How Real Estate Developers Think. Peter Hendee Brown
projects. The public-private partnership, or PPP project model, an alternative financing method introduced in the early 1980s, quickly proliferated around the United States and the world and has continued to dominate in the twenty-first century. These projects are legal and financial partnerships between private developers and governments—usually city governments—who offer to support a private project financially with public resources such as low-cost land, environmental cleanup grants, low-cost money in the form of tax-exempt debt, and future tax revenues (tax abatement and tax increment financing, or TIF). Policy makers hoped that the use of public resources to reduce the costs and risks for developers working in unproven urban areas would stimulate the market and “prime the pump” for future private development and reinvestment in the city that would not require subsidies. In exchange for these resources, the public would obtain benefits or amenities as a part of the project, ranging from streetscape and sidewalk improvements to public plazas, parks, green roofs, and parking facilities. Often, however, the public benefits seemed sparse or not very public and the subsidies were viewed as payments that lined the pockets of private developers while moving a large share of the risk onto the public partner. At the same time subsidies became a normal expectation from developers in many cities where elected officials wondered when the pump would finally run by itself.
For all of these reasons, by the 1980s, public confidence in local government’s ability to fairly represent the public’s interests in its regulation of private real estate development was very low. Americans increasingly insisted on having a voice in projects and developments in urban areas that would affect them in the areas of property rights, social equity, and the environment. The public’s growing suspicion and distrust of government officials and the private developers they regulated led to ever-increasing scrutiny of development proposals, outright opposition to many, and a general fear of change as exemplified by the term NIMBY, which stands for “not in my backyard,” or, worse, BANANA, which means “build absolutely nothing anytime near anything.” In this atmosphere of distrust, by the twenty-first century, even traditional private development projects that received no public subsidy had effectively become “public-private” projects in character by the time they had wended their way through long, complex, uncertain, and often-fraught public review and approval or “entitlement” processes. Virtually every urban project required the developer to work with neighbors and the community in addition to the usual approval bodies such as planning, zoning, and heritage preservation commissions as well as the city council. Indeed, by the start of the twenty-first century, being a real estate developer had become more difficult than ever before, in large part because of the public’s fear of change and distrust of developers.
By the 2000s and 2010s—and after more than a half-century of residential abandonment—cities had started to become attractive places for middle-class people to live again, as population growth had caused suburban sprawl and congestion while higher gas prices started to make longer commutes increasingly costly in both time and money. These negative push forces, in combination with the pull forces of improved public safety, access to arts and culture, and the rich sense of community that exists in urban areas, began to drive people back toward the core in search of a better quality of life. Demographics played a key role too, as both the baby boomers and their children, the millennials, began to prefer urban living over the suburban single-family homes they were raised in, and this continued to play an increasingly influential role in urban real estate development as the flight to the city took off.
By the 2010s, the question had become how to address this growing demand for new development in cities if each project would be exposed to the kind of opposition that the developer Neil Ornoff had faced in Evanston. The answer lies in coming to a better understanding of developers.
What Are Developers and What Do They Really Do?
There is no one route into the real estate development business. It is not a legally recognized profession like architecture, engineering, or law, which requires specific academic degrees and work experience to obtain licensure. A handful of American universities have offered formal degree programs in real estate in the past and a number of new programs were created during the building boom of the 2000s but even so, relatively few developers are graduates of those programs. The developers profiled in this book who did attend college obtained degrees in everything from architecture, business, and law to art history, music, creative writing, and cooking. States do not license or regulate developers, although many developers are licensed real estate brokers or agents, some are licensed as contractors or homebuilders, and some do hold licenses to practice other professions such as law, architecture, and engineering. Many developers belong to and participate in industry trade organizations such as the Urban Land Institute; NAIOP, the Commercial Real Estate Development Association; and Lambda Alpha International, the honorary society for the advancement of land economics. The U.S. Bureau of Labor Statistics classifies developers as “land subdividers,” because they buy land and increase its value by subdividing it and building higher-density uses on it. There are many different kinds of developers, and they each specialize in different product types, work in different geographic areas and contexts and at different scales, and range in organizational size from solitary individuals to national and multinational corporations.
The one thing all developers have in common, however, is that they make their money by buying a piece of land or a building or a complex of buildings and then increasing its value. They do this by investing in capital improvements such as renovations or the construction of new buildings, by improving operations, or both. If a developer is successful, rents or sale prices can be increased, the final value of the asset will be greater than the cost of acquisition and improvement, and the developer will realize the difference between costs and value as profit.
Land developers, for example, buy suburban or rural land at agricultural prices and then obtain zoning approvals for a subdivision of new homes or an office or industrial park. Once they have received their approvals, they regrade the land and provide the sewer, water, storm water, power, and road infrastructure that will make the land developable. Then they sell the lots or building pads to a homebuilder or to a developer of office or industrial buildings. Land developers make money by selling the improved land for a price that is greater than the combined costs of buying the agricultural land, getting the approvals, and providing the infrastructure. The difference between these costs and the sales price is their profit.
Many commercial office developers and production homebuilders are also land developers who plan for and develop office parks or communities of single-family homes or townhomes on the land they have improved. These developers can also speed up or slow down land development, infrastructure provision, and building production. This flexibility allows developers to match their rate of delivery with market demand and rates of product “absorption”—the speed at which they can sell or lease their buildings. With this incremental approach, these developers can also use anticipated income from the rental of completed offices or proceeds from the sale of completed homes to pay the costs of development related to those buildings or units without having to develop more land than needed at any one time.
Most developers specialize in one of the four traditional rental real estate product types: commercial office space, warehouse and light industrial facilities, retail strip centers and malls, and multifamily housing or apartments. Some developers specialize in variations on these product types, from hotels, casinos, entertainment centers, and mega-malls to senior housing, student housing, and mixed-use development. Finally, some developers specialize in for-sale housing, which includes single-family homes, townhomes, condominiums, and cooperatives.
Developers generally work in either the suburbs or urban areas. Suburban development is typically lower density and less risky in terms of the politics of the approval process. In the suburbs, land is more plentiful, uses are separated, interest group politics are weaker, and people and buildings are farther apart, as are any affected neighbors. At the same time, suburban cities have smaller staffs and less capacity to evaluate development projects. In larger cities, however, there are many more neighbors who are close by and vocal, there are large planning and development staffs, and there are interested politicians who must listen to their constituents as they evaluate proposed projects. And because urban land is scarce and more costly, density is important because it directly influences the value of land. Urban sites also come