Eric Fedewa has been leading managing partner in Ascend Capital Partner. He has over 20 years experience in the Real Estate Development. He is passionate about his work and famous in the industry for his unique ideas.

1. Development and
management
Eric Fedewa - Familiarize yourself
with principles of real estate

2. Outline
 Process of development
 Operation: ongoing management

3. Occasions for development
 A use in search of a site:
◦ New locations for expanding franchise.
◦ Need for a new school.
 A site in search of a use:
◦ Raw land in path of urban growth.
◦ Land adjacent to new freeway intersection.
 Resources in search of an opportunity:
◦ Pension fund with money to invest.
◦ Private investor looking for high-yield
investment.

4. Process of development
1. Establishing site control
2. Feasibility analysis, refinement, and testing
3. Obtaining permits
4. Design: Architect and other professionals
5. Financing
6. Construction
7. Marketing and leasing
8. Operation

5. The time line

6. 1. Establishing site control
 Wide differences in access to land.
 Land already owned.
◦ Dream case.
 Land assembled for specific purpose.
◦ Difficulty of land assembly often justifies
government involvement in urban renewal.
◦ Assembly of land for Walt Disney World—
devised elaborate blind entities to acquire all of
the pieces of land to eliminate a
“hostage/holdout” situation.

7. A holdout in China
The builders have since excavated a 10-metre pit around
Yang's house, so he is holed up there without water or
electricity, threatening to use his martial arts skills
against anyone who tries to dislodge him.
Source: CBC News; AP

8. Another holdout
Source: AP

9. WSJ, June 15, 2007
 “The Clise family began buying prime real estate
here (Seattle) in 1889…Now, after patiently
accumulating 13 contiguous acres
downtown…the family is putting the land on the
market.”
 “The area…has the potential for 13 million SF of
development—which would rival the size of…the
entire World Trade Center complex in New York.
 “My father talked to me about this…you do not
want to sell this off piecemeal…the value is in the
assemblage as a whole.”

10. Tools for site control
 Options: right (but not obligation) to
purchase land in future before a certain
date, at a predetermined price.
◦ This gives time to developer for conducting
feasibility analysis, run construction and
environment evaluation, to obtain necessary
zoning, etc.
 Joint venture: landowner puts land into
development in return for share of profits.
◦ May do joint venture with future tenants as
well.

11. 2. Feasibility analysis, refinement,
and testing
 Financial feasibility question: does the
value, when built, exceed the cost?
◦ An application of NPV analysis.
 Tests and surveys that may be necessary:
◦ Soil tests.
◦ Environmental tests.
◦ Critical habitats (Endangered Species Act).
◦ Seismic tests (earthquake vulnerability).
◦ Archaeological (prehistoric ruins).

12. 3. Obtaining permits
 Multiple layers of permits may be needed.
◦ Site plan review.
◦ Regional and environmental impact review.
◦ Zoning change.
 Site plan review: an inevitable hurdle.
◦ Complex set of issues.
◦ Rules and criteria involve interpretation by authorities.
◦ Neighbors usually resist change.
◦ Negotiation is critical skill: important to building support
of authorities and citizens in advance.
◦ Negative decision can kill a project in one meeting.

13. Hurdles
 NIMBY: not in my back yard.
 BANANA: build absolutely nothing
anywhere near anything.
 “Every successful developer is a good
negotiator …. Through a thicket of
obstructions and objections.”

14. 4. Design
 Architect: represent developer in hearings
for permits; provide pre-design
schematics of user functions and resulting
spatial interactions; provide complete
design; serve as project manager.
 Land planner: creates development layout
or “map.”
 Landscape architect: Shapes topography,
soils, vegetation, and other objects
around a structure to harmonize with and
enhance it.
 Engineers: soil, mechanical, electrical,
civil, etc.

15. Greener buildings, greener bottom
line
 Toyota Motor Sales USA likes green the way
Henry Ford liked black…the division's new
Torrance, California, headquarters is one of the
largest environmentally friendly building
complexes in the U.S… All good intentions aside,
Toyota went green more for the payback than
the praise. At a minimum…the Leadership in
Energy and Environmental Design (LEED)-guided
design for the complex had to surpass a 10 %
return on investment. "The project focused on
long-term operational savings to increase the
rate of return."
 Source: CFO.com.

16. 5. Financing
 Development has a sequence of
financing needs:
◦Land acquisition and
preconstruction.
◦Construction.
◦Gap or “mezzanine” financing.
◦Postconstruction.

17. Land acquisition and
preconstruction financing
 Land acquisition cost: cost of the land.
 Preconstruction costs (“soft costs”): title
examination; feasibility analysis, market
research and testing, permitting process
(legal and architectural fees).
 Typical dilemma: developer faces capital
constraint, but banks and other institutions
are reluctant to lend on asset with no cash
flow.
 Solutions: use of option, joint venture, and
equity partners.

18. Construction financing
 Covers soft costs and hard costs (for
direct costs of materials, labor, etc.).
 Typically from a bank.
 Floating rate is popular (over prime
rate or LIBOR).
 This type of financing is less risky than
land acquisition financing: No title,
environmental or ecological risks;
permits all in hand.

19. Mezzanine debt
 Banks usually lend only 70 – 80% of
construction costs.
 In place of equity to fill gap, developer
may seek high-interest-rate mezzanine
debt.
 Often secured by pledge of ownership
shares, but not of property.
 More expensive than first mortgage
construction debt, but often cheaper than
equity financing.

20. Postconstruction financing
 Construction financing usually lasts less than 2-3
years.
 Most construction financing providers (e.g.,
banks) expect to harvest their loans shortly after
issuance of a certificate of occupancy.
 Postconstruction financing can be a take-out
permanent loan that kicks in when the certificate
of occupancy is issued.
◦ This financing may be come in stages; at the
beginning, the financing size can be small,
called “floor loan.”
 Another financing approach is to have a
“miniperm loan.” A miniperm loan is a
construction and postconstruction loan. The
typical loan term is 5 years.

21. 6. Construction
 Construction is a complex organizational
problem with dozens of subcontractors
and hundreds of steps.
 General contractor: oversees and controls
project.
 Construction manager: liaison and
representative of developer during
construction.

22. 7. Marketing and leasing
 Marketing normally is carried out by an
“outside” broker.

23. 8. Operation
 Chapters 21 and 22.
 Effective management is important to
maintain and increase value.

24. Home construction steps, I
 1. Layout; homesite is cleared and staked
out.
 2. Excavation: grading with proper
drainage.
 3. Footing: foundation’s foundation, a
concrete base below the frostline, upon
which the foundation sits.

25. Home construction steps, II
 4. Foundation
 5. Framing: floor, wall, and roof framing
forms the "skeleton" of the home.
 6. Mechanicals: heating, cooling,
plumbing, electrical systems.
 7. Insulation

26. Home construction steps, III
 8. Drywall
 9. Flooring
 10. Trim: a carpenter installs doors,
cabinets, and molding.
 11. Paint
 12: Final trades: light fixtures, faucets,
commodes, and appliances.
 13: Carpet/wood flooring and final
cleaning.

27. Operation: ongoing management
 Commercial RE is extremely management
intensive; it is not like putting $ in stocks or
bonds.
 The value of commercial RE is largely created
by holding the property for a long period of
time, say 10 years.
 Transaction costs are too high to buy and sell
property frequently.
 Thus for a long horizon, effective ongoing
management is particularly important.

28. 2 layers’ RE management
 Asset management: asset manager deals with
physical, financing, or ownership structure of the
property.
◦ Managing the principal’s RE portfolios
◦ Refinancing
◦ Expansion
◦ Making recommendations for buying and selling
properties
 Property management: property manager is
responsible for day-to-day operations of the
property.
◦ Marketing
◦ Selecting tenants
◦ Collecting rents

29. RE management

30. Asset manager
 Asset manager (who has RE expertise)
usually work for institutional investors
(who do not have RE expertise).
 Usually requires an advanced degree.

31. Asset management functions, I
 Before property is acquired:
◦ Finds specific assets in which owner/client can
invest.
◦ Researches/arranges the financing.
◦ Negotiates acquisition price.
◦ Oversee due diligence and closing process.
 Compare to asset managers of stock or
bond portfolios.

32. Asset management functions, II
 After property is acquired:
◦ Monitor and control operating performance.
 Site visits, property tax assessments, etc.
◦ Report value-enhancing opportunities for
rehabilitation, historic preservation,
modernization, and conversion.
◦ Suggest strategies for lowering owner’s cost of
capital.
◦ Be aware of opportunities to restructure equity
ownership.
◦ Continually reassess sell vs. hold decision.

33. An asset manager’s required
knowledge set
 Portfolio theory
 Asset pricing
 Capital market (financing)
 Urban economics (location)
 Investment value analysis
 Appraisal
 Property management
 Get an MBA, MSRE, or MSRED.

34. An asset management firm: PREI
 Prudential Real Estate Investors (PREI) is the real estate
investment management business of Prudential Financial.
PREI, comprised of fund management centers in the US in
Parsippany, New Jersey and Atlanta, Georgia; and globally
in Munich, London, Singapore and Mexico City; is
supported by a network of local offices throughout the
world. PREI’s specialized operating units offer a broad
range of investment opportunities and investment
management services in the United States, Europe, Asia
and Latin America. As of December 31, 2006, PREI
managed $36.9 billion of gross assets ($26.2 billion net)
on behalf of more than 400 clients and is ranked among
the largest real estate investment managers.
 www.prudential.com/prei

35. Property manager
 Often needs to report to an asset
manager.
 Detail-oriented.

36. Property management functions
 Marketing the property
◦ Leases are perishable assets.
◦ Independent brokers are usually paid on a
commission basis.
 Selecting tenants
◦ Credit tenants.
 Vast majority of potential tenants are not credit tenants.
◦ Tenant mix.
 Signing leases
 Collecting rent
 Repairing and maintaining property
 Communicating with owners
 Maintaining tenant relations

37. Property management education
 University education rarely focuses on this
profession; the closest one may be hotel
management.
 A number of professional and trade
organizations (education providers) exist:
◦ Institute of Real Estate Management (IREM)
◦ Building Owners and Managers Association
International (BOMA)
 Human skills.