How to Be a Successful Developer

By Ralph Pisani and Robert Pisani

In today’s world of investment hype and unpredictable stock market fluctuations, there is still one asset you can count on: land. Ralph Pisani and Robert Pisani were both adjunct faculty members of the Wharton School of Business, where they taught real estate development. Now, with this easy to understand and informative guide, anyone can begin to invest in the development of valuable real estate.

  How to Be a Successful Developer is a complete sourcebook for all your questions about how to succeed in land development, from the factors you should consider when looking at properties, to financing, zoning procedures, and much more—all in clear concise terms which anyone can understand.

• Language: English
• Publisher: Open Road Media
• Release date: May 27, 2014
• ISBN: 9781497632011

Ralph Pisani

RALPH R. PISANI was successfully engaged in real estate from 1967 to 1992 acting as a general contractor, a property manager, a real estate consultant to large corporations and a land developer. He currently dispenses sage real estate advice on the golf course in Florida. ROBERT L PISANI was the Real Estate Correspondent and currently is the Wall Street Reporter for CNBC television. Both were adjunct faculty members of the Wharton School of Business, where they taught real estate development.

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How to Be a Successful Developer

Ralph R. Pisani and Robert L. Pisani

Contents

Publisher’s Note

Foreword

Preface

Acknowledgments

1. Real Estate Development: Getting Rich in America

2. A Brief History of Real Estate Development

3. Myths and Facts About Real Estate Development

4. Forty Factors to Consider When Acquiring Land

5. Financing

6. Retaining the Professional Team

7. Zoning and Subdivision

8. Environmental Issues

9. Construction Management

10. Sales and Marketing

11. The Settlement

12. Getting Started

Bibliography

Publisher’s Note

This edition occasionally refers to documents and figures which could not be reproduced in the electronic edition. Effort was made to reproduce the text of those items as accurately as possible, but some were omitted for technical reasons. Our apologies if this causes readers any inconvenience.

Ralph Pisani dedicates this book to his wife Barbara, who refuses to accept the idea that there are limitations to the things he can do.

Robert Pisani dedicates this book to his mother, Elizabeth.

Foreword

The real estate developer is the quintessential entrepreneur. The word entrepreneur, like the word enterprise, comes from an old French word meaning to undertake. This etymology accurately describes the goal of the real estate developer/entrepreneur: to undertake the development of property. Successful developers/entrepreneurs are often identified by their personality profile, which can be summarized as follows:

Self-reliance. Developers are an autonomous lot. They believe in themselves and the right to guide their own destinies. They are more comfortable giving orders, and have more faith in those orders, than receiving orders from others.

Leadership. Because they are self-reliant, developers tend to be leaders. Most developers are either sole proprietors or the principal owners of their company, and they know the buck stops with them. They are take-charge persons, preferring to make their own decisions.

Propensity toward risk. Since there are many factors that go into the success and failure of each project, developers must have a tolerance for uncertainty. Developers examine the risks (financial, political, legal, and economic) in each project, evaluate the probability of success, and minimize the chances of failure by reducing risk whenever possible. Developers, however, are not crapshooters.

Opportunity seekers. Successful developers carefully evaluate the market place, seeking opportunities in the form of market niches not exploited by previous developers.

Achievement motivation. Developers are driven by the desire to succeed. Success can come in many forms: money, power, respect, fame.

Action and goal oriented. Because they are driven to succeed, developers are action and goal oriented. They have a clear idea what they need to do, and the self-discipline and perseverance to direct all their efforts toward the completion of the project.

As with all entrepreneurs, developers are psyched to believe that they alone can achieve the goal and grab the brass ring. There is not only the prospect of profit but also the psychological gratification that comes from building.

Mere possession of some or all of the above traits, however, does not guarantee success in real estate development. Ralph and Robert Pisani’s pragmatic book identifies and clarifies the issues developers must face when they consider developing a parcel of raw land. This volume can be used as a checklist to guard against pitfalls, reduce risk, and identify the barriers that must be overcome to successfully complete a development venture.

Still, a successful development is not easy to come by. Before a single bulldozer arrives at the site, a developer will have spent hundreds of hours choosing the land, determining its use and potential market, assembling a professional team, securing the financing, obtaining government approvals, and marketing. For thoughtful, informed developers the goal—a development which is a credit to the community and a profitable venture—will be more than worth the effort.

William Zucker

Founder of the Real Estate Center

at The Wharton School

Professor Emeritus, The Wharton School

University of Pennsylvania

Preface

Marcus Licinius Crassus was said to be the richest man in ancient Rome. He counted as his friends and enemies the greatest men of his time: Caesar, Pompey, and Cicero. Fifty years before the birth of Christ, Crassus amassed a fortune so great that, in the words of the biographer Plutarch, the greatest part of Rome, at one time or other, came into his hands. How did he become so wealthy? Crassus was no fool. He was a real estate developer.

Ever since Crassus, real estate development has been dogged by the myth that it is a game played by very rich people. Today, visions of Donald Trump making big stake deals often come to mind when people think about real estate developers.

People also have an image of developers as devils from out of town who descend on quiet rural communities, buying large tracts of land from poor farmers, taking no interest in local concerns, and putting up acres of ugly buildings that create traffic, water, sewer, and other public service problems.

The truth does not support these images. I was not at all wealthy when I began in real estate development, nor were most of the people I knew who were involved in the business. And while development, like all businesses, does have its share of shady operators, the vast majority of developers are not devils (I had my horns filed down long ago).

Americans have always had a fascination with real estate and real estate development. Go to a party, and chances are a few people will be huddled in a corner earnestly discussing land investments. I am often approached by doctors, lawyers, bankers, and others with investment capital. They all want to be developers. They sense that people are making money in the business, but just can’t figure out how.

Unfortunately, more than a few have launched themselves into real estate development without doing their homework. Lured by constantly appreciating land values and fabulous tax advantages, thousands of individuals who knew nothing about development went into the business in the last two decades. Many made huge sums of money, some were modestly successful, but many lost their shirts and were confounded.

I wrote this book so that those interested in real estate development as a business would be more successful than confounded. My purpose is to enable anyone interested in development to: 1) recognize that there is still plenty of room for fresh faces in real estate development; 2) find out how the business works from the viewpoint of a practitioner; 3) present information that will enable the reader to make informed development decisions; and 4) show how, using myself as an example, one can make a modest personal investment and start on the road to financial independence. Ultimately, I would like to leave the impression that real estate development is still the quickest, surest, and most exciting way to acquire wealth in America.

I am one of the fortunate ones; starting with a modest investment in 1968, I have through a combination of hard work, luck, and sheer nerve amassed a considerable sum of money entirely from real estate development. Along the way, I learned not only how to develop land and put up buildings, but also the subtle art of getting what I wanted. I learned how to talk a skeptical banker into lending the money for my projects, how to obtain approval from a hostile zoning commission, and how to calm the fears of those who were afraid that my development would lower the quality of life in their neighborhood.

This art, the psychology of development, is as important as the actual mechanics of the business. There are many developers who are as well versed in the mechanics of development as I am but have never fulfilled the success potential of the business because they never learned the art of persuasion. Part of this book concerns this art, because if you do not have it, you will not be as successful as you could be.

While this book began as an introductory text for my students at the Wharton School, I also wrote this book for those who are peripherally involved in the development business, such as real estate brokers, bankers, lawyers, accountants, municipal officials, engineers, architects, interior designers, and others who may be familiar with one part of the business but are not sure how that part fits into the whole. Those who would like to be passive investors in development ventures sponsored by syndicates, joint ventures, and real estate investment trusts but feel they need to learn more before they make their investment will find here an overview of the fundamentals of real estate development. Finally, those readers plagued by locust like developers in their own communities who want to learn how and why development occurs will find lots of information here.

A few words about terminology. The phrase land development has a specialized meaning in real estate development. It refers to the process of constructing infrastructure facilities such as water, sewer, and streets, and not to the actual process of erecting buildings. In this book, however, unless otherwise noted the terms land development, or just development, and land developer or developer, refer to the entire spectrum of real estate development, from land speculation through construction.

Ralph R. Pisani

Robert L. Pisani

New Hope, Pa.

Philadelphia, Pa.

March 1989

Acknowledgments

Much of this book was inspired by William Zucker, Professor Emeritus and founder of the Real Estate Center at the Wharton School of the University of Pennsylvania. This book began as an introductory course on real estate development which the authors taught for the past several years to MBA students at Wharton. In preparing the curriculum, we realized that there were no general interest texts specifically on development that our students could use. There were technical manuals on construction and land use management, zoning, sales and marketing, environmental issues, real estate investment and related matters, but nothing specifically to introduce students to the parts of development and how they relate to one another. We therefore had to develop our own course of instruction.

Bill Zucker spent many hours going over the details of the course with us and, when we suggested that it might be made into a book, encouraged us to begin the process.

We are grateful to the many people who agreed to be interviewed and to those who took the time to review draft chapters, particularly:

Scott A. Williams

Meridian Bank

Philadelphia, Pa.

Bob Moore

Planning Commission

Bucks County, Pa.

John Carson

John Carson & Associates

Doylestown, Pa.

John R. Pomponio

Environmental Protection Agency

Philadelphia, Pa.

Clyde Waite, Esq.

Stief, Waite, Gross and Sagoskin

Newtown, Pa.

Berel Altman

Altman Brothers, Inc.

Glenside, Pa.

Arthur Sasso

The Jason Group

New York, N.Y.

Stephen Harris, Esq.

Harris and Harris

Warrington, Pa.

Roger Wells

Roger Wells, Inc.

Haddonfield, N.J.

Boris S. Lang

Atlantic Financial

Bala Cynwyd, Pa.

Ed Schlaner, P.E.

Martin Schuler Engineers

Allentown, Pa.

Richard Bickel

Delaware Valley Regional Planning

Commission, Philadelphia, Pa.

Richard Elkman

Group Two

Philadelphia, Pa.

John Hoch

Penn Title Insurance Company

Allentown, Pa.

Janis Gibson

Warren, Gorham & Lamont

New York, N.Y.

Al Marmero

Summit Homes, Inc.

Cherry Hill, N.J.

Morton L. Olshan

Mall Properties, Inc.

New York, N.Y.

Jerrold Berman

Summit Homes, Inc.

Cherry Hill, N.J.

Special thanks must also go to the staff of the National Association of Home Builders, especially David Seiders, Gopal Ahluwalia, Robert S. Villanueva, David L. Ledford, and Michael S. Carliner, who made themselves available for interviews and offered their considerable insight into the homebuilding industry.

We would like to thank Kathy Coon and Ida Weingram of the Jenkins Memorial Library in Philadelphia, the librarians at the Lippincott Library of the University of Pennsylvania, the Free Library of Philadelphia, and the National Association of Home Builders for their research assistance. Our literary agent, Richard Curtis of Richard Curtis and Associates, provided us with much-needed advice and encouragement. Our editor, Michael Hamilton, cheerfully guided us through the publishing maze. Becky Tribull, our executive secretary, patiently typed the first drafts and handled many of the administrative tasks associated with the production of this book.

For help with the literary aspects of the book, we would like to thank our copy editor, Eugene O’Leary; Art Spikol for his columns in Writer’s Digest; and William Zinsser for his book, On Writing Well.

Finally, our wives, Barbara and Suzanne, offered us their patience, understanding, and advice.

R.R.P. and R.L.P

Men honor property above all else; it has the greatest power in human life.

Euripides (c. 400 B.C.)

The spirit of property doubles a man’s strength.

Voltaire (1764)

Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments. The wise young man or wage earner of today invests his money in real estate.

Andrew Carnegie

The fortunes of the future will be made in real estate.

John D. Rockefeller

1

Real Estate Development: Getting Rich in America

Why Real Estate Development Is An Attractive Business

Admit it! Americans honor and respect success. Horatio Alger ranks with George Washington in our national mythic consciousness. Moreover, we love and sometimes exalt the progeny of success: money.

There are few businesses in the United States that offer as many rewards and opportunities as real estate development. But it wouldn’t be such an attractive and lucrative business if it wasn’t for one fact: development is first and foremost about land. Why is land so special? Will Roger’s advice, Buy land, they ain’t making any more of it, contains all of the reasons why land is a good investment. Those reasons are:

Land is unique. No parcel of land is like any other parcel of land in the world. It is unique in its physical location, as well as its physical characteristics. This is why location, location, location are often cited as the three most important factors in real estate in general and development in particular.

Land is indestructible. You can mine land, blow it up, move the dirt, but you can never destroy the surface of the earth. Think about it: homes, cars, factories, humans, everything else decays and falls apart, but the earth abideth forever, in the words of Ecclesiastes. This is why land has always been considered such good collateral, and why lenders consider it a good investment. People come and go, but the land is always there.

Land is immobile. You cannot pick up land and move it anywhere. You cannot lose it, steal it, or hide it. You never go looking for a piece of land you own and say, Gee, it was here yesterday. Your land is always where you saw it last.

Uniqueness, indestructibility, and immobility are the distinguishing features of real estate. What about development, which is the specific branch of the real estate business that constructs buildings? In addition to the factors discussed above, development has the following specific features that make it an attractive proposition.

Leverage

This is the primary advantage of development. Leverage is the use of other people’s money to make money for yourself. When a house is built today, chances are that at least 75 percent of its total cost (including land, construction, marketing, overhead, etc.) is financed by somebody else, usually a commercial bank or savings and loan association. In return, you pay interest to the lender.

A lender will allow you to use leverage because the property that you are developing should rise in value through the fruits of your labor. You can be assured that your lender will use your developed property as collateral on your loan, so if you go broke your lender will foreclose on property that is worth more because of your efforts. This is the advantage developers have over other manufacturers—land is unique and, if it is built to a specific market, should not be difficult to sell. By contrast, the manufacturer of plastic balloons does not have this advantage. A lender will not lend as much to the balloon maker as he would to the developer, since what would a lender do if he were to foreclose on a million balloons? Lenders also invariably have the first lien on a property, which will give them comfort but not a total guarantee that they will be paid in the event that you go broke.

Leverage is important to the profitability picture of development. For example, the profit for a small developer is typically between 10 and 20 percent of the sales price of a house. You may say that 10 percent is not a great return, given the risks inherent in development. You may think you can make at least that much by playing the stock or bond market, and you may be right (but we wouldn’t bet on it). The main difference, however, is that when you play the stock or bond game, you are using your own money, while with the development game you are using someone else’s money.

An example can illustrate the difference. Suppose you built a house and sold it for $100,000. Assume that $85,000 represented the total cost of building the house (land, construction, interest, overhead, etc.). Assume further that you obtained a loan for 75 percent of that $85,000 from a commercial bank, so that your actual investment was only $21,250.

Since you sold the house for $100,000 and it cost you $85,000 to build, you made $15,000, or a 15 percent net profit. But wait—you only invested $21,250, so your actual profit (your return on investment) is 70 percent ($15,000 return ÷ $21,250 investment = 70 percent return on investment). How did you make that much money? You used leverage. Had you taken that $21,250 and invested it in the stock market and received a 10 percent return, you would have only made $2,125. You made seven times that much in your development deal.

The real skill, however, is to be able to build that house for $85,000 and to find someone who can pay $100,000 for it. This is the challenge of development—building profitable, affordable housing by containing costs and building for a market. Both of these issues will be discussed in later chapters.

Taxes

In the past, developers were able to deduct interest and depreciation on their projects. Tax shelters were major incentives for being in rental real estate. The Tax Reform Act of 1986 shifted the developer’s investment strategy from tax shelter losses to making a profit.

For the homebuyer, however, the greatest tax advantage is still intact-the power to deduct mortgage interest on first and second homes. This alone will continue to fuel new home sales for many years to come.

Demand

There is a constant demand for new construction in this country, for two reasons: a growing economy needs new buildings, and old buildings wear out. Housing, shopping centers, schools, office buildings, and industrial facilities all get old and need to be replaced. An estimated 100,000 to 400,000 homes are lost each year to aging, fire, flood, and other hazards and need to be replaced.

Population increases also add pressure to build. While the U.S. population is growing at a slow rate, there has been an increase of about 1.3 million new households each year because of changes in lifestyle that have occurred over the past two decades. The traditional family (father who works, homemaker mother, children) now comprises only ten percent of all the households in America. Divorcees, single-parent households, unmarried couples with and without children, healthy retirees, and singles have caused demographic changes in the United States that greatly affect development. The migratory nature of the American population and the increase in second homes also add to the pressure for new development.

Age groups also will play a significant role in development. For example, the baby boom generation born between 1946 and 1962 helped fuel a rise in first-home buyers during the 1970s and early 1980s. Now that baby boomers are older and have children, they need bigger houses. These move-up buyers will be an important segment of the home-buying public in the 1990s. First-time buyers will decrease.

Empty-nesters are one of the hottest age groups in housing today. They are retirees, moderately affluent, in good health, with their children grown. They are eager to live in an active community with recreation and low maintenance and without the stigma of an old-age home. As discussed in the Sales and Marketing chapter, many developers now build their houses toward lifestyle and age segments in addition to income brackets.

Self-employment

Most of us are required to earn a living. Some are content to work for others. Many, however, view self-employment as the ultimate way to earn a living, knowing that for better or worse they are the masters of their own destinies. Each year, hundreds of thousands of people pursue this dream and start their own businesses.

If the epitome of success is to be your own boss, love what you do, and earn tons of money doing it, then development offers the best of all possible worlds.

Personal Satisfaction

Real estate development provides a tremendous feeling of accomplishment. It is a creative process that begins with locating a parcel of land and ends with the construction of a building.

Developers are a vital link in the economy of the United States, providing infusions of capital into the economy via jobs and materials. There are hundreds of economic and social effects that occur when a home, office, or factory is constructed and sold. The total value of all construction activity in 1987 was roughly $440 billion, about ten percent of the Gross National Product of the United States. For this reason, the construction industry has often been referred to as the backbone of the economy.

THE PLAYERS IN REAL ESTATE DEVELOPMENT

There are four main players in real estate development: speculators, subdividers, land developers, and builders.

Speculators buy raw, undeveloped land, hold onto it, and sell it at a later date for a profit. They do nothing to develop the land. The speculator presumably knows that land values will rise in an area in a short period of time. The reason could be a new employer, shopping mall, or interstate highway. Regardless, land speculators (and developers in general) always try to buy in the direction of growth. The advantages of land speculation are costs lower than development and high potential gain. The disadvantages are that raw land generally does not produce income, financing is difficult to obtain because nothing is done to improve the land, and future increases in value, needed to make the investment pay off, may or may not materialize.

Subdividers buy raw land and, if not zoned for its best use, attempt to change the existing zoning to a higher and more valuable use or density. One example is to buy land zoned residential and attempt to have it zoned for commercial or industrial use. Subdividiers also seek to divide the land into blocks, building lots and streets in accordance with government regulations.

Like speculators, subdividers gamble that the land they buy will be ready for development soon. Subdividers reduce their risk by doing market studies that decide if development is likely