Texas suburb. by Ron Chapple on 500px

https://500px.com/embed.js

When you rezone a property to build something new, pretty much every city will ask you to provide reports and studies that assess the potential impacts of that something new. 

They’ll ask you to look at the impact on traffic, the impact on storm water, the impact on shadows in the area, and the list goes. This, of course, is fair and reasonable. It makes sense to measure the impact of the proposed changes to see if it will work in the given context. 

But those are not the only impacts to consider. I think that many of us underestimate the flip side, which is the impact of doing nothing, or in this case, building nothing. Here’s a recent quote from an excellent interview with urban economist Edward Glaeser:

Personally, I believe there are always huge costs to saying “no” to people who want to create space for new families that want to live in the city; who want to make the city more affordable. There are always costs – I believe that very, very strongly – but, sure, there are also benefits to saying “no” at certain times.

Glaeser is, of course, not saying that we should allow unfettered development. He is saying that there are costs (or impacts) to building and costs to not building. The challenge is that we assume, often incorrectly, that saying “no” simply means the status quo will prevail. And we do not consider the impacts.

So what does that mean? Here’s an example.

The Neptis Foundation, which is a nonpartisan and charitable urban research group, just published an interesting report called, Growing Pains: Understanding the new reality of population and dwelling patterns in the Toronto and Vancouver regions. 

What the report did was compare growth and settlement patterns in both the Greater Toronto (and Hamilton) Area and Metro Vancouver between 2001 and 2011. And what they found was two different stories.

Of the one million people that moved to the Toronto region between this period, roughly 80% of them settled in new greenfield housing subdivisions at the urban edge. And only 18% of people moved to areas that were well serviced by public transit.

By contrast, only 31% of Metro Vancouver’s population growth went to greenfield areas and 69% went to urban intensification areas. Nearly half of these new residents ended up settling next to high frequency transit.

From an environmental standpoint, Vancouver’s settlement pattern is obviously preferable. But it takes hard work to achieve that. The barriers to infill development are more formidable than the barriers to greenfield development. This is despite the fact that there are well documented social, economic, and environmental costs associated with urban sprawl.

My point with this example is that growth and demand will find somewhere to settle. Some locations make more sense than others, but sometimes there’s no choice when we have decided to say “no.” So what we ought to be doing is measuring both the impact of building, as well as the impact of not building.

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.

Texas suburb. by Ron Chapple on 500px

https://500px.com/embed.js

When you rezone a property to build something new, pretty much every city will ask you to provide reports and studies that assess the potential impacts of that something new. 

They’ll ask you to look at the impact on traffic, the impact on storm water, the impact on shadows in the area, and the list goes. This, of course, is fair and reasonable. It makes sense to measure the impact of the proposed changes to see if it will work in the given context. 

But those are not the only impacts to consider. I think that many of us underestimate the flip side, which is the impact of doing nothing, or in this case, building nothing. Here’s a recent quote from an excellent interview with urban economist Edward Glaeser:

Personally, I believe there are always huge costs to saying “no” to people who want to create space for new families that want to live in the city; who want to make the city more affordable. There are always costs – I believe that very, very strongly – but, sure, there are also benefits to saying “no” at certain times.

Glaeser is, of course, not saying that we should allow unfettered development. He is saying that there are costs (or impacts) to building and costs to not building. The challenge is that we assume, often incorrectly, that saying “no” simply means the status quo will prevail. And we do not consider the impacts.

So what does that mean? Here’s an example.

The Neptis Foundation, which is a nonpartisan and charitable urban research group, just published an interesting report called, Growing Pains: Understanding the new reality of population and dwelling patterns in the Toronto and Vancouver regions. 

What the report did was compare growth and settlement patterns in both the Greater Toronto (and Hamilton) Area and Metro Vancouver between 2001 and 2011. And what they found was two different stories.

Of the one million people that moved to the Toronto region between this period, roughly 80% of them settled in new greenfield housing subdivisions at the urban edge. And only 18% of people moved to areas that were well serviced by public transit.

By contrast, only 31% of Metro Vancouver’s population growth went to greenfield areas and 69% went to urban intensification areas. Nearly half of these new residents ended up settling next to high frequency transit.

From an environmental standpoint, Vancouver’s settlement pattern is obviously preferable. But it takes hard work to achieve that. The barriers to infill development are more formidable than the barriers to greenfield development. This is despite the fact that there are well documented social, economic, and environmental costs associated with urban sprawl.

My point with this example is that growth and demand will find somewhere to settle. Some locations make more sense than others, but sometimes there’s no choice when we have decided to say “no.” So what we ought to be doing is measuring both the impact of building, as well as the impact of not building.

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.