
the section where sellers and buyers trade the risks of ownership and development. The condi-
tions to close can be myriad, but this is a summary of the most common closing issues:
Buyer’s due diligence period

• The length of time that the Buyer has to complete its Due Diligence Review, The
availability of any necessary or desired time extensions,
• Whether or not the good faith deposit is at risk during the Due Diligence Review period.
Buyer’s good faith deposit

• The amount of the cash deposit that the buyer puts in escrow,
• If and when the deposit is refundable,
• Additional cash deposits that may be required for extensions or various contract
provisions.
302 Part III
Document preparation and review
• Who prepares the initial draft contract,
• The review period to respond to contract changes,
• The required addendums and exhibits that must be reviewed.
Title and survey resolution

• Buyer’s approval of ALTA Survey showing all easement and rights-of-way,
• Buyer’s satisfaction with the title insurance exception.
Public approvals
• Public approvals or permits acquired prior to closing,
• The maximum time period allowed for obtaining these approvals or permits.
Third-party debt or additional equity capital

• Time period for buyers to obtain commitments for the required debt capital,
• Time period for buyers to obtain commitments for the required equity capital.
1031 tax deferred exchange requirements

• Time periods identify properties to be traded,
• Pledge of Cooperation by both parties.
Board, Executive or Investment Committee Approvals prior to closing
Westfield Disposition Example: Building Developer Sale to Another Building

Developer @REDM6
The Letter of Intent (LOI) for Westfields, discussed above, was quickly converted to a
binding contract where the final sales price increased to $42.45 million. Crescent’s Investment
Committee reviewed the disposition memo and approved the sale. This is a good example of
a Building Developer selling a zoned and ready-to-developed property to another Building
Developer who is more optimistic and has a more aggressive building schedule.
Tyvola Crossing example: Land Packager sale to a Land (Re)Packager @REDM7

Tyvola Crossing was a 12.2 -acre site that Crescent bought over 25 years ago and then zoned
it for a grocery-anchored shopping center. Unfortunately, the anticipated residential develop-
ment in the area never materialized, so the demand for a shopping center never occurred.
Finally, Crescent management decided to sell the property to Land (Re)Packager whose
intention was to re-zone the property for a mixed-use development. This is a good example
of an Investment Committee reviewing a “mistake” and agreeing with management to move
and redeploy the release capital to a more profitable development, hopefully.
Hidden River example: sale of excess land to a related party @REDM8

Crescent acquired the 250-acre Hidden River property located on the outskirts of Tampa,
Florida, over 30 years ago. The project was sold as a successful office research/office park,
but two land parcels remained: a 20-acre site with only 2 buildable acres and a 107-acre site
that was all wetlands. The original developer and former Crescent employee wanted to buy
the property for sentimental reasons and possibly building a “gathering place” for his friends
and family. Related party transactions are very problematic and fraught with suspicion and
conflicts of interest. This is a good example of an Investment Committee providing over-
sight and approvals so that the best interests of the company investors are protected. Also,
sometimes the Investment Committee needs to encourage the management to clean-up its
balance sheet and get rid of non-productive properties
Crosstown Center example: Land Developer sale to an owner-user @REDM9

This Disposition Memo seeks the approval of the sale of a 10-acre site to an owner/user who
constructed its headquarters building on the site. Crosstown Center was a land development
that Crescent acquire over 30 years ago. Acting as a Land Developer, it has sold building-
ready lots to several multi-family developers, as well as several hotel developers. Recently,
it had received Investment Committee approval to become an office Building Developer and
start a speculative office building. The Investment Committee had to evaluate how this sale
to an owner/user fits into the long-term development strategy, which appeared to be changing.
In this case, the sale was approved because the owner/user headquarters building would help
to establish the new direction of the development as a prime office location. This is a good
example of the Investment Committee providing a “big picture perspective” to balance very
transaction-oriented project developers.
Belgate Ikea land sale: a land sale with significant pre-closing conditions
@REDM10
The 164-acre Belgate development in Charlotte, NC, is driven by a pre-sale of a 30-acre
site to a major international retailer. The disposition memo outlines the terms of the sale and
highlights the pre-closing conditions. After the receipt of various governmental approvals,
Crescent had specified time periods to complete the following: site grading, roadway exten-
sions, and utility extensions. Because of the retailers anticipated opening date, failure to meet
these milestones carried a penalty to Crescent of $30,000 per day. The Belgate development
team was able to convince the Investment Committee that it could meet these milestones
and the risk of penalties was very small. In fact, the milestones were met, and everyone lived
happily ever after.
Post-closing conditions
Sales contracts must address certain actions that are underway and will continue after
closing, as well as actions that will start after the actual closing has occurred. Some guarantees
will extend long after closing has occurred.
The closing of a contract represents the passing of the title of the property from the seller
to the buyer. However, the Real Estate Development Process (aka the creation of value)
continues during the contract period and into the post-closing period. Examples of these
activities include the construction of tenant improvements, the leasing of vacant space, the
remediation of environmental conditions, and the completion of weather-related activities
such as landscaping. Typically, sellers and buyers agree on a transaction price that would
occur if all of these activities were complete, and then at closing, the buyer and seller agree
304 Part III
to holdback or place part of the sales proceed in a third-party escrow account. The escrow
agent will have specific instructions concerning when and how the escrowed funds are to be
disbursed to the seller.
For example, the sale of a newly constructed office building that is partially leased may
have holdbacks at closing for unfinished tenant improvements or unpaid leasing commis-
sions. The escrow agent would disburse the escrowed funds based on a pro-rata schedule as
the tenant improvements are completed or the leasing commissions are paid. Similarly, there
may be an economic earnouts that are paid to the seller as leases are placed in effect at
certain rent levels. Finally, funds may be disbursed according to a budget when landscaping
or paving projects are completed.
Environmental remediation projects are not complete until a government approval or a
“no further action” letter is received, so funds at closing may be placed in escrow until the
receipt of the approval or letter.
Land developers and building developers often negotiate sales contracts that close before
the building-ready site is completed. In these situations, the parties enter into post-closing
Development Agreements. These agreements could deal with the completion of dry and wet
utilities, roadways, traffic control systems, or common area improvements such as parks or
storm water retention facilities. To be effective, the Development Agreements must address
the following questions:
• What must occur? The exact specifications of the to-be-built improvements must be
carefully documented.
• When must they occur? The exact dates or conditions for the completion of the
improvements must be carefully documented.
• What happens if the specifications or milestones are not met? If the seller fails to
complete the specified improvements by the exact date, then the buyer can seek a
remedy by looking to the seller’s personal guarantees and letters of credit, posted surety
bonds, or other self-help remedies.
Development Agreements between the seller and multiple buyers present a unique predica-
ment if the seller defaults on the Development Agreements. The seller and multiple buyers
would enter into another agreement that would specify the order of priority during which the
buyers can engage in self-help provisions.
Guarantees against future legal actions or penalties are commonly made in sales contracts
by both parties may provide restrictions on future competition. Sellers may agree not to
sell any additional properties that may be competitive until the buyers have attained a
certain lease level or occupied the property for a specified number of months. Buyers also
may agree not to engage in other activities. For example, apartment developers will not
sell their units as condos, or the condo developers will not lease their unsold units as apart-
ments. Finally, Selling Developers may restrict their future sales activities so that they will
offer any new products first to the Buying Developers before offering them for sale on the
open market.
Potomac Yard Land Sales: Post Closing Development Agreements @REDM11

As discussed earlier in Chapter 8, Crescent’s land bay sales at Potomac Yard had substantial
post-closing obligations that were memorialized in Development Agreements that were
executed at closing. To manage its myriad of obligations in five different Development
Agreements, Crescent constructed the worksheet shown in the referenced hyperlink that
defined the post-closing subtasks, the responsible party, the completion dates, the current
status, and side notes. This is a good example of Land Developers monitoring their post-
closing obligations. This is also how Land Developers maintain a good reputation for
integrity and responsibility.
One and Two Potomac Yard sale: a building sale with significant post-closing
conditions @REDM12
As discussed earlier in the Chapter 9, Crescent’s pre-sale of One and Two Potomac Yard to
Morgan Stanley for $213.5 million was based on a staged purchase price. That is, closing
would occur at shell completion and Crescent was paid $100 million. The next payment was
at GSA occupancy and lease commencement when crescent would be paid $95.5 million.
The final staged payment occurred at the USGBC LEED Silver Certification, and Crescent
would be paid $18 million. Again, the development team had to convince the Investment
Committee that the purchase price is fair, but also that the team could meet all the post-
closing commitments, so Crescent could receive the full payment of the contract. Again,
the post-closing conditions were met, the fundings were made, and everyone lived happily
ever after!
Close the sales transaction

“Closing” is a euphemism for a crisis. All of the outstanding issues must be resolved for the
closing to take place, so the closing event provides the natural tension that is required for
issue resolution. Seasoned developers, whether sellers or buyers, appreciate the tension that
occurs around the closing, and they remain calm and clear-eyed as issues are resolved, one
by one. Sometimes, closings don’t occur, and the transaction needs to be unwound. There
may be fees or penalties that need to be paid and documents, reports, and certain work
products that need to be returned or transferred according to the contract provisions.
Closings, whether successful or not, require professional behavior from all parties. No one
should forget that real estate development is a process, and one transaction will not end a
career. There is always another deal to be done and more friends to be made.
The closing Tasks require the following questions to be addressed:
• When and where does closing occur?

• When does title pass?
• When and how are funds transferred?
• Who is notified and when?
When and where does closing occur?

An exact time and place for the closing must be specified and shared with all parties. Since
the ancillary agreements need to be reviewed and accepted before the closing can occur,
there should be a series of dates established prior to closing for the distribution and review
or all documents. A trial closing, or a “dry-run” a week before the scheduled closing is rec-
ommended to keep the scheduled closing date on track. Typically, Mondays and Fridays are
not good days for a scheduled closing.
306 Part III
A specific location for the closing should be established for the efficient collection, organi-
zation, and execution of the required documents. The specified location will also be influenced
by what persons actually need to be physically present at the closing table. Of course, no one
wants to miss the closing party, but a closing party can scheduled-on a separate date and at a
different location.
With electronic signatures and execution pages by counterpart, few principals need to be
physically present. However, the authority to execute documents needs to be established and
verified prior to closing; the dry-run closing should ferret this out.
When does the title pass?

While the title to the property usually transfers at the completion and execution of the closing
documents, there are numerous other allocations that need to be made as of a certain date.
Sometimes allocations and transfers are made as of a specified date just in case the actual
closing date slips a little. A specified as-of date will make the lawyers’ and accountants’ jobs
much easier as they specify the following:
• When the rent becomes the property of the buyer,

• When the insurance policies take effect,
• When the buyer’s liability begins (and the seller’s liability ends),
• When the buyer’s loan obligations begin,
• When the seller’s loan obligations are extinguished.
When and how are funds transferred?

At the end of the closing process, the funds are distributed to the appropriate parties. However,
in this age of electronic funds transfer, these transfers can be done at the speed of light so
that accurate distribution instructions, electronic addresses, and notifications are imperative.
This is where cyber security is paramount. Important transfers include the following:
• Buyer’s cash proceeds to the seller,

• Buyer’s borrowed capital proceeds to the seller,
• Seller’s funds proceed to its lenders,
• Seller’s funds proceed to its equity investors.
The above transfers may not occur simultaneously, especially the transfer of the seller’s
funds to their equity investors. The distribution of funds to equity investors is usually dictated
by partnership agreements that explicitly provide for the priority of cash proceeds.
Who is notified and when?

Many times, the sales transaction is conducted with confidentiality although many persons
are notified but subject to confidentiality agreements. However, once closing has occurred,
numerous persons must be notified for legal, business, and personal reasons. While “con-
structive notice” of the sale occurs when certain documents are recorded in the county court-
house, the information can be incomplete and misleading. As part of the closing process,
sellers and buyers should agree on a press release that accurately states the parties involved,
the location of the property, and the date of the closing. This official press release can be
distributed to the numerous persons, governments, vendors, and tenants affected by the
transaction. An incomplete list of these parties include:
• Tax authorities,
• Municipal authorities,
• Tenants,
• Vendors,
• Equity investors,
• Lenders,
• Neighborhood stakeholders,
• Police and Fire departments,
• Local politicians.
Prior to closing, the individual names and contact information should be researched and
verified.
Of course, both the seller and buyer can use phone calls, email, and letters to communicate
the completion of the transactions and to thank the many persons that made the closing
possible.
Alternative disposition strategies

Sometimes Selling Developers cannot find any buyers and cannot afford to hold the project
any longer. In these cases, developers may need to evaluate alternative disposition strategies.
These alternative disposition strategies should initially be considered during the Acquisition
Tasks when developers consider the “back-door” exit possibilities if the expected plans don’t
work out or materialize.
Reserves, lines of credit, and partnership loans

Developers need to expect negative cash flows when the major capital expenditures that
require additional capital exceed the annual cash flow from the property. For these expected
major expenditures, developers must establish reserves, lines of credit, and partnership
loans. However, unexpected capital expenditures may also be handled by tapping into these
sources of capital. Nevertheless, there may be restrictions on these funds, and they may not
be adequate to handle major unexpected capital requirements.
Buy-sell agreements
Buy-sell provisions are usually part of partnership agreements and provide a method for the
partnership to resolve partnership disputes. If some partners want to sell and some partners
want to hold or continue, then the buy-sell provisions may provide a way to bring new
capital partners into the project. Buy-sell agreements may also be included in joint venture
agreements, loan documents, or tenant leases.
Partial parcel sales

The famous sage, James Graaskamp said, “Always sell your losers first!” when discussing
the Land Development Stage of the Real Estate Development Process. This is good advice,
308 Part III
but sometimes Land Developers are stuck holding their best parcels when a financial crisis
occurs. This may be the incentive for the Land Developers to sell their best parcels to
adjacent land owners, competitors, government agencies, or opportunistic buyers. These
partial parcel sales may provide the capital to hold on to a development until better market
conditions occur. Unfortunately, sometimes the sales of these partial parcels of land just
postpone the inevitable.
Note and mortgage default
Default and foreclosure

When developers default on the notes that are collateralized by the project through the
mortgage agreement by not making the required monetary payments to comply with
other loan provisions, then lenders declare default and give the borrowing developers the
agreed upon period to cure the default. When the defaults are not fixed during the cure
period, the lender begins the foreclosure process that is carefully specified in state laws.
Effectively the lender forecloses on the borrower’s Right of Equity Redemption and then
forces a sale of the property to repay the loan If the property sale is insufficient to pay off the
mortgage loan amount, then a deficiency judgement is levied against the borrower.
Deed in lieu of foreclosure

In some cases of mortgage loan default, especially in purchase money mortgages, the
borrower and lender agree that the borrower will give and the lender will accept a deed to the
property as full payment of the mortgage amount. This provision eliminates the borrowers
risk of a deficiency judgement.
Contract default
When developers are controlling or acquiring a property by using a contract agreement,
developers may elect or be forced to default on the contract by violating some contract
provision. In most cases, there are notification and cure provisions in the contract, along
with specified penalties. Private contracts usually are not governed by state and federal laws,
so termination provisions are simpler than mortgage loan defaults and foreclosure13. Three
contracts are most commonly used by developers: sales contracts, land contracts, and option
contracts.
Sales contracts
When developers default on a sales contract and the default tis not cured, the remedies
usually are based on the good faith deposit or other personal guarantees.
Land contracts
If the title has not passed from the seller to the buyer, there may not be continued liability on
the buyer once the default has occurred, notice is given, and the cure period has expired.
At this time, the land contract is null and void, and both parties move on.
Option contracts
Option contracts usually provide the buying developer, the optionee, the right to buy the
property at some future time and at some future price. These contracts usually provide for
some defined action by the optionee such as making periodic monetary payments. Default
occurs when the monetary payments or other required actions are not made. Default is
declared, cure periods expire, and the option agreement is declared null and void. Both the
optionee and the optionor can then move on with no further obligations.
Bankruptcy
The declaration of bankruptcy by developers or property owners is usually a last resort.
However recently in the United States, high profile developers have contended that they are
just using the “laws of the land” to their advantage. Bankruptcy is serious business and
should not be discussed or declared without a full understanding of the bankruptcy process.
Bankruptcy proceedings involve special bankruptcy judges and bankruptcy attorneys. The
most frequent bankruptcy declarations are governed by Chapter 7 or Chapter 11 of Title 11
of the United States Bankruptcy Code.
Chapter 7
Chapter 7 bankruptcy is often called “straight bankruptcy.” It is used to give the creditors
chance for a fresh start by selling all of the bankrupt entity’s assets to pay off the outstanding
indebtedness. Its purpose is for an orderly distribution of the debtor’s (developer’s) assets.
Chapter 11
Chapter 11 is often referred to as “debtor in possession.” This bankruptcy proceeding looks
to the preservation of the debtor’s assets while a plan of reorganization and repayment is
worked out with the creditors. The bankruptcy judge and a majority of the creditors must
approve the reorganization plan.
Summary
The Sales and Disposition Tasks must be completed at the end of each Stage of the Real
Estate Development Process even if Selling Developers plan to continue onto the next stage.
The Disposition Tasks help developers understand and measure the increased property value
that has occurred during the Stage of development that has just been completed. It also
forces Selling Developers to look forward to the next Stage of real estate development in
order to understand the challenges that Buying Developers will face.
The Disposition Tasks and Acquisition Tasks are two sides of the same coin, but they have
very different perspectives. Selling Developers begin the Disposition Tasks by updating the due
diligence review package that they prepared as part of the Acquisition Tasks. Selling Developers’
due diligence packages will then become the starting place for the Buying Developers’ due
diligence reviews.
By understanding the challenges in the next stage of development, Selling Developers
will also better understand how to provide attractive terms and conditions to Buying
Developers, so Buying Developers will promptly submit letters of consent, and then negotiate
and sign binding contracts, and then close the transaction.
310 Part III
Selling Developers must be cognizant of the fact that unsuccessful Buying Developers
may be excellent prospects for the Selling Developers’ next projects. This is particularly true
for land projects with multiple phases of development. Unsuccessful bidders should be
treated fairly and honestly in the bidding process. Biased or rigged bidding processes will
tarnish Selling Developers’ reputations and make future sales more difficult.
Building Operators who manage a portfolio of properties should annually evaluate
whether a property should be sold or held for another year. However, we will hold these
portfolio management decisions as the topic for another book. Sales and Disposition Tasks
are the last group of Tasks for each Stage of the Real Estate Development Process, and they
should be the most economically rewarding to the developers as they recognize the increased
property value caused by the successful accomplishment of the other Development Tasks.
Notes
1 One definition of Market Value is: “The most probable price (in terms of money) which a property
should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer
and seller each acting prudently and knowledgeably, and assuming the price is not affected by
undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and
the passing of title from seller to buyer under conditions whereby: the buyer and seller are typically
motivated; both parties are well informed or well advised, and acting in what they consider their
best interests; a reasonable time is allowed for exposure in the open market; payment is made in
terms of cash in United States dollars or in terms of financial arrangements comparable thereto;
and the price represents the normal consideration for the property sold unaffected by special or
creative financing or sales concessions granted by anyone associated with the sale.” From the
Federal Register Vol. 55, No. 163, August 22, 1990.
2 Reversion Value is also known as sale price based on a cap rate and growth rate of long-term cash
flows (B&F)
3 This is a pedestrian (non-legal) summary of very complicated documents that may have numerous
major parts. Both Selling and Buying Developers need to engage experienced and competent
transaction attorneys.
4 http://realestatedevelopmentmatrix.com/textbook/res/Westfields+Letter+of+Intent.pdf
5 Representation and Warranties are described in more detail in Chapter 14.
6 http://realestatedevelopmentmatrix.com/textbook/res/Westfields+Sale+white+paper.pdf
7 http://realestatedevelopmentmatrix.com/textbook/res/Tyvola+Crossing+Sale+white+paper.pdf
8 http://realestatedevelopmentmatrix.com/textbook/res/Hidden+River+Land+Sale.pdf
9 http://realestatedevelopmentmatrix.com/textbook/res/Crosstown+Center+Land+Sale.pdf
10 http://realestatedevelopmentmatrix.com/textbook/res/Belgate+White+Paper.pdf
11 http://realestatedevelopmentmatrix.com/textbook/res/development_agreement_summary1rev
9-1-05.xls
12 http://realestatedevelopmentmatrix.com/textbook/res/potomac_one__two_sale_v2.pdf
13 Of course, these contracts must be “legal.” That is, they must meet the conditions of a binding
contract and not contain illegal provisions or intend to commit illegal acts.
22 Summary
The purpose of this book is to explain the Real Estate Development Process, using consistent
terminology, to introduce a seven-Stage, holistic model that includes the entire lifecycle of a
project, from the Land Banking Stage to the Property Redevelopment Stage. This model is
presented visually by creating a matrix that combines the Stages of Development and the
Development Tasks: The Real Estate Development Matrix.
Part I of the book, Chapters 1–4, discusses the Real Estate Development Process using
four graphics and then presents the Real Estate Development Matrix, a two-dimensional
model which combines the Development Tasks and Stages.
Part II of the book, Chapters 5–12, discusses each of the seven Stages of Development in
terms of key players, critical tasks, controllable costs, and major risks. This discussion is
expanded by the inclusion of real-world case studies to illustrate the Stages.
Part III of the book, Chapters 13–21, discusses each group of the eight Development
Tasks and their respective subtasks that are explained and amplified by real-world examples.
Throughout the book, the companion website, http://realestatedevelopmentmatrix.com/,
is used to complement the written material with links to case studies, examples, and special
skills.
READER TAKEAWAYS
What is real estate development? Hopefully, readers will now be able to answer this question
with the following insights gleaned from this book.
Real Estate Development is:
• a multidisciplinary endeavor;
• intrinsically simple, but incredibly complex;
• intellectually stimulating and incredibly interesting;
• a local activity, except when it is not;
• a public process;
• very humbling.
Readers should also be able to answer these additional questions:
• Where are we now?

• Where are we going?
• How do we get there?
312 Summary
Finally, readers should recognize the three commandments of real estate development:
• Know Thy Markets.

• Know Thy Costs.
• Know Thy Self.
When asked to characterize what they learned at a CCIM live workshop, one person said,
“Now I can go home and tell my wife and kids what I do for a living.” Immediately, another
student said, “Now I can go back to my company and tell them what we do for a living!”
One final caveat: the Real Estate Development Process provides developers with the
opportunity to experience the full range of human emotions in a 24-hour period, from despair
to euphoria. We wish you the best of luck!
Afterword
Future discussions of the Real Estate Development Process must be expanded and additional
dimensions of the Process must be explored. These discussions should include recogniz-
ing globalization, understanding technological innovations, and enhancing communication
skills.
Recognize globalization
Real estate development is synonymous with economic development in most of the world,
since economic development is usually associated with an improved built environment.
In the United States, sustainability is relegated to a subtopic of environmental issues. However,
in many parts of the world, especially in Western Europe, sustainability is a major criterion
for evaluating economic expansion and real estate development. Also, green building con-
struction techniques and conventions are rapidly advancing outside of the United States.
Therefore, future discussions of real estate development should be less U.S.-centric and
should include case studies and examples that are outside of the United States.
Also, infrastructure discussions need to be enlarged to encompass a global perspective,
so they expand beyond individual physical projects, like bridges or toll roads, and include
international health, security, and trade systems. Improving infrastructure systems will
directly increase real estate values throughout the world.
Understand technological innovations

The technological revolution is changing people’s daily lives, and real estate developments
as well. Real estate developments typically have an economic life of 20–30 years and a
physical life of over 50 years. By contrast, rapid technological changes have an economic
life of five to ten years, and directly impact the value of real estate developments.
The ways in which energy is generated, transmitted, stored, and used changes almost
monthly. In addition, building materials and construction technologies change every year
and leave state and building codes constantly out of date. Technological advances in human
health and safety systems are changing the way real estate projects deal with security, life-
safety, and interior environments.
One of the most disruptive technologies is the rapid development of driverless vehicles.
Driverless cars (and trucks) will change the way people connect to their jobs, and transit-
oriented developments will need to be re-conceptualized.
Finally, the use of social media to promote, advertise, and finance real estate development
is just starting to be appreciated. Households looking to buy or rent a home are keenly aware
314 Afterword
of the importance of electronic advertising and marketing. The commercial market is just
beginning to appreciate and adapt to these changes in the marketplace.
Enhance communication skills

It’s ironic that the growth of the communication revolution seems to be correlated with the
polarization of public discourse and debate. Recognizing that real estate is a public good,
developers must engage in public discussions and debates about the governance of our
existing built-environment, as well as future land use activities. Social media has become a
vehicle to facilitate these discussions along with live, town-hall meetings. Developers must
appreciate the power and the nuances of social media, as well as the need for personalized
community outreach activities. Virtual reality technologies will help stakeholders of all
kinds experience the developers’ dreams of landscapes, buildings, skylines, and viewsheds.
Educators have coined the phrase “high tech, high touch” as a way to characterize the
students’ interactions with digital technologies and personal interactions with faculty. Perhaps
“high tech, high touch” will become the communication mantra of real estate developers.
Index
accessibility index 282, see also Transportation architects 107–8, 112–13, 250, 270–2, 275–9;
and Accessibility landscape 82, 108, 271; of record 108, 271
accounting 156, 213–14, 225–6 Arlington County (VA) 139, 185, 199, 226, 231,
Acquisition 14, 56, 84, 111, 130, 192, 195–211; 290; Approvals/Permits 266–7; Building
closing 209; contract negotiations 205–8; due Development 118, 120; Land Development
diligence 208–9; feasibility studies 196–201; 91–3, 95–6, 98–100; Land Packaging 68,
Financing and 213, 217; Land Banking 36, 71–4
38; Property Redevelopment 171, 174, 176; Armed Forces Retirement Home (AFRH) 42–4,
Sales/Disposition and 294, 301; underwriting 179, 257; Land Packaging 62–8, 74
requirements 201–5 Army Corps of Engineers 51, 66, 81, 83, 98, 252
activists 53, 82, 139, 173, 253; Building Art and Planning Commissions 266
Renovation 154, 156 Arthur, C. 42
adjacent land owners 53, 55, 81–2, 133–4 asking price 297–8
advertising 57, 239–42, 298, 313–14 assemblage 37, 213
Advisory Council on Historic Preservation asset managers 132–3, 136
(ACHP) 66 Atlanta (GA) 223
Advisory Neighborhood Commissions atmospheric conditions 251
(ANC) 66 attorneys 35, 53–4, 173, 300, 309
affinity groups 240
air pollution 251 back door 37, 39, 307
air transportation 284 “Back of the Envelope” (BOTE) 198–203, 274
AirPark West 288 Bank of America 59–60, 87
airports 52, 288 bankruptcy 60, 309
Alberta 180 Base Relocation and Closure (BRAC) 169
Alexandria (VA) 118, 185, 226, 266; Land Beijing 251
Development 91–3, 95, 98, 100; Land Belgate 100–1, 215–16, 289–90, 303
Packaging 68–70, 73–4; Physical Bent Tree Tower 222–3
Improvements 272, 274 bicycles 283–5, 291
ALTA Surveys 57 Blatchford (AB) 181
American with Disabilities Act (ADA) 286 Board of Zoning Approvals (BZA) 267
amortization 132–3, 218–19, 299 bonds 82–3, 218, 291
Annapolis (MA) 224 Boston (MA) 256
annexations 53, 59–60 box diagrams: Building Development 104–5;
Approvals and Permits 10, 14, 138, 192, Building Operations 129; Building
255–68, 272; Building Development 109, Renovation 148–9; Land Banking 32; Land
112–13, 122; Building Renovation 154, 156; Development 77–8; Land Packaging 48–9;
communicating with understanding 259–60; Property Redevelopment 169; Stages 25, 27
Land Development 81, 83, 85–6, 93, 95; Bozzuto 89, 114, 117
Land Packaging 55–6, 58, 60; natural tension bribery 264
in process 256–9; obtaining 264–7; preparing brochures 241
for worst 260–4; Sales/Disposition 296, 300, brokers 35, 230, 298
302; Transportation/Accessibility 288, 292 Brookfield Properties 162, 165
archeology 87 Brueggeman, W. 18
316 Index
Buchanan, J. 42 capitalization 107, 117, 130, 132, 222; Overall
budget 110, 155–6, 240, 274; Financing Tasks Rate (OCR) 197, 199–201
214, 225–6; Land Development 83–4, 86, Capitol Challenge 198
see also costs carrying costs 36, 38, 174
Builders’ Justified Land Price 111 Cars-To-Go 285
Building Development 13, 15–16, 24, 103–26; case studies: Acquisition 198–201, 204–5, 207;
Approvals/Permits 259, 266; Building Approvals/Permits 259, 266–7; Building
Operations and 129, 132, 143, 145; case Development 114–25; Building Operations
studies 114–25; costs 111–13; Environmental 139–45; Building Renovation 157–65;
Issues 248–50, 253; Financing 217–18, 220, Financing 215–17, 222–4, 226; Land Banking
222–3; key players 107–9; key Tasks 109–11; 39–46; Land Development 87–101; Land
Land Development and 76–85, 87, 89–90, 96, Packaging 59–74; Marketing 231–2; Physical
99, 101; Land Packaging and 58, 61; Improvements 271–2, 274; Sales/Disposition
Marketing 230–2; Physical Improvements 300–5; Transportation/Accessibility 288–91
270, 272, 274, 277, 279; Property cash-on-cash returns 197–8, 204
Redevelopment and 187; risks 113–14; cashflows 213–15, 223
Sales/Disposition 297, 302–3 cemeteries 87, 173, 253
building improvement districts 134, see also Center for Housing Innovation 250
neighborhood associations Centex Homes 41, 59–60, 95
Building Operations 13, 25, 27, 127–46; change orders 112–13
Approvals/Permits 266–7; Building Charlotte (NC) 100, 215, 217, 266, 289, 303
Development and 104–7, 109, 111, 117, Charlotte Douglas International Airport 288
122, 124; Building Renovation and 148–52, checklists 209
165; case studies 139–45; costs 136–7; Chesapeake (VA) 207
Environmental Issues 249–50; Financing 215, circle diagrams 27–8; Building Development
218, 220, 223–4; key players 132–4; key 106; Building Operations 130–1; Building
Tasks 135–6; Land Packaging and 58; Renovation 150; Land Banking 32–3; Land
Marketing 228, 230; Physical Improvements Development 79; Land Packaging 50–1;
270, 277–8; risks 138–9; Sales/Disposition Property Redevelopment 170–1
297, 310; Transportation/Accessibility 291 Citi Bike 285
Building Owners and Managers Association civil engineers 35, 82
(BOMA) 249 Clark Construction 273
building ready 51, 78 Clean Water Acts 51, 252
Building Renovation 13, 16, 25, 27, 147–66; Clearco 45
Building Operations and 129–30; case studies closing 209, 301, 304–7
157–65; costs 155–6; Financing 215, 218, Co-star 141
224; key players 151–4; key Tasks 154–5; commencement 220
Physical Improvements 270, 274, 277; Commission of Fine Arts (CFA) 62
Property Redevelopment and 169, 171, 174; Commonwealth Atlantic Properties (CAP) 68,
risks 156–7; Sales/Disposition 297 73, 91, 185
building systems: improvements 275, 278; Commonwealth Center One 241, 274
operations 133, 135, 143, 145; renovation communicating 259–60, 314
153, 156 community 10, 100–1, 240, 261, 264; outreach
Bureau of Indian Affairs 52 93, 95, 314
burial sites 87, 173, 253 Comparison, Units of 296
buy-sell provisions 307 competitive properties analysis 238–9
Comstock Homes 99, 232, 253
Cabin Mountain Land 74 confidentiality 261, 306
Camden Property Trust 99, 232 Congress 42–3, 51, 66
Canada 180 construction see Building Development; Land
capital 5, 37, 58, 82, 151, 212–27, 289; Development
Acquisition Tasks 201, 204–5, 209; Building construction loans 132, 201, 217–20, 223;
Development 107, 110; Building Operations Building Development 107, 109–10, 112–13,
132–3, 136–7; financial projections 213–17; 124; Building Renovation 151–2; Land
formation/accumulation 217–24; Development 82, 85
management/reporting 225–6; Sales/ consulting 36, 54, 134, 174, 176
Disposition Tasks 302, 307 contamination 70, 79, 97–8, 247–8, 252–3
Index 317
contingency 85, 156 Department of Defense (DOD) 52, 66, 169, 249
contractors 82–6, 142–3, 173, 289; Building Department of Energy 136, 140–1, 249
Development 108–9, 111–12; Building Department of Environmental Protection (DEP)
Renovation 153, 155; Physical Improvements 52, 259, 261
273–7, 279 Department of Highways 52
contracts: acquisition 205–8; default 308–9; Department of Homeland Security 52
land 221, 299, 308; sales 84, 111, 174, 300–4; Department of Interior 51–2
vendor 135 Department of Natural Resources 52
Cooke, J.K. 185 Department of Transportation: federal 51;
Cooper Robertson and Partners 271 state 81
Coordinated Development District (CDD) 68–9, deposits, good faith 208, 301
92–3, 266, 274 depreciation 150
corruption 264 descriptions 295–6
Cost Approach 296 design 181, 270–2
cost-benefit analysis 153 Design-Bid-Build model 275–6
costs 6, 56–7, 242; Building Development Design-Build model 276–7
111–13, 123–4; Building Operations 135–7; Detroit 235
Building Renovation 155–6; hard/soft 213, developers 17, 25–6; behavior 14–15; defining
217, 240, 274; Land Banking 37–8; Land 9–10; self-descriptions 10–11
Development 80, 84–5; Land Packaging 56–7; developing: definition 8, see also Building
over-runs 86, 113, 156; Property Development; Land Development
Redevelopment 171, 174, 176; of travel 282 Development Agreements 84, 304–5
county governments 52, 120, 169 disabilities 286–7
cranes 120–1 disposition see Sales and Disposition
Crescent Resources 43–4, 140, 250, 267; distance 282
Acquisition 199, 204–5, 207, 209; Building District of Columbia see DC
Development 118–20, 122, 124; Land Dividend Capital 234
Development 91, 93, 95, 97–8, 100; Land documentation 135–6, 209, 249–50
Packaging 62, 66, 73; Marketing 231–2, 241; Downtown Crown 114, 125
Sales/Disposition 300, 302–5; Transportation/ draw requests 214
Accessibility 288–91 driverless vehicles 285, 313
Crosstown Center 303 drones 285
Crown Farm 39–41; Building Development Dubai 272
114–18, 125; Land Development 87–91, 101; due diligence 177, 232, 247; Acquisition 196,
Land Packaging 59–61, 74; Physical 208–9; Sales/Disposition 295–8, 301, 309
Improvements 274 Duke Energy 44, 207
CSX Transportation 120, 122, 183–7 Duke Industrial Project 224
culture 253 dumping 252
cumulative preferred returns 37
cycles, market 233–6 Eakin Youngentob Associates 94
earthquakes 253
Dallas (TX) 222–3 easements 55, 173, 290, 295–6
Davis Bacon Act 52 economic analysis see Market Analysis and
Davis, J. 42 Marketing Strategies
DC 62, 66–8, 177–80, 257 Edmonton City Center Airport (ECCA) 180–3,
DC Department of Transportation (DDOT) 187
66–7 Einstein, A. 260
DC Office of Planning (DCOP) 66–8 electricity 133, 137, 143, see also utilities
deadlines 208 elevators 133–4, 143, 286–7, 290–1
debt 5, 34, 215, 217; Acquisition Tasks 201, 204; Elkington, J. 245
Sales/Disposition Tasks 302, 308–9 Elm Street Development 94
default 175, 214, 308–9 emergencies 134, 136, 292
deficiency judgment 308 Emery, C. 10–11
defining real estate development 8–11 employment 179, 235, 282
delays 83, 85–6, 113, 138, 156 empowerment 181
demand and supply 5, 237 energy 137
demolition contractors 173 Energy Star 134, 136, 140, 249
318 Index
engineering 133, 172, 250; Building Floor Area Ratio (FAR) 296
Development 108, 112–13; Building Florida 122, 207
Renovation 153, 155; Land Packaging 54, 57; force majeure 39
Physical Improvements 272–3, 278–9 forecasting 10, 36, 235–7, 242
Entitlement Documents Package 55 forestation 252
entrepreneurs 6, 9 free look period 196, 208, 298
Environmental Issues 14, 35, 54, 192, 240, Freedom of Information Laws 261
244–54, 258, 271, 304; atmospheric & (sub) Fundamentals of Real Estate Development 8,
surface 251–3; Building Development 108–9, 229
111–12, 119–22, 125; Building Operations funds transfers 209, 306
134, 136, 139, 141–3; Building Renovation future see forecasting
153, 157; certifications 249–50; cultural &
historical 253; Impact Study 52, 154, 288; Galleria Mall 157
Land Development 81, 87; Property gap mortgage 132, 220
Redevelopment 173, 177; site assessments General Services Administration (GSA) 119,
246–9 122, 222, 249–50, 305
Environmental Protection Agency (EPA) 51, 66, geology 93, 252
119, 140, 154, 199, 222, 241, 248–50, 252; Georgetown (DC) 160–2, 166
Land Development 81, 83 Georgetown University 143
equity 5, 37, 56, 151; Acquisition Tasks 204–5; geotechnical studies 54, 86, 96, 99, 295
Building Development 107, 110, 124; globalization 6, 313
Building Operations 132–3, 136; Financing Golden Triangle 141, 162
Tasks 214–15, 217–18, 220–2; Land good faith deposits 208, 301
Development 80, 82; Sales/Disposition government 109, 251, 257–61, 265; Land
Tasks 302, 306 Banking 42–4; Land Packaging 51, 62, 66–8;
escalators 286–7, 290–1 Property Redevelopment 169–70, 174, 178–9;
escrow 111, 300–1, 304 Transportation/Accessibility 288–92, see also
Approvals and Permits; regulation
factors of production 6, 9 Graaskamp, J.A. 8–9, 12, 229, 258, 307–8
Fairfax County (VA) 157–60, 237 graves 87, 173, 253
feasibility studies 93, 196–203, 205, 208; Land Great Recession 60, 114, 214, 236, 259
Packaging 55, 57, 74; Physical Improvements Green Building Guidelines 140
271, 274 green buildings see Environmental Issues;
Feasible Set 193 sustainability
federal agencies 51–2, 66, 119, 222, 252 Green Globe Certification Program 249
Federal Aviation Administration (FAA) 120 Greenbrier Tower 207
Federal Emergency Management Agency Greensboro Grove 198
(FEMA) 66, 251–2 Gross Margin 197–8, 216
federal government 62, 66–8, 178–9, 257, 265, ground cover 252
288–9 Guaranteed Maximum Price (GMP) 111, 113,
Federal Highway Administration (FHA) 66 155
Federal Protection Services 119 guarantees 82, 220, 278, 301, 303–4
Financing 14, 151, 175, 192, 209, 212–27;
Building Development 110, 112, 124–5; Hampton Courts 145
Building Operations 127, 137; capital hard costs 213, 217, 274
formation/accumulation 217–24; Land Hayes, R.B. 42
Banking 34, 36, 39; Land Development 82, hazardous materials 139, 153, 177
85; Land Packaging 56, 58; management/ health and safety 136, 272–3
reporting 225–6; projections 213–17; Sales/ heat island effect 251
Disposition 299, 301 Hidden River 302–3
Finley, R.W. 11, 198–9 “highest and best use” 229
fire fighters 134, 136 highways 51–2, 60, 283, 285
first right of refusal 83, 107 Hilton Waterfront Hotel 224
Fish and Game Commission 52 historical conditions 153–4, 156, 173, 253, 258
Fisher, J. 18 hold-over tenants 130, 149–50, 152–3, 155, 169
flex buildings 237 holdbacks 220, 223–4, 304
flood plains 251–2 holding costs 85, 171, 213, 216
Index 319
horizontal development see Land Development Land Banking 13, 15, 24, 30–46; Building
hospitals 177–8 Development and 115; case studies 39–46;
hotels 19, 224 costs 37–8; key players 34–6; key Tasks 36–7,
House of Representatives 66 221–2; Land Development and 81; Land
Howell Mill Square 223–4 Packaging and 47–50, 74; Physical
Hyatt Hotel 120 Improvements 270; Property Redevelopment
hydrology see water and 152, 167, 170, 176, 187; risks 38–9;
hypersupply 234 Sales/Disposition 297
land contracts 221, 299, 308
IKEA 216, 290, 303 Land Development 13, 24, 76–102; Approvals/
improvements see Physical Improvements Permits 266; Building Development and
Income Approach 296 103–7, 114; case studies 87–101; costs 84–5;
industrial buildings 19, 237 Environmental Issues 248–9, 253; key players
infrastructure 61, 226, 272, 289; Land 80–3; key Tasks 83–4, 215–18, 226; Land
Development 76, 79, 81, 95–6, 99–100; Packaging and 48–51, 57–8, 61, 73–4;
Physical Improvements 266–7; Property marketing 230; Physical Improvements 270,
Redevelopment 172, 177 272, 274, 277, 279; Property Redevelopment
innovation 179, 181–2, 271, 313–14 and 187; risks 85–7; Sales/Dispositions 297,
inspectors 109, 134 303–5, 307–8; Transportation/Accessibility
insurance 53–4, 140, 173; Financing Tasks 213, 288–91
224; Land Banking 35, 37, 39 land lease 36, 62, 209, 221
interest 37, 80, 112, 224, 260 land owners, adjacent 53, 55, 81–2, 133–4
interest rates 58, 82, 152, 201, 217–19 Land Packaging 13, 24–5, 27, 47–75; Approvals/
interim users 70, 150, 213; Land Banking 36, Permits 266; Building Development and
38–9; Property Redevelopment 169, 172, 114–15, 118; case studies 59–74; costs 56–7;
174–5 Environmental Issues 248; key players 51–4;
interior architects 107 key Tasks 54–6, 221; Land Banking and 31–4,
intermodal hubs 284 36, 41–2, 44, 46; Land Development and 79,
internal rates of return (IRR) 198, 204, 216–17, 81; Physical Improvements 270–1, 277;
222, 226 Property Redevelopment and 168–70, 172–6,
Internal Revenue Service (IRS) 52, 80, 225, 282 183, 187; risks 57–9; Sales/Disposition 297,
International Plaza 122–3, 201–2, 207, 274; 302; Transportation/Accessibility 290
Building Development 122–5 land parcels 175–6
interviews 247 land planners 54–5, 57, 82
investible future 30 landscape architects 82, 108, 271
Investment Committees 207, 223, 298, 302–3, landscaping 137
305 Las Vegas 236
Investment Reports 207 lawsuits 72
investment values 56, 296 Lazard Freres 68, 185
investors 204, 306; Building Operations 127, Leadership in Environmental and Energy Design
132, 136, 140–1; Financing Tasks 218, 222 (LEED) 62, 241, 249–50, 305; Building
Development 119–20, 122, 125; Building
Jamestown Properties 162 Operations 136, 140, 142–3
janitorial services 137, 143 Leadership Legacies 8
JBGR 89, 114, 117 leasing 36, 62, 176, 209, 296; Building
Johns Hopkins University 11, 259 Development 106–8, 110–11; Building
joint venture 124, 204, 222–3, see also Operations 130, 133, 135–6, 140–5; Building
partnerships Renovation 153, 155; Financing Tasks
JP Morgan 122, 140–1, 250 217–18, 221
legal description 208, 295–6
K Street (DC) 141–3, 145 legal expenses 36, 174
K-Corp 45–6 Letter of Intent (LOI) 74, 196, 205, 232, 298,
Kay, M. 260 300, 302
KB Homes 41, 59–60, 89, 114 leverage 217
Kiwanis Trail 45 liability 37, 173, 175, 213, 222
Kroger Grocery 223 Liberty Property Trust 264
Kuwait City 272 lien 152
320 Index
limiting assumptions 208 mortgage 214, 217–24; Acquisition 201, 209;
limiting conditions 192 Building Development 104, 112; Building
Lincoln, A. 42 Operations 132–3, 136; Building Renovation
linkages 282 151–2; Land Development 80–1; Property
loans 37, 45, 80–2, 85, 217–18, 289, 307–8, Redevelopment 174–5; Sales/Disposition 299,
see also capital 301, 308
lobbyists 261 motivated sellers 34–5
local authorities 35, 109, 134, 251; Approvals/ Mueller, G. 234
Permits 257, 261, 265–6; Building Renovation municipalities see local authorities
154, 156; Land Development 85, 100; Land Murphy’s Law 56
Packaging 51, 53, 68–73; Property
Redevelopment 168, 171, 174, 177–8; NAIOP 198, 258
Transportation/Accessibility 288–91 National Association of Realtors 258
local historians 153, 173 National Capital Planning Commission (NCPC)
location 235, 282, 292 66–8, 257
Los Angeles 251 National Environmental Policy Act (NEPA) 52,
Lyft 285 66, 72, 154
National Geospatial Intelligence Agency (NGA)
M Street (DC) 160–6 232
maintenance 133, 277–8, 290–2 National Historic Preservation Act (NHPA) 52,
management 132–3, 136, 152, 156, 225–6 66, 154
marginal value see spread National Park Service (NPS) 52, 62, 285
Market Analysis and Marketing Strategies 6, 14, National Pollutant Discharge Elimination
228–43; Acquisition and 197, 208; Building System (NPDES) 259
Development 110, 113–14; Building National Register of Historic Places 52
Operations 138, 143; Building Renovation National Trust for Historic Places (NTHP) 66
154–7; competitive properties analysis 238–9; Native Americans 52
Financing and 216, 223; forecasting 10, 36, negotiations 83–4, 232, 300–4
235–7, 242; Land Banking 35, 38; Land neighborhood 240; activists 53, 82, 154, 156,
Development 85–8; Land Packaging 56–61, 173, 253; associations 118, 134, 139;
73; market conditions analysis 233–8; deterioration/social issues 138, 177; groups
promotions/advertising 239–42; Property 100, 174–5
Redevelopment 167–8, 176; real estate market neighbors 53–5, 81–2, 120, 133–4, 172–5, 258
characteristics 4–5; Sales/Disposition and Nestle 145
297–300; site level strategies 229–32; Net Operating Income (NOI) 123–4, 199
Transportation/Accessibility and 286, 289 net present value 198
Market Capitalization Rate 107 “no further action” letter 248
market cycles 233–6 North Carolina 44, 215, 217
market value 296 North Moore Street 145
Massachusetts Avenue (DC) 143–5 “Not In My Back Yard” (NIMBY) 258
mathematical programming 192 “Not On Planet Earth” (NOPE) 53, 258
Mathews Company 45
Memorandum of Understanding (MOU) 66, 68, Oaktree Development 246
257 off-site transportation 283–6
merchant builders 103, 107, see also Building Offering Memorandum 295
Development Office of Historical Preservation 253
Meridian Development 99 offices 18, 118–19, 141, 160, 162–5
Mexico City 42 Ohio 248
mezzanine loans 220 Oklahoma 11
M.I. Homes 89, 114 on-site accessibility 286–8
milestones 207–8 Open Meeting Laws 261
Millennium Realty Advisors 232 options 37, 56, 74, 174; Acquisition Tasks 209,
mini-perm loan 110, 220 221; Sales/Disposition Tasks 299, 301, 309
mistakes 242 outreach 93, 95, 240, 314
mixed use 19, 60, 90, 177, 223, 266 over-runs 86, 113, 156
mold 139, 153, 157 Overall Capitalization Rate (OCR) 197, 199–201
Montgomery County (MD) 41, 59–60 Overall Return 197–8
Index 321
paper enhancements 79 predicting see forecasting
paper infrastructure 48, 54 press release 306–7
parking 67, 120, 160, 198, 258, 290–1 price: acquisition 56, 74, 174; asking 297–8;
parks and recreation departments 257, 285 guaranteed maximum 111, 113, 155;
partial parcel sales 307–8 materials/labor 86; sales 87, 114, 171, 301–3
partnerships 124, 133, 159, 204, 246; Financing private sector 256, 261, 267
Tasks 220, 222–3; Land Banking 39, 41; Land product types 17–20
Packaging 56, 59–60; public-private 170, 187, production: factors of 6, 9; functions 5
286, 289–90; Sales/Disposition Tasks 306–7 professionals 15–16
paths 284–5, 289, 291 proffers 112
patient money 222 profitability 216–17; feasibility studies 197–9,
Peabody College 44–5 see also spread
pedestrians 283–5, 287, 291 Program of Requirements (POR) 119
Penn Landing 264 programming 192
pension funds 140, 223 project managers 152, 155–6
perched water 98–9 projections: financial 213–17, see also forecasts
performance bonds 83, 291 promotions 239–42
Perkins and Will 182–3 property managers 132–3, 136, 152, 156, 225
permanent loans 133, 152, 218–20, 223–4 Property Redevelopment 25, 167–87, 198;
Permit Extension Act 259 Building Renovation and 148, 150, 152, 165;
Permit Purgatory 267 case studies 177–87; costs/risks 176–7; key
permits see Approvals and Permits players 172–4; key Tasks 174–5; Land
Phased Development Site Plan (PDSP) 68, 92, Banking and 32–3; Land Packaging and
118–19, 266 47–50, 53; Physical Improvements 270;
phasing 87, 89, 299 Sales/Disposition 297
Philadelphia 264 Public Art Concept Plan 266
Phipps Tower 124–5, 201, 203–5, 207 public records review 247
Physical Improvements 14, 113, 269–80; public sector 256, 261, 267
Building Operations 138, 142–3; Building public works departments 257
Renovation 156–7; construction 273–7; public-private partnerships 170, 187, 286,
engineering 272–3; Land Development 86, 289–90
90; maintenance 277–8; planning/design Pulte Homes 89, 95, 114
270–2; Sales/Disposition 303–4; purchase money mortgage 151, 174, 209, 221,
Transportation/Accessibility 285–6, 289 299, 301, 308
Piedmont Town Center 217, 266–7 purchase and sale agreement 221
planning 82, 172, 249, 257; Land Packaging 52,
54–5, 57; Physical Improvements 270–2, quality 86, 113, 138, 156–7
278–9
police officers 134, 136 railways 120, 122, 177, 183–4, 284–5
politics 35, 53, 173, 175, 260, 264, 286 reading 233
pollution 247–8, 251 real estate: defining development 8–11; general
portfolio 130, 132, 140, 224, 310 themes 5–6; market characteristics 4–5; three
post-closing conditions 208–9, 303–5 commandments 6–7
Potomac Yard: Acquisition 199–201, 207; Real Estate Development Cube 18
Approvals/Permits 266; Building Real Estate Development Matrix (@REDM)
Development 118–22, 125; Building 3–4, 12–16
Operations 139–41, 145; Environmental Real Estate Development Process 8–9, 11, 303,
Issues 250, 253; Financing 222, 226; Land 311–12
Development 91–101; Land Packaging 68–74; Real Estate Investment Grade Value Index 141
marketing 231–2, 241; Physical recession 234, see also Great Recession
Improvements 271–2, 274; Property recovery 234
Redevelopment 183–7; Sales/Disposition recycling 135, 137, 143
304–5; Tasks 216–17; Transportation/ Redbrick LMD 180
Accessibility 290–1 redevelopment authorities 172, see also Property
pre-closing conditions 207 Redevelopment
pre-construction services 103, 273 regional analysis 235–8
pre-sale 132, 152, 290, 303, 305 regional authorities 35, 52, 257, 265, 288
322 Index
regulation 44, 58, 62, 81, 252, 267 Land Development 76–7; Land Packaging
REITs 162, 165 47–8; Property Redevelopment 167–9;
renovation see Building Renovation Stages 25–6
rent 132–3, 135, 147, 152–3, 213 Schilke, C. 256, 265
repairs and replacements 278, 291 scope creep 112, 155
reports 136, 214, 225–6, 234, 247 Scott, W. 42
representations 205–6 seaports 284
Request for Information (RFI) 181–2 security 119–20, 134, 137, 273, 284–7, 290–1
Request for Proposals (RFP) 62, 119; Property seller-financing 151, 175, 209, 210, 221, 299, 301
Redevelopment 177, 179, 182, 187 Senate 66
Request for Qualifications (RFQ) 62 sewers 52, 70, 118, 177, 261, 274; Land
reserves 85, 137–8, 278, 291, 307 Development 83, 92–4, 96, 100
residential 18, 68, 89, 95, 114, 143, 145, 232 Shakespeare, W. 7, 24
restaurants 142 shopping centers see retail
retail 18–19, 302; Building Development 117, shovel ready 51, 78
122–3; Building Renovation 149–51, 154, sidewalks 283, 287, 290–1
157–62, 166; Financing 223–4; Silo Bend Industrial Park 207
Transportation/Accessibility 282, 287 Simpson, A. 260
returns 124, 197–201, 204, 217; Land Banking site level strategies 229–32
34, 37; on total costs 107, 199–201, 222 site visits and assessments 242, 246–9
review boards 206–7, see also Investment Smith, A. 6
Committees Smith (Charles E.) Company 72–3, 118
Richmond Fredericksburg and Potomac social media 176, 241, 298, 313–14
Railroad (RF&P) 183, 185, see also soft costs 213, 217, 240, 274
Potomac Yard soil 86, 96–9, 247–8, 252–3
rights: -of-way 55, 60, 295–6; bundle of 4, 205 Soil Management Plan (SMP) 97–8, 253
RIPA 117 solicitation for offers 298
risks 9, 217–18, 300; Building Development Sources and Uses of Funds Statement 213
113–14, 120, 124; Building Operations 130, South Carolina 44
138–9; Building Renovation 152, 156–7; sovereign wealth funds 140
Land Banking 38–9; Land Development 80, Special Skills 4, 215
85–7; Land Packaging 57–9, 74; Property spread 34, 51, 80, 132, 151, 171–2, 216–17;
Redevelopment 176–7 Acquisition 196–7, 199–201; Building
roads 38, 60, 283, 285, 287–91; Land Development 107, 123–4
Development 78, 80–1, 96–7 Stages 5, 12–18, 23–9, 118
Rouse, W.G. III 264 stakeholders 66–8, 73, 76, 82, 95, 254, 264, 272
Rumsfeld, D. 17 state authorities 52, 81, 248, 257, 265, 288–9
Ryland 89, 114 State Historic Preservation Offices (SHPOs) 52,
154
S-Curve 274 storm water 58, 60, 83, 252, 259, 266–7
safety 136, 155; Physical Improvements 272–3; streams 252
Property Redevelopment 171–2, 174; streets see roads
Transportation/Accessibility 287–8, 292 structural issues 157, 172
St. Elizabeth’s 177–80, 187 subcontractors 108, 153, 155, 273–5, 279
Sales Comparison Approach 296 subdivision approval 261–3
Sales and Disposition 14–15, 132, 151, 176, 192, submarkets 236–8
196, 294–310; alternative strategies 307–9; subsurface conditions 252–3
Building Development 108, 110; closing Sunbrook Partners 60, 87–90, 114–15
305–7; contracts 84, 111, 174, 300–4, 308; sunlight 251
due diligence 295–7; marketing 230, 240, supply and demand 5, 237
297–300; price 87, 114, 171 surety bonds 83, 291
“satisficing” 192 surface conditions 251–2
scenario analysis 242 survey 35, 54–5, 57, 82, 173, 295
scheduling 83, 86, 225, 273, 305 sustainability 5, 125, 181–3, 241, 244–6, 271–2,
schematic diagrams: Building Development 104; 313; Building Operations 134, 136; Land
Building Operations 128–9; Building Packaging 54, 58, see also Environmental
Renovation 147–8; Land Banking 31; Issues
Index 323
takeaways 311–12 Vanderbilt University 44–5
Tampa (FL) 122, 207, 302 vendors 135, 137, 278, 291
Tasks 14–18, 25, 191–4; Building Development Venn diagrams: Building Development
109–11, 120; Building Operations 135–6; 105–6; Building Operations 129–30;
Building Renovation 154–5; Land Banking Building Renovation 149–50; Environmental
36–7; Land Development 83–4; Land Issues 245; Land Banking 32–3; Land
Packaging 54–6; Property Redevelopment Development 78–9; Land Packaging
174–5 49–50; Property Redevelopment 169–70;
tax 38–9, 52, 85, 134, 136, 213, 225–6 Stages 26–7
tax incremental financing (TIF) 289 vertical development 103, 279, see also Building
TCR 232 Development
technology 5, 274, 285, 313–14 Vienna (VA) 198
tenants 169, 230; Building Development 108, Virginia 68, 96–8, 159, 184–5, 198, 207, 237,
111–12; Building Operations 130, 133–8, 266–7; Northern 154, 217, 232
142–3; Building Renovation 149–55; Virginia Rail Express 122
Transportation/Accessibility 287, 289–90 Vornado 162
Texas 222–3
third dimension 17–20 wages 52
three commandments 6–7, 199, 210, 312 walkways 283–5, 287, 291
title 35, 53–5, 57, 111, 173, 295, 303, 306 warranties 206, 278, 301
Total Development Costs 199 Washington (DC) 222, 236, 250, 285; Building
trails 284–5, 287, 289 Operations 141, 143; Building Renovation
Transportation and Accessibility 14, 52, 120, 157–65; Land Banking 40, 42; Land
157, 281–93; construction 288–90; Packaging 59, 62, 73; Property
maintenance 290–2; off-site transportation Redevelopment 178–9
283–6; on-site accessibility 286–8; Property Washington Area Airport Authority 122
Redevelopment 177, 192, 198 Washington Metropolitan Area Transit Authority
Transportation Master Plan (TMP) 266 (WMATA) 157
trees 252 Washington Redskins 185
tri-party agreements 220, 223 waste 96, 135, 137, 143, 182
triple bottom line 245 wasting parts 137
Tucker County (VA) 74 water 177; Environmental Issues 248, 251–2;
Tysons Corner Shopping Center 157–60, 166 Land Development 81, 83, 97, 100–1; Land
Tyvola Crossing 302 Packaging 51–2, 58, see also storm water
weather 85–6, 136, 251, 285, 291
Uber 285 website 4, 19
underwriting 153, 196, 201–5 weighted average 239
Units of Comparison 296 West Virginia 205
University of Oregon 250 Westfields Corporate Park 205, 232, 241,
Urban Design Guidelines 55, 68, 70, 72, 92, 266, 300–2
271–2 wetlands 81, 252
Urban Land Institute (ULI) 8, 229, 258, 260 White Paper 207
US Green Building Council (USGBC) 62, Wilder, L.D. 185
249–50, 305; Building Development 119, 122, wildlife 52
125; Building Operations 136, 140–3 wind issues 251
USAA 140–1 World Trade Center 251
USF&G Insurance 207 Wormald Homes 90, 114
utilities 55, 78, 137, 266, 290–1; Land
Development 78, 80–1, 89, 94, 96 yield curve 218
valuation 134, 229, 296 zoning 71, 78, 114, 295; Approvals/Permits 258,
value creation 5, 13–16, 25–6, 145, 195–6, 224, 266–7; Building Renovation 169–70, 172;
294; Building Operations 127, 129–30 Physical Improvements 271–2, 277

Dokumen - Pub - Real Estate Development Matrix A Handbook 9781138745049 9781315180779

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Dokumen - Pub - Real Estate Development Matrix A Handbook 9781138745049 9781315180779

Uploaded by

Copyright:

Available Formats

‘The new text Real Estate Development Matrix is the first truly significant advancement on

Kimberly J. Kohlhepp, MSREI, LEED AP BD+C is currently the Associate Director of

ISBN: 978-1-138-74504-9 (hbk)

Typeset in Times New Roman

Visit the companion website: http://realestatedevelopmentmatrix.com/

PART III 189

NAIOP and CCIM Institute

How to use this book

• Real estate development is a multidisciplinary endeavor. Because there are so many

Daniel B. Kohlhepp, PhD, MAI

Kimberly Kohlhepp, MSREI, LEED AP BD+C

NAIOP and the CCIM Institute

The writing team

3.1 Real Estate Development Matrix 12

1 Land Banking Stage.

THE REAL ESTATE DEVELOPMENT MATRIX COMPANION

Unique characteristics of real estate and real estate markets

Long economic lives

Lengthy and complex production functions

Sustainable development and green building technologies

The three commandments of real estate development

Know thy markets

Know thy costs

• To cause to grow or get larger

Real estate developers defined

Real estate developer activities

Obtain public approvals and permits

Predict the future

Form multiple teams

R.W. “Wes” Finley

CREATING THE REAL ESTATE DEVELOPMENT MATRIX

Overview of the seven Stages of real estate development

Exhibit 3.1 The Real Estate Development Matrix.

Exhibit 3.2 Stages of development: Stages across; Tasks down.

1 Land Banking – Acquiring unimproved land.

• risk and uncertainty diminish;

In each Stage, developers must answer these questions:

Overview of the eight development Task categories

I Acquisition: Should the project be acquired, and if so, how?

Task/Stage cells in the Development Matrix

1 Expenditures are made.

Developer behavior in the Development Matrix

Exhibit 3.3 Developers work down the Matrix.

Professionals and service providers in the Development Matrix

Exhibit 3.4 Professionals work across the Matrix.

The Development Matrix as a model

THE THIRD DIMENSION: PRODUCT TYPES

Exhibit 4.1 Third dimension: product type.

Exhibit 4.2 Real Estate Development Cube.

Product type examples on the website @REDM3

Chapter 6: Land Banking

Exhibit 5.1 Real Estate Development Matrix.

All the world’s a Stage,

1. Land Banking Stage

2. Land Packaging Stage

3. Land Development Stage

4. Building Development Stage

6. Building Renovation Stage

7. Property Redevelopment Stage

Schematic diagram description

Box diagram description

Exhibit 5.2 Schematic diagram.

Venn diagram description

PART III 189

3.1 Real Estate Development Matrix 12

Exhibit 3.1 The Real Estate Development Matrix.

Exhibit 3.2 Stages of development: Stages across; Tasks down.

Exhibit 3.3 Developers work down the Matrix.

Exhibit 3.4 Professionals work across the Matrix.

Exhibit 4.1 Third dimension: product type.

Exhibit 4.2 Real Estate Development Cube.

Exhibit 5.1 Real Estate Development Matrix.

Exhibit 5.2 Schematic diagram.

Exhibit 5.3 Box diagram.

Exhibit 5.4 Venn diagram.

Exhibit 5.5 Circle diagram.

Exhibit 6.1 Real Estate Development Matrix.

Exhibit 6.2 Land Banking Schematic diagram.

Exhibit 6.3 Land Banking Box diagram.

Exhibit 6.5 Land Banking Circle diagram.

Exhibit 6.6 The Land Banking equation.

Exhibit 6.8 Aerial photo: Metro area.

Exhibit 6.9 Aerial photo: Crown Farm site.

Exhibit 6.10 Aerial photo: Armed Forces Retirement Home.

Exhibit 6.11 AFRH sources of annual income.

Exhibit 6.12 Vanderbilt aerial photograph.

Exhibit 6.13 Kiwanis Trail area photo.

Exhibit 7.1 Real Estate Development Matrix.

Exhibit 7.2 Land Packaging Schematic diagram.

Exhibit 7.3 Land Packaging Box diagram.

Exhibit 7.4 Land Packaging Venn diagram.

Exhibit 7.5 Land Packaging Circle diagram.

Exhibit 7.6 Land Packaging equation.