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Who’s Afraid of Development Deals?

Everywhere you look there are stalled development projects. You’ve seen them – the PVC farms where the infrastructure piping is in the ground and not one house has been constructed that now serves as a playground for bugs and bunnies. Or the multi-storied office buildings with the exterior walls up and that’s all. Many of them never made sense to start with, the concept for the development rooted in the fertile mind of a developer primarily due to the availability of cheap capital and healthy cap rates for new real estate developments. These cowboys never even tried to evaluate supply and demand before sending the bulldozers out to the site. However, the credit crunch in 2007 put an end to that particular nonsense.

But lurking in the vast wasteland of stalled developments are some that had, and will have when the market strengthens, strong fundamentals and solid developers behind them. The developers or their lenders just did not have the staying power to finish the project. Stalled developments are a pox on developers, their lenders, and the municipalities in which they reside (abandoned, ugly, and not producing either rent or tax revenue), but to shrewd investors they spell opportunity.

Even the bears are predicting that it now appears that this economy will creep its way back and in 2012 be relatively stable as demand for goods and services increase. There has been virtually no overbuilding of commercial real estate product anywhere in the US (not true with residential projects) so supply is limited. A large threat to gaining entitlements to build on vacant land is the “green” or sustainable development attitude prevalent now; it will constrain supply because it will be difficult or impossibly expensive to entitle a project. The disappearance into the FDIC folds of hundreds of local and regional banks (the source of most project acquisition and development loans) makes development capital scarce so the price of development capital has gone up.

Apparently some investors have noticed the opportunities. According to The Real Deal (www.therealdeal.com) buyers have picked up 20 sizeable developments projects recently in NYC for 50% or greater discounts, and are now continuing the development efforts. This new construction can be built for significantly less money not only because of reduced land costs but because there are often other discounts or incentives from lenders, municipalities and construction firms who need work. All this adds up to new development that will be very competitive on pricing or rents when completed.

You don’t have to be in the Big Apple or even have a particular site in mind. Another approach to this investment is to partner with a developer to identify opportunities and develop the stalled projects, marrying your capital with their expertise in exchange for healthy preferred returns. The savvy developers know how to source deals, underwrite the project, negotiate with lenders, bring entitlements current, build the buildings and get them leased. Never has this expertise been available at so cheap a price and under such good terms. Urban Land Institute (www.uli.org), the land use and development industry group, has sponsored conferences and white papers on the subject of picking up stalled developments and bringing them back to life, and is a useful resource for information.

Susan Lawrence is President of Real Estate Strategies, Inc., http://www.restrategies.net, based in Winter Park, Fl. The company specializes in assisting private companies with investment in real estate.

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