Entrepreneurial activity is the heart of all that is real estate. It sits as the center of all real estate interaction. Giving life to other activities such as: investing, lending, professional activity, consuming, governing and successor entrepreneurial activities. “Developers, like all entrepreneurs everywhere, assume large risks for the promise of large returns”( Diaz, Hansz pg 198). Developers mitigate risk by taking small steps towards full commitment. These steps allow the developer to see all viable options as well as keep him agile to change direction when needed, with the least amount of risk possible.
The first step is to conceive a development project, which will outline a productivity analysis or highest and best use. The productivity analysis is used to choose the correct site in the given target market. Highest and best use is utilized in order to find the use resulting in the greatest productivity for the site. These first two analyses make it possible for the developer to identify a site and a market. Now the developer can gather information such as public/tax records, planning and zoning. All of this information can be found for free. Once the entrepreneur has a wealth of information he will compile it into a financial pro forma and a rough site plan. Even with this little information the entrepreneur has enough insight to whether or not this project could be viable.
If at this point the project seems viable the developer will move on to step two where the feasibility of the project is tested. “Developers are the coordinators of the activities, converting ideas on paper into real property” (David Kneeding). To fully bring this idea to life the developer must first, make sure that the market will support the projects vision and secondly that the site is legally and physically suitable. To make sure that the market will support the projects vision the developer will do an internal market analysis and feasibility study. In order for this study to be truly useful the developer must chose an exact market to concentrate on. While doing this study the entrepreneur must be intimate with the market he is proposing to enter. He must know the current competition as well as competition that will come in the future. The developer must also collect demographic data on the consumers in the area. Once the financial feasibility is nearing completion the developer must conduct his due diligence meaning “to shed light on the legal and physical suitability of the site for the project” (Dias Hansz pg. 206). Making sure that the site is legally and physically fit insures that there will be less expenses and headaches down the road. If the both the project feasibility and due diligence check out the developer moves on to gain control over the site. Which is called and option. It is an exclusive right. “That means that no one else can buy or sell that property during the term of your option”(Coble International).
Once the property is tied up and the project has passed all the steps the next stage is to refine the project. The developer will refine the pro forma and design so it will be accurate and attractive to investors and lenders in the next steps. The developer must also be involved in the community in which the project will be built. For if the project is not compatible with the surrounding community the probability of success will be dramatically diminished. In this step the developer must gauge how much capital can be raised and how many investors he can accumulate. Since the entrepreneur has refined his pro forma and has designs he is ready to meet with lender and investors.
At this stage the entrepreneur has to design the project. This where he will fuse the construction of the project with the financial capital he has raised. The developer now hires engineers and architects to design the building and site plan. This is a detailed lay out of the building, which includes everything from elevators to plumbing. Once this layout is finished the government then gives the permits for the building to be constructed. This is when the entrepreneur meets with the GC and bids out the contract to other subcontractors. At this point the developer compiles a lender and investor package called the executive summary. This is a summary of all details and main points making it simple and easy to read. It contains information dealing with vacancy rate, rental rates and geographic features. Also included is a marketability study, which determines “the likely demand for, as well as the existing and likely supply of, a particular property” (Diaz Hansz pg. 213). Once the developer has put together a sufficient executive summary he presents this to investors and lenders. The developer acquires a short-term loan from the lender to fund the construction of the property and a takeout loan commitment this pays off the money used to construct the project. A bridge loan is also issued to the developer to fund the project up until it gets operating. Once the design is finished the developer starts to market the space that is about to be created. Some common ways to do this are to pre sell and prelease. The next stage is construction of the design. In this stage there are many deadlines that must be met. The construction of the project must be done on time and on budget. While construction is going on the lender is constantly inspecting the progress of the building making sure that only enough money is transferred to the developer as is needed and nothing more. The developer must also manage government inspections and obtain a certification of occupancy. The developer must be up to the building code on all things that the government inspects. Which may be everything from framing to gas lines. The developer must also obtain a certification of occupancy, which means that the building meets all the requirements to house people.
Once the building has been fully built the entrepreneur now has the decision to hold on to the asset. The asset that he has just created will give him income and equity for years to come. The other option is to sell the asset once it is completely finished and get a return on investment quickly. The entrepreneur’s main goal is to mitigate risk and receive high returns. He can only do this by taking small steps towards his vision and coupling it with the real estate market to an intimate extent. Which results in the creation of the organism we call real estate.
Hansz, J. Andrew, and Julian Diaz. Real Estate Analysis Environments and Activities. Dubque, IA: Kendall Hunt, 2010. Print.
Coble International. "Real Estate Options." Import Export International Business And Trade Services. International Trade Business to Business Resources, 8 May 2011. Web. 09 May 2011.
Kneeding, David. "Home Developer." Entreprenuer.com. 9 Sept. 2009. Web. 5 May 2011.