TheWorldofaDeveloper:MovinganIdeatoReality
ThisinformationisprovidedbyGrowSmartMaineasaresultoffeedbackfromthepublic
attheJune2016Forum:GrowthinPortland:CanPublicProcessHelpBridgethe
Divide?
Whatmakesadevelopertick?Howdotheychooseprojectsandneighborhoods?What
isthebestwayforthepublictooffersuggestions?Whatmakesa“good”development?
And,behindthecurtain,howdothefinanceswork?
ThesewereallquestionsaskedbytheattendeesatGrowSmartMaine’s2016forumon
GrowthinPortland.Itisourhopethattheanswerstothesequestionsthiswillleadto
moreeffectiveconversationsbetweenthepublicanddevelopers,andultimately,to
developmentsthatcreatemorelivableandenjoyableneighborhoodsalloverMaine.
Whatmakesadevelopertick?Obviously,differentthingsfordifferentpeople,butall
wanttocreateaprojecttheycanbeproudof.Formany,innovationandcontributingto
theneighborhoodinsomewayiskey.Thiscanmeananythingfrommakingastatement
withanestheticallypleasingbuilding,tocreatingmuch-neededaffordablehousing,to
buildingaspacethatbuildscommunityandmakestheneighborhoodlivelier.A
developerisabusinessperson,andthisistheirlivelihood,sotheprojectneedstopayoff
intheend.Butthisisnottheonlymeasureofsuccess.
Whatistheroleofadeveloper?Adeveloperisthepersonwhohasthevision,findsthe
site,workswiththeneighborhoodtoadaptthedesignandthecityortowntofollowor
adapttherules,findsthefinancing,andhiresthebuildingcrew.Oftenthedeveloper
alsorentsorsellsthefinishedproduct.Thedeveloperisthefirstonein,andthelastone
out.Thedeveloperalsotakesthefinancialrisk,usuallymakingmoney,sometimes
breakingeven,occasionallylosingmoney.Adeveloperneedstohave20%ofexpertise
inabout20differentareasandknowhowtoassembleateamtotieitalltogether.
Step1:Findingasite.Everydeveloperhastensitesthey’dlovetogettheirhandson,
duetolocation,theexistingbuilding,orlocalamenities(somecombinationofutilities,
sidewalks,stores,parks,trails,views).Forexample,adevelopergetsacallonasitethat
isupforsale.Firststep,takeaquicklookatGoogleMaps.Sayit’sinaneighborhood
thatisofinterest…thedeveloperthinksit’supandcoming,italreadyhasgood
amenities,orperhapsthedeveloperjustseespossibilitiesthatnooneelsehasyetseen.
Thedeveloper’sfirststepistoinvestigate.Importantitemstoconsiderinclude:
• Land:isitinafloodzone?Arethereanywaterissues?
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SoilandEnvironmentalissues:Whatwastherebeforeorwhatisthere
now?Istherelikelytobecontamination?Istherelikelytobeledge
(blastingexpense)orclay/sand(theexpenseofdrivingpilesforstability).
Neighborhood:Howdoesthepublicfeelaboutthesitebeingdeveloped?
Whatconcernsdotheyhavethatwillaffecttheuse,lookornumberof
unitsinthedevelopment.Aretheyconcernedaboutheight,traffic,
gentrification?Howcantheseconcernsbealleviated?
ZoningandRegulation:Willazonechangebeneeded?Howdifferent
fromthezoningthatiscurrentlyinplace?Ifso,howlikelyisthe
municipalitytograntone?
Title:Iseverythinginplace,orwillaninvestmentneedtobemadeto
legallyclearthetitlebeforeaclosing.
TaxCredits:Isitahistoricbuildingorneighborhoodsothattaxcredits
couldbeused?Doesitmakesensetodoso?
Placemaking:Whatistheneighborhoodlike?Couldthedevelopmentadd
toitandmakeitbetter?What’sinitfortheneighborhood?Thisisa
criticalcomponenttosuccess.
Amenities:Isnaturalgasavailable?Ispublictransportationnearby?Bike
paths?Whatotheramenitiesalreadyherecouldaffectmarketabilityof
theunits?Whatcouldthisdevelopmentdotoincreasetheoverall
attractivenessoftheneighborhood?
Marketfeasibility:Canwerentorselltheseunitsformorethanthecost
ofconstruction?Ifwebuildit,willtheycome?
Step2:ToTakethePlunge…orNot.Nowit’stimetomoveoutofthe“backofthe
napkin”stage.Thedeveloperwillbeabletoanswersomeoftheabovequestionswith
existinginformationandacertainlevelofintuition,buttofindoutenoughtoseriously
crunchnumbers,expertsneedtobebroughtin.Theselikelyincludeanarchitect,
environmentalengineerstoassessthesoil–becausethataffectsconstructioncosts–
perhapsalawyer.Thisprocesswilltakeseveralweeks.Itgenerallycostsabout$20,000
justtokickthetires,sotospeak.Itisduringthisphasewhenasetofbasiccostnumbers
aredeveloped:
• Costofland
• Costofpreconstruction/softcosts(taxes,fees)
• Costofconstruction(actualbuilding)
• Costofloan(interestcostandfeesoverthelifeoftheproject)
• Stabilizationcosts(keepingtheprojectfundedduringthetimeittakestobefully
soldorrented)
Theseareallbalancedagainst:
• Potentialincome(Estimatedrentorsaleprice)
Duringthistimeperiod,thedevelopershouldbemeetingwiththeneighborhoodto
takeintoaccountconcernsandideas,andadaptthebuildingasneeded.Hereisalso
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wheredeveloperstakeagoodhardlookatwhatcouldgowrong:whatcouldcostmore,
takelonger,oraffecttherentalorsalesmarketbythetimethebuildingiscompleted.
Onceallthisispulledtogether,thedevelopermakesadecision.Willtheprojectpayoff?
Doesitfitintohis/hervision?Shouldhe/shemoveahead?
Step3:MovingtoPre-Construction.Iftheleapistaken,thenthenextstepsaretogeta
designandplanonpaperandstartputtingbidsouttocontractors.Detailed
geotechnicalworkmaybeneeded.Thedeveloperwillnowbegintocontactbanksabout
thisspecificproject.Untilthebidscomein,conversationswithbanksarebynecessity
somewhatpreliminary.Typically,adevelopertalkstomorethanonebank,because
gettingagoodrateandaslongaguaranteeontherateaspossibleiskeytosuccess.
(Fiveyears?Eightyears?Tenyears?)Bidsoftencomeinhigherthanexpected,soonce
theyarrive,thereisusuallyaperiodofwhatiscalledvalueengineering,orfindingplaces
toreduceconstructioncoststhatdon’treducetheoverallvalueoftheproject.Thisstep
cantakesometime.
Finally,oncetheconstructionbidsandothercontractorbidsaresolid,thebankdealis
firmedup(includinganappraisalthatishighenoughtowarranttheloan)anyneeded
zoningchangesareapproved,theneighborhoodisreasonablyhappywiththeproject,
andnolawsuitsareinsight,thedeveloperwillusuallystepbackandtakeonefinallook
atthenumbers.Ifthingslooktight,he/shecanassessthemarket:haverentsorsales
pricesmoved?Nowthatclosingisimminent,wherearerates?Andfinally,adjusting
thosenumbers,whereisthereturn?Isitstillsufficienttomoveahead?Iftheansweris
yes,thedevelopermovesaheadtobuytheland,hiretheconstructionteamandbreak
ground.
Step4:Construction.Anyonewhohaseverbuiltahouse,garageormaybeevenashed
knowsthatnothingevergoesaccordingtoplan.Butnotgoingaccordingtoplanispart
oflifeforanyoneinthebuildingbusiness.Fromadeveloper’sperspective,havingthe
buildingreadytoliveinbyAprilorAugust–whenpeopleinMainetendtomove–isa
goal.Sincethatgoalisoftennotmet(seenoteonstabilizationcostabove),thisisone
morevariable.Otherchallenges,especiallyinSouthernMaine,arelackofavailable
workerswhentheyareneeded.Again,theseareallstandardissuesinthebuilding
trades,notparticularforadeveloper.
NeighborhoodInteraction:Gooddevelopersinteractwithaneighborhoodearlyand
often.(SeeGrowSmartMaine’sNeighborhoodMeetingsThatBuildSupportforYour
Project.)Asaresidentwhocaresabouttheneighborhood,itisyourresponsibilityto
attendthesemeetingsandtalkwiththedeveloperearly,beforetoomuchisinvested.
Suggestionsthatcouldhaveeasilybeenadoptedearlyintheprocessaremuchless
likelytobeimplementedtowardstheend.It’suptoyoutotalkaboutyourvisionforthe
neighborhoodandbeapartoftheprocess.Yourneighborhoodwillbenefit–andsowill
you!
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SAMPLEConstructionCostAnalysis
(numbersforillustrationpurposesonly–donotrepresentrealcosts)
OriginalEstimate:
Costofland,preconstruction,building
Costofloan
Estimatedstabilizationcosts
$5million
Revisions:
Architectchangestoinitialdesign +.2million
Geotechnicalanalysis:needtodrivepiles +1million
Newtotal
6.2million
ActualBidCost:
$7.5million
ValueEngineering -$4million
Newtotal
$6.9million
Developerthenevaluatesnewsquarefootcostandassessesanyrevisionstooriginal
assumptionsonrentorsalecost,debtservice,andlengthofneedforstabilizationcost.
Cananyofthesebeadjustedtomakethenumberswork?Thisisthepointatwhichthe
developermustmakethefinaldecisiontobuildornottobuild.
ManythankstoEthanBoxer-MacomberofAnewDevelopment,andJonathanCulleyof
RedfernProperties,whosepresentationattheDecemberMEREDAmeetingprovided
backgroundforthisdocument.AnyerrorsaretheresponsibilityofGrowSmartMaine.
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