as well as localities will assist in the mitigation of risk.
• Limit ownership liability: Property developers should select a special purpose vehicle (SPV) for each project to protect themselves from personal liability in relation to tenants, consultants, contractors and the general public.
• Limit financial liability: Developers should aim to effect non-recourse financing for all loans and use an SPV to shield their personal assets. Another approach is to find financial equity partners who will help to carry any financial losses.
Summary
This chapter provides an overview of property development and the risks and rewards in both residential and commercial development. You must decide whether you have the motivation and personality to take up this profession or whether the industry carries too much risk for you personally. If you conclude that it is worth your while you need to understand that success will not be achieved overnight. It will take several years of learning and experience, and some hard knocks, to build up a full understanding of what it means to be a property developer. The following chapter offers some key insights into being a successful practitioner.
CHAPTER 2
Characteristics of a successful developer
The property development industry offers boundless opportunities for those who are prepared to take the time to acquire the knowledge that most buyers and sellers of established real estate do not have. It is not a business that will reward those who act quickly or spontaneously or who operate purely on gut feeling. Only a few who depend for success on luck alone will profit by it. It is a risky business, in which the stakes are often high when compared with other ventures. But with high risks come potentially higher returns. The successful developers I know work on strategies to reduce the risks associated with their projects as well as their personal financial exposure.
What makes a successful developer
Property development is an innovative and rewarding entrepreneurial activity that attracts a diverse range of people with various backgrounds and skills. In a development project of any size, a team of people with different skill sets is required from start to finish, and for the project to succeed there must be a leader, a highly motivated visionary and entrepreneur who drives the team. As in all businesses, there are good, principled entrepreneurs and unethical ones. Consistently successful developers take a professional and ethical approach to their business.
The successful property developer has a full understanding of the development process from the inception of the project to the final operation of the building(s) and understands the roles of the various participants in the process. As leader, he or she must have the ability to analyse, conduct and test the feasibility and financial aspects of the project. Other prerequisites for success are good management skills in development planning, development management and project management and a good understanding of construction methods. As with all entrepreneurs, the property developer must have the ability to read the market. Last but not least the developer has to understand the various risks involved in the project and develop strategies to mitigate these risks. In summary, successful property development requires the following interacting components.
Successful developers are passionate about property and thrive on all aspects of this stimulating industry. They talk about property constantly and read voraciously to build on their knowledge and skills. They relish the challenges that property development offers and are prepared to take risks. These developers have a passion for excellence and an eye for detail. A failed project or new building with poor quality standards reflects a developer who does not possess these qualities. In addition, the successful developer follows a very simple formula, which is to listen carefully to the needs of the market and deliver a product suitable for that market.
It takes years of hard work and hands-on experience before you can lay claim to being a developer. Successful developers build their knowledge through reading and attending various courses. They undertake their own development through hands-on experience. This experience can be gained either by working with a seasoned developer or by employing a professional development or project manager. Once you have a full understanding of the development process and the risks involved you can embark confidently on your own projects.
A well-conceived, comprehensive plan is a key component of a successful development. Planning the project, from initial concept until final operation, should be thoroughly considered, analysed and managed. The planning should cover not only the design of the building but also the various development strategies to be applied. Very few businesses can operate successfully by means of crisis management, but there will always be situations in which the developer must make quick decisions, whether in negotiations or to keep the project on schedule. With proper planning these determinations are in effect not crisis decisions but are the result of the developer's selecting from a number of considered options.
Property developments can take longer than expected so the developer should carry enough cash reserves to navigate any slumps or unforeseen circumstances. It is good practice to allow for a contingency cash amount in your feasibility study. The successful developer keeps an eye on lesser items, such as minor overheads and additional professional advice, that may be required. A good financial package can add to the profitability of the project. The lower the cost of servicing a loan, the more profit will end up in the developer's hands. Good knowledge of finance and how banks operate places the developer in a strong position to negotiate a cost-effective financial package. The structure of the financing will play an important part in the evaluation of risks and how to react if the project fails to perform.
In most developments construction costs and schedules have a nasty habit of not keeping within the projected limits. Careful monitoring of budgets and time schedules is an essential element of a profitable development. Projects can exceed their budget as a result of unforeseen costs such as poor soil or rock conditions or the increasing cost or poor estimation of building materials needed. Each cost element should be thoroughly analysed before construction starts. Wherever possible, fixed prices or fixed rates should be negotiated with the contractor. In addition to budget controls, time and program schedules should be strictly adhered to. The longer the construction takes the less profit the developer will make because of the delay in leasing or selling the project. The extra time will also cost additional interest on money borrowed. At the time of negotiating the contract with the building contractor, the developer should ensure that there are strict penalties for any delays. Conversely, the contractor can be financially rewarded for completion ahead of schedule.
Developing property is undoubtedly one of the most complex businesses around. The key to a successful development is effective and responsible management – more specifically, management of the people involved. Every day the developer must deal with a diverse range of people, from professionals to government bureaucrats to contractors to building materials suppliers. Experienced developers understand that it is virtually impossible for one person to handle all of these people at the same time, so among the good management and leadership skills they learn is the art of delegation.
Successful property developers work on the basis that the real profit is made when a site or parcel of land is first purchased. Paying too much for the land would means reducing building costs at the expense of quality in order to make a profit. Only by having extensive knowledge of the area and market, together with the skills to negotiate a realistic deal, will the developer be able build a quality project. Negotiations can be complex, difficult and acrimonious, but there are various helpful negotiating tactics that experienced developers keep in mind throughout the process.
The building industry is riddled with stories of bad workmanship and poor service. We often hear of developers selling inferior products. Remember the old adage: you can fool some of the people some of the time, but not all of the people all of the time. It is very easy to spend a great deal of money in marketing your development, but if you do not deliver the goods as promised, people will eventually catch on and you may lose more money in the long term. If you want