By: Jim Castagnet
In an effort to build upon my development knowledge, I have a handful of property development books that I am making my way through. The lesson I learned from this one is that barriers to entry, like regulations, make a huge impact on the viability of a project. Policy and regulations impact property development and especially housing affordability.
The author is a developer in Australia. Australia has a lot of red tape when it comes to development, like requiring Archeological studies prior to Development Approval. Yikes. Location matters. Especially when that location may require you to perform numerous expensive and obscure studies prior to gaining approval from the local government, which is a big step in the initial viability of a project.
What is Property Development?
Author’s Definition: Buying land and buildings and then making improvements to them so that their selling price exceeds the price paid for them.
Property Development Org Chart:
The architect is responsible for the performance of the consultants, and will often recommend consultants to the CEO.
The book was made up of cautionary tales of mishaps during development in Australia and checklists developed thereafter.
My favorite checklists were:
- The 7 Deadly Mistakes in Property Developing
- Builder Due Diligence
- Development Lender Submissions
- 7 Phase Property Development Process
The 7 Deadly Mistakes in Property Developing:
These are the common mistakes that plague developers. Take a look in the mirror. Are there any of these that are blindspots for your current projects?
- Lack of due diligence
- Massaging the financial feasibility. Overestimating the sales and/or underestimating the construction costs.
- Underestimating the power of neighbors.
- Selecting the wrong builder.
- Shoddy legal documentation.
- Not selecting the right consultant.
- Buying the wrong site.
Builder Due Diligence:
Picking the right builder is vital to the success of any project. There is a method to the madness of comparing apples to apples in an orderly fashion.
- Documentation: In order for the submissions to reflect the same build outcome, the documentation must be detailed and unambiguous. For larger projects it is usually accompanied by a Bill of Quantities.
- State of the market: A builder who is not hungry enough for the work will charge you a high price. Builders often get hungry as opposed to desperate because they’re finishing a project and want to avoid downtime between jobs.
- Tender Process: The goal of the tendering process is not necessarily to obtain the cheapest possible price for a project, but rather to minimize project risks by appointing a contractor who will deliver to the predetermined scope and quality, within the timeframe and budget derived from the developer’s feasibility analysis.
- Initial Interview with Contractors
- Tender Invitations
- Mid-Tender Interviews
- Tender Evaluation
- Negotiations & Appointment of Contractor
Development Lender Submissions:
What do you need to have when beginning your application for funding with a lender? Put your best foot forward with a professional submission.
- Detailed feasibilities indicating all the cost estimates
- Details of leases or potential leases
- Copy of tenancy schedule
- Copy of valuation
- Copy of quantity surveyor’s report
- CV of borrowers/guarantors
- CV of builder or list of past projects if owner-builder
- Details of facility required
- Copies of the business’s last two years’ financial statements
- Copies of last two years’ tax returns for any director, partner, or guarantor
- Statement of assets and liabilities for each borrower/guarantor
- Contract of sale
- Details of any other loans and/or credit facilities
- Trust deeds
- Diagram showing the borrowing entity and any other related entities
- Copy of lease profile for each asset
7 Phase Property Development Process
An overview of the author’s process in Australia. Oversimplified, of course. But it gives you a framework to begin.
Phase 1: Source Development site and establish project viability:
- Source a development site
- Location: Desirable location to your demographics
- Permissible Use: Zoning within your location
- Yield: Sites with the highest densities and height allowances
- Technical analysis
- Interesting Nugget: Site Orientation: A South-facing site (when you live North of the Equator) is more efficient energy wise than other orientations.
- Financial feasibility analysis
- Financial modeling and project funding
- Project legal structure
- Sales and marketing strategies
- Exit strategy
- Establishing a business plan
Phase 2: site negotiations and acquisition:
- Procure Funding
Phase 3: Approval process:
- Development Approval process
- Construction certificate
Phase 4: Construction process:
- Tender documentation
- Tender for builder
- Manage construction
- Cost management
- Project management/contract administration
Phase 5: Sales and marketing
- Execute predetermined strategies
Phase 6: Exit strategies
- Execute predetermined strategies
Phase 7: Project evaluation
- Group performance analysis
I appreciate an operator making mistakes, learning from them, and then wanting to teach others so that they avoid the same mistakes. There was some value in this book from that perspective. Much of it was lost on me due to him operating exclusively in Australia. Fortunately, Texas is not Australia.