Earlier this week I received a message from an undergraduate architecture student interested in moving into real estate development after school. That was his 10 year plan. And he had clearly read my blog post, “Transitioning from architecture to development.”

In his message, he asked me if there were any books I would recommend he read to improve his real estate and finance knowledge, and, if I could have a “redo”, if I would still do a M.Arch (Master of Architecture) or just go straight to the MBA?

After responding to his message, I thought: “This would make a good blog post, as well as an opportunity to talk about the current state of real estate education in Canada.” So here goes.

If you’re looking for a good real estate book to get you started, I recommend checking out “Real Estate Finance and Investments: Risks and Opportunities" by Peter Linneman. It’s a much easier read and way more casual compared to most textbooks. When I was in grad school, people referred to this book as the "blue bible.” The cover on the previous edition was less purple and more blue. Unfortunately, he has also changed his glasses since the photo below.

To his second question, if I were to do it all over again, I wouldn’t change a thing about my education. I loved architecture school and combining it with business school classes and a real estate concentration was the best thing for me. I never wanted to be just a “numbers guy”, but I also never wanted to be a fanciful artist type who didn’t know how to build and manage a pro forma.

Now, let’s talk about real estate education in Canada.

I think we’re way behind. In the US, you can do a Master of Science in Real Estate Development, a Master of Real Estate Development, and all sorts of other real estate degrees. In Canada, you’re probably doing a MBA with a few elective real estate classes. Real estate is the largest asset class in the world. Does that not justify a dedicated degree?

Part of the reason for this, I think, is because real estate development is still very much an entrepreneur’s business–though it has become more institutionalized in recent years. Because of this, people get into development from a variety of different professions. They just need that entrepreneurial hutzpah. And that’s all fine, but I still think that the profession, the economy and our cities would benefit from University trained developers.

So if you’re reading this University of Toronto, I think–and I’ve thought this for awhile now–that The John H. Daniels Faculty of Architecture, Landscape and Design and The Rotman School of Management should get together and collectively form a real estate program. Who’s with me?

I’ve already spoken about why I became a developer and offered some insights into how you might be able to transition from architecture into development. So now I’d like to start focusing more on the day-to-day of what it means to be a real estate developer.

And since I seem to be getting a lot of questions from readers on career and development related topics, I’ve decided that I’m going to turn these posts into a regular blog series. Right now the working name is “Developer Dirt”, but if you have a better name I’m all ears (let me know in the comments below).

So let’s start with step 1.

You’re ready to develop a new project and you’re now in the market for some land (also known as a site). It could be a greenfield site (meaning it’s virgin land that hasn’t yet been tainted by humans) or, on the other end of the spectrum, it could a brownfield site (meaning it probably once housed industry, it’s contaminated as all hell, and you’re going to need to clean that puppy up before you build).

Without going into further detail about all the different kinds of sites you could potentially buy (which is a post in itself), here are 3 high level things to keep in mind as you move forward.

Land is the residual claimant

What this means is that you want to start with your top line. You want to start with revenue. What can I build on this site (use and square feet) and how much can I ultimately sell or lease that space for?

Let’s say, for example, that you think you can build 100,000 square feet. If it were office space, you’d want to know that rents in your area are $30 per square feet and that that’s going to render you $3M a year in rental income. If it were residential condos, you’d want to know that the market is absorbing $500 per square foot and that if you sold 100,000 square feet worth of condo, that your revenue would be $50M. But remember this is top line.

Once you know your top line, you then need to figure out what it’s going to cost to bring you that revenue stream. In other words, what are the hard costs (construction costs), the soft costs (consultant fees and other non-construction costs), the return my investors are going to demand, the money I need to keep the lights on in my business, and so on.

Hopefully, once you’ve calculated all of these numbers, you’ll have some money left over from that original top line number. That residual money is what you can reasonably afford to pay for the land, which is why it’s often referred to as the residual claimant. But even though it comes last in this example, it comes first in development. If you overpay at the onset, it’ll be an uphill battle the rest of the way.

You often don’t know what you can build

But here’s the rub: You often don’t know exactly what you can build. When developers buy land they often consider what they can build “as-of-right” and what they think they can build as a result of variances, rezoning and other discretionary actions.

As-of-right basically refers to what the current zoning permits. It’s what you could go out tomorrow and build (after you get the requisite permits of course). Unfortunately though, as-of-right uses and densities are not often inline with what’s actually happening in a neighborhood. So you need to go into the city for things like a zoning by-law amendment.

Similarly, vendors want the most for their land and so they’re going to be aggressive on this front. As a developer, this is the point where you surround yourself with a team of smart people who can help you figure out what’s reasonably attainable for the site in question. And sometimes you have to worry about the politics as much as the planning.

Approvals are uncertain

During the due diligence phase, the goal is obviously to mitigate as much of your risk as possible. Nobody wants to get stuck with a piece of land that they overpaid for that they now can’t (profitably) develop. But sometimes shit happens.

It may seem like a no brainer. You could have a site that’s surrounded by transit with lots of great precedences (this matters) for the height and density that you’re hoping to obtain and that you feel will be appropriate for the neighborhood. But sometimes the stars don’t align.

And that’s why development is a risky game.