Supply and demand data is never the whole story in project feasibility and financial projections; all new communities are not qualitatively the same.
By Brock Chapman
It seems each generation of real estate development professionals laments about how difficult the entitlement approval process is now vs. when they first started their careers.
The reality is the entitlement process has always been challenging. But, each year real estate professionals also grow more sophisticated in how they manage the complexities of the evolving entitlement process.
One of the top challenges is how to manage compromises and concessions so that it benefits the community and delivers a quality product in a timely manner. This delicate balancing act places developers under pressure to perform quickly and efficiently, while refusing to settle for inferior design or sub-par financial results.
With just the click of button, spreadsheets and market databases allow us to pinpoint pricing and past sales absorption performance of competitive projects, sub-markets and entire MSA’s.
The challenge is that, without the appropriate context, this supply and demand information creates a false sense of certainty in project feasibility and financial projections. Why? All new communities are not qualitatively the same. In other words, lots and homes that are similar in size and regional proximity may yield significantly different values due to the qualitative nature of the neighborhood in which they are located. This qualitative aspect of valuation often gets lost when supply and demand are the only focus.
This is where the art of land planning can get lost in the commoditized financial analysis shuffle. This includes considerations as community design, targeted amenities, personal service retail proximity, views, schools, streetscapes and impactful entries, transportation alternatives, trail connections and open space, communal gardens and thoughtful use of eco-friendly, xeriscape and water-wise plant materials. Yet, these qualitative items are often what homebuyers consider most when making a purchase decision.
These same factors provide freedom from the “commodity trap,” where only prices matter. When done well, this value-added community design approach can also greatly influence the rate at which homes are sold. Nothing helps or hurts a project pro forma more than time.
For optimal long-term value creation, development professionals and investors must view the “soft” aspects of the neighborhood planning as equal to the “hard” financial and supply and demand analysis of the feasibility process.
It’s an approach that includes the following:
Engage all Stakeholders Early: Avoid the common “concessions spiral” pitfall by engaging community members, even project opponents, in the earliest stages of the project visioning and design process. Communicate the benefits of a holistic design.
Use True Comps: During the project feasibility stage, make sure you are using truly comparable projects when determining costs, price points and projected absorption rates. True market “comps” should include similarly well-designed and amenitized communities, not only nearby lots and/or homes of similar size.
Demonstrate Value: Be prepared to clearly demonstrate the added financial value and benefits of a well-planned, differentiated community that is accurately targeted to a specific buyer population. Show how avoiding the standard subdivision lot “commodity trap” will produce better long-term value for all stakeholders. This approach has positive brand value implications as well.
Meet with Officials: Elected officials have the final vote on discretionary entitlement approvals, and they often rely on recommendations from their staff. Ensuring that they understand the benefits of your overall design early in the process is ideal.
Focus on Underlying Interests: Open collaboration with all stakeholders can provide tremendous benefits and goodwill. Ask questions and listen carefully to identify underlying interests rather than debate initial positions. Commit to uncovering and understanding the true interests behind initial stated positions.
Set Realistic Expectations: Be sure your company, investors and team members understand and support this approach, so they understand the inevitable trade-off of time, effort and initial capital required.
Are the outcomes of this approach worth the extra time, effort and commitment? Absolutely. By understanding that your community plan is part of a larger tapestry in which people live their lives, raise their families and pursue their dreams, everyone wins.
Brock Chapman is SVP and Regional General Manager, Western States, for The True Life Companies. Brock brings seasoned knowledge and expertise in negotiations to the company’s residential development processes. For more information, visit www.thetruelifecompanies.com