Zack Kaufman

Fin 180

Assignment 3

Entrepreneurial Activity

In the real estate industry there are a number of different activities that one could pursue to generate income. Out of all of them to choose from, many interest me and I intend to pursue many of them throughout my career. The one activity however, that I wish to spend the bulk of my career doing is land development. Within the category of land development there are a number of different ways that one can make money. There is the taking of raw land, and adding all the components, and the end process being a brand new development. There are also activities within development, which one can do to make money, without having to actually complete the project. There are two sides of the spectrum when it comes to development, (1) commercial and (2) residential. Both can be lucrative, however both are also risky. There are also other activities that can be lucrative, like redevelopment, buying and flipping property, and purchasing or selling already existing projects. Through this paper I will touch on some activities and examine them more closely.

In order to develop land, a developer or group of developers must follow a series of steps cognitively and/or on pen and paper before they can determine if a project is feasibly or not. At times, this series of steps varies but the general idea is the same. First, they must conceive an idea. This includes finding a site in which they want to develop, drawing up a rough site, and figuring out all the documents and financial obligations that they will experience or pro forma. The second step is to examine the feasibility of the project. Including but not limited to, performing legal due diligence, gaining control of the site, doing a study of the market, and coming up with ball park numbers as far as cost and revenue goes. Gaining control of the site does not necessarily mean buy the site, but what it does mean is to sign a contract or have the rights to the land if everything checks out so the developer does not have to fully commit to the land if the feasibility study fails. The third step is to refine the concept. This includes refining prior documents; get proposals from engineers, architects and general contractors. Also, develop a “teaser” investor and financing package. Once all of these have been accomplished the next step is to design the project. This includes acquiring a schematic or vested map, create the design and construction documents, acquire all necessary permits, bid and finalize the construction costs, buy the land, finalize all investor and financing packages, begin marketing and start presales and leasing options. The fifth step is to construct the design, this includes, manage lender inspections, pay the contractor throughout the building process, be prepared for any government inspections and manage tenant improvements. The last step of the process is to manage the asset. At this point there are a few different things that a developer can do. They could lease the different units and generate cash flows, they can sell the units and cash out, or do a combo of the two and manage the property. They will likely do which ever is more profitable or in their best interest.

The steps I mentioned above apply to residential or commercial development projects. There are different building codes that each side must follow and different rules that each side must follow. With each side comes different fees that one must pay and regulations to follow. Currently in Fresno for a residential development project the developer must pay a $5,000-impact fee per unit within the development. The fees go to the local public schools and other infrastructure work, just because the developer chose to build in that area. Now all developers plan to execute the project from start to finish. Many developer’s whole business models are based on only the first few steps of the process or a select few. Some developers design a tentative map and sell the maps to a parcel of land; while others do everything up till the actual break-dirt point, then sell the project. These different strategies could benefit both sides greatly, as some companies are better at different stages of the development process.

Another area of development that has emerged in the market, especially as of lately, is redevelopment. Redevelopment has become more popular recently for a number of reasons. First being that as time has progressed, many buildings that were developed many years ago are beginning to age and become out dated. Many of these areas have also lost their appeal to consumers and many are financially strained. This is a window for developers to purchase the property at a discounted rate and fix it up for a profit. They could turn it into another type of income generator like a 10 or less board in care or keep it at its prior state, just remodeled. Another redevelopment area is flipping houses. This has become much more prevalent especially in recent years due to the crash of the housing market. The housing crash left many foreclosures available on the market, some at highly discounted prices and many entrepreneurs saw an opportunity to make money.

As with any area of business there are risks and there are also cyclical patterns, all of which occur in the real estate market. Nothing stays up forever and constant is a rarity. Many opportunities that existed in the past are not available anymore. At one time buying raw land building a house and selling it could bring you thirty percent return on your investment. Now, it costs more to build a house then one could sell it for, in most cases. Overall, opportunity in the real estate industry leaves many doors open to be explored and conquered. Because of our capitalistic economy and government, there are not too many barriers to entry in the real estate industry. If you have the drive and determination to make a project happen it is a realistic possibility and can be reached.

References

Diaz, Julian and Hansz, Andrew J. “Real Estate Analysis: Environments and Activities”

Chapter 8, © 2010.

Olin, Bill. Phone Interview. Real Estate Lender and Financer. 1 May 2011.

Dyke, David. Phone Interview. Real Estate Entrepreneur. 5 May 2011.