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The Not So Sexy Side of Real Estate Development

by Kyle Zaylor on February 17, 2013 · 10 comments

  
Real Estate Development

I’m going to make a statement. You may agree or disagree.  But, for the sake of this article, I’m going to make this statement and stick to it. Here it goes:

Real estate development is “sexy.”

There are certain professions that seem to have an undefined panache to them. An architect comes to mind. So does a doctor, astronaut, and chef. These professions just seem to have an allure that other professions don’t always have. I would argue that, on the surface, real estate development also has an allure to it.

Why Real Estate Development is Sexy

I was asked recently to describe what is so great about real estate development…easy.

  • It’s entrepreneurial. You are essentially creating something out of nothing.
  • You have a direct impact on the improvement of your community.
  • You are managing the entire planning, financing, building, and selling process.
  • You can point to your project and see it, touch it, and claim “I built that”.

These are all great things and motivate many developers in the industry. But with any profession there are always elements that make it, shall we say, not so “sexy.”

The Un-Sexy Side of Real Estate Development

After going on and on about the many great aspects of development, I was then asked what I didn’t like about real estate development. While I wasn’t jumping for joy to lament, one recent email I received came to mind almost immediately. In many ways, it sums up what is so challenging about developing real estate.

One morning I got to the office, turned on my computer, and saw an email at the top of my screen with the subject line that read:

“Stop the project. We got killed in zoning last night.”

I was shocked, mystified, and quite unhappy. The email related to a project that had been green lit after months of research, lengthy due diligence, and careful planning. This project, in almost everyone’s minds, should have been a slam dunk. It was soundly underwritten, very well designed, and would have greatly improved the fabric of its community—win, win, win for all involved.  Yet, after months of work (and thousands of dollars spent), it was derailed in the entitlement process.

When people comment that real estate development is a risky venture, it’s usually because of the exhaustive list of expenses, planning, and research required upfront to get a project off the ground. A common phrase in the field is “90 percent of the work is done before one sees construction crews on the site.”  Pair these points with the notion that a project can be stopped dead in its tracks because of one or a few issues and you start to see its “un-sexy” side.

Common Pre-Construction Costs for Development

It was fortunate that the particular project above didn’t incur any additional expenses. Had it continued on and been halted later in the process, the losses would have been far greater.  While this isn’t an exhaustive list, here are a few of the common expenses incurred on the project before that fateful email:

  • Design
    • Architect fees – design, administration
    • MEPS Engineer
    • Structural Engineer
    • Planning Consultant
    • Geotechnical Consultant
    • Environmental Engineer
    • Vertical Lift Consultant
    • Surveyor and Boring
    • Testing and Controlled Inspections
    • Engineering Inspection Fees
    • Environmental Inspection Fees
    • Interior Designer
  • Legal
    • Borrowers Legal Fees
    • Accountant
    • Tax Consultant and Fees
    • Risk Insurance
    • Liability Insurance
    • Administration
    • Plan, Printing and Reimbursements
  • Permitting
  • Finance
    • Market study
    • Appraisal
    • Underwriting fees
  • Marketing
    • Marketing plan, development
  • All of these expenses were incurred before a shovel was put in the ground or a construction draw was made. Yet because of an entitlement issue, the project was shelved and put on the back burner.

    It’s always tough to put a tremendous amount of work into anything and not see the rewards. While the fate of the above project is common for many, developing real estate is still extremely exciting and rewarding for those that are able to see their work through to completion. If you’re developing a project, don’t be deterred by the mountain of work required upfront. Just be extremely careful and thorough about your work because the reward could be worth the extra effort in the end.

    Photo: k::snyder

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    { 10 comments… read them below or add one }

    Dennis February 17, 2013 at 7:16 am

    The township where I reside has a group of folks who in the past fought every project to the death, driving up the cost of development. Recently an ordinance was passed on the State level that required the zoning board to make a decision on each case within 90 days.

    What was also changed is no longer could a project be blocked by forcing the developer to adhere to non existent ordinances created by the board. If a project complies with all existing zoning codes for that zoning district it cannot be turned down.

    Reply

    Kyle Zaylor February 18, 2013 at 4:51 am

    Dennis, those are interesting changes in the entitlement process. I learned firsthand (with this project and others) that new projects can be very challenging when parts of the process are out of your hands.

    Reply

    Karen Margrave February 17, 2013 at 9:45 am

    Kyle, Good article. But now you have me curious, what was the problem that your project was stopped after it had already been “green lit”?

    Reply

    Kyle Zaylor February 18, 2013 at 4:57 am

    Hi Karen. The project had other pieces in place (financing, design, etc.), but it was known early on that the entitlements were going to be one of the big risks with the project up until that point. Given the response from zoning, it became more of an uphill battle than previously thought.

    Reply

    Jeff Brown February 17, 2013 at 10:14 am

    Hey Kyle — I respect and admire developers, especially since the one time I did it myself. It wasn’t my cuppa tea, not even close. However, it gave me a lifelong appreciation of why developers are worth every penny they earn.

    Reply

    Kyle Zaylor February 18, 2013 at 4:59 am

    Hi Jeff. Great to hear! There’s somewhat of a delayed gratification that goes along with it given the length of a typical project.

    Reply

    Rick Rose February 17, 2013 at 3:14 pm

    Some of the best laid plans can get foiled especially in home building. I deal more with selling real estate then in the development of it. I can truly appreciate the difficulties that come with the development side. I think this article is great to help people understand what to expect in a new build.

    Reply

    Kyle Zaylor February 18, 2013 at 5:00 am

    That’s absolutely true, Rick. Thanks for checking out the article.

    Reply

    John February 18, 2013 at 9:57 am

    I feel for you, and hope you’re well-rewarded for all the work you do. But beyond just “un-sexy” development, it’s not sexy to be RICH these days, or to be in the dreaded, feared (and misunderstood) “1%.”. Which is why most wealthy people keep a low profile. And the more government infuses itself into our lives, via all the bureaucracy (zoning, planners, ordinances, and all their rules and nitpicking) imposed on us job-creators and economy builders these days, the worse it will get.

    So we get Gerard Depardieu choosing Russian (or was it Belgian?) citizenship over France and its 75% tax, And Tina Turner choosing Switzerland. And you and I setting up self-directed Roth IRAs and 401k so we can keep just a little more of what we’ve earned. EARNED!

    If others are jealous of our success, let them work and earn their own fortunes! We’re happy to pay our “fair share,” of taxes, which is a lot these days, but are sick of ne’er do wells (from the lazy druggies to the corporate welfare queens) all expecting us to fund their handout lives.

    Reply

    Andi James February 18, 2013 at 10:38 pm

    Kyle, thanks for sharing this info. This showed that real estate is a very big business with a lot of things to consider. . If you are in this kind of business you really have to spend a lot of time to become successful.

    Reply

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