Real Estate Development Process

In a real estate development project, the developer is adding value by creating more space, changing the use, or both. The development process could be drastically different based on the type of the project, the jurisdiction, and financing requirements. In this article, we are describing the development process for major real estate redevelopments. So these steps do not apply to minor renovations. Real estate development process is a process to produce or improve real estate assets which spans from asset acquisition to post-construction sale. Typically, a development manager in any real estate development firm is in charge of the process. The entire process can be broken down into the following steps:

When a piece of real estate property is brought forward, a development manager has to do their due diligence by checking off many market and legal requirements. The list of requirements generally includes environmental requirements, financial feasibility, lender's and municipal requirements.

Almost all jurisdictions are now requiring that any major development application clean up the soil they want to build on. Contamination is generally defined as:

States or provincial governments keep a registry of properties that includes their soil profile, contamination history, soil relocation plans, etc. Jurisdictions are nowadays putting these databases online allowing people to search the database, sometimes at a fee. Both the real estate salesperson and the real estate developer need to look for this information. While agents are under the responsibility of disclosing what they know about the site contamination history (e.g. the site was used as a gas station back in 1970s), the developers need to make sure the site complies with the laws and regulations. To do that, a real estate developer engages a professional environmental firm to do the research, and if the site is contaminated, to provide a report that outlines the scope of contamination, the cost and time estimate for the site remediation. Municipalities often require that a certificate of compliance from a government agency in charge of environmental cleanup be issued as part of the documents for the redevelopment application on that site. Also, many lenders refuse to advance any funds if the site is deemed contaminated, or the cost of remediation from a reputable company makes the project infeasible.

The financial success of a major development project requires that the highest and best use of the property is identified, the project is designed based on this use, the financial statement, and cash-flow statement are created detailing all relevant information. The most important architecture in residential or commercial real estate is the financial design and architecture of the project. This is the most crucial part of the due diligence process. Development managers usually use one of the tools of the trade to do their valuation. These are a few tools that do the job:

When acquiring a site, a developer manager should make sure that the title is not encumbered with charges. This step is usually done in the agreement or contract of purchase and sale by the developer's lawyer, but it is something to watch out for.

Real estate projects often require outside investors and lenders' capital. A real estate developer has to create a case that shows:

Many lenders require that the real estate developer has enough experience in the field which means they know what they are doing. They also would want to make sure that the developer has a skin in the game. This means that the developer has to be invested in the project as well. Simply putting investors’ money on the line might not be enough for some lenders.

Investors and lenders both want to see your proforma. It is important that you show them a detailed proforma complete with the cashflow statement showing them the sources and uses of funds. Our valuation product is designed for this and can provide the financial statement and the cashflow statement.

Municipalities generally have rules and bylaws that determine the land use, density, height, setbacks, etc. Oftentimes a new development application does not comply with one or more of these requirements. According to the municipality bylaw, non-compliance with these rules could trigger a variance, redevelopment, rezoning requirement. For instance, changing the zoning of a single-family residential to a high-rise development will almost universally trigger a rezoning requirement. A real estate developer need to provide a detailed application and convince the municipality staff and council that the proposed redevelopment plan suites the long-term vision for the area and benefits the community by providing additional housings, either rental or strata, creating jobs by creating office spaces, or improve the quality of life by creating much needed amenities, etc. This is the part that requires vision, need identification, creativity and negotiation skills. As a developer, engaging with the community and the municipality staff early on in the process can save everyone a lot of time and effort.

The rezoning and redevelopment process often goes through a community feedback process. People living in that community would have certain concerns that could potentially change the design or profitability of a project. Traffic, architectural design, additional population, lack of infrastructure for the added population load due to redevelopment, protection of view, shadowing of the building on adjacent neighbors, etc. are just some of the concerns often raised by the neighbors. It would typically take multiple rounds of public input and a public hearing to get the final public opinion ready for the city council's consideration. This process of getting feedback from the community, going back to the drawing board to make the necessary changes, and providing a revised application could take months. The earlier these feedback points are obtained from the public, the less time it will take to go through this step.

After doing all the work to find a suitable property, create a project, secure the funds, cleanup the site, satisfy the neighbors, city, and all other government officials, you can now put the shovel in the ground! A real estate development firm usually contracts out the construction to a construction manager. Some real estate developers self-perform the construction. The work to oversee the construction depends largely on the type of the contract between the real estate developer and the construction manager. A fixed-price contract means that the construction manager owns the risk in exchange for a higher amount of compensation. A cost-plus contract on the other hand means more risk for the developer manager at a lower cost. Regardless of the engagement type and contract, at the end of the day the real estate developer needs to make sure that the project is on budget and on time performed while meeting or exceeding all codes and best industry practices.

A real estate asset needs to generate revenue. In a strata arrangement, the individual units can be marketed and sold. Some jurisdictions have laws around when a real estate development is legally allowed to market. For instance, a jurisdiction may require that all development permits have to be finalized and issued before the project can be marketed to the public. A real estate developer's job at this point is to market the units, whether rental or strata, when they are allowed to do so under the laws of their jurisdiction, to ensure that the units are not sitting empty.

There needs to be an exit strategy for any kind of real estate project. In case of strata units, the exit is the sale of the unit. With the rental units, a developer typically stabilizes a project by renting out the units and ensuring that the units are generating the maximum revenue before doing the final valuation. Once the asset has been 100% stabilized, the developer could either market and sell the building or refinance the building. Once refinanced, the developer can pay off the existing construction loan. The investors could choose to own a partial percentage of the building, sell their shares to other investors, or sell their shares to the developer.