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Real Estate Development - 4th Edition: Principles and Process

Real Estate Development - 4th Edition: Principles and Process

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Real Estate Development - 4th Edition: Principles and Process

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Dec 15, 2007


Ideal for anyone new to real estate development, the fourth edition of this bestselling book covers each stage of the process step by step, explaining the basics of idea conception, feasibility, planning, financing, market analysis, contract negotiation, construction, marketing, and asset management. Thoroughly updated, the book includes material on financing and marketing.
Dec 15, 2007

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Real Estate Development - 4th Edition - Mike E. Miles




The principles and process of real estate development should not be studied without looking at both the people who are involved in the process and the people who are the ultimate users of the product. Although this book focuses on the role of the developer or the development company, many people affect and are affected by real estate development. We all consume the end product. Individuals ultimately provide financing for a project. Individuals make up the public sector that allows a development to be built. People in many allied professions produce the buildings that are used by people of many different backgrounds and income levels.

Anyone who is thinking about going into real estate development should try to understand who helps a development come to fruition and how they do it. Most important, developers must understand the users and their needs. Without users, buildings—no matter how aesthetically pleasing or how theoretically functional—have no value.

Part I looks at the people who make a development possible—the developer as prime mover, those of our society who will be the users, and the many players who work with the developer to provide what the end user wants/needs.


The Real Estate Development Process

Real estate development is the continual reconfiguration of the built environment to meet society’s needs. Roads, sewer systems, housing, office buildings, and lifestyle centers do not just happen. Someone must initiate and manage the creation, maintenance, and eventual re-creation of the spaces in which we live, work, and play.

The need for development is constant, because population, technology, and taste never stop changing. New generations, new lifestyle choices, and revolving immigrant groups, coupled with the evolution of technology, drive economic changes in consumer tastes and individual preferences.

Whether current consumer, new citizen, or real estate professional, all of us inhabit the built environment. Further, through the legislative/political process, we collectively continue to alter the rules of the development process. Therefore, we should all understand the development process. The development process creates the houses we live in, the mixed-use development down the street, the 25-story office tower downtown, the warehouse that stored the paper this book was printed on, and the convenient (but to some tastes terribly unattractive) fast-food restaurant on the commercial strip.

Both public and private participants in real estate development share compelling reasons for understanding the development process. The goals of private sector participants are to minimize risk while maximizing personal and/or institutional objectives—usually profit (wealth maximization) but often nonmonetary objectives as well. Few business ventures are as heavily leveraged as traditional real estate development projects, magnifying the risk of ruin but also increasing the potential for high returns to equity. Large fortunes have been and continue to be made and lost in real estate development.

The public sector’s goal is to promote sound and smart development, ensuring that construction is attractive and safe and that new developments are located and designed to enhance the community, provide needed space, and boost the economy. Sound development means balancing the public’s need for both constructed space and economic growth against the public responsibility to provide services and improve the quality of life without harming the environment.

The public and private sectors are involved as partners in every real estate development project. A key tenet of this book is that all participants enjoy a higher probability of achieving their goals and objectives if they understand how the development process works, who the other players are, how their objectives are interwoven, and the need to achieve consensus.

This book was written for people who need to understand real estate development from the perspectives of both the public and private sectors. Its aim is to be useful to present and future developers, city planners, legislators, regulators, corporate real estate officers, land planners, lawyers specializing in real estate or municipal law, architects, engineers, building contractors, lenders, market analysts, and leasing agents/brokers. Readers are assumed to have already acquired the fundamentals of real estate and/or city planning. This book summarizes but does not repeat in great detail basic information about real estate law and finance, urban economics, and land planning and design. Although the focus of our book is the individual entrepreneurial developer, it is important to note that developers can also be financial institutions, corporations, universities, medical centers, private investors, cities, municipalities, and others. The process laid out in this book remains essentially the same—no matter who the developer is. Market decisions still have to be made, pro formas still need integrity, designers have to be consulted, and so on. The process might be layered by various institutional procedures and committees and boards of trustees, but the product is achieved by going through the same steps. In fact, many institutions and cities are hiring entrepreneurial developers on a fee basis to manage a project’s development within the larger organizational framework.

Throughout, the book includes profiles of developers and the diverse set of professionals who work with developers. Their career paths are always interesting and often surprising. Their perspectives on development are especially valuable because these individuals have lived the process we are describing. Development decision making has become more difficult as the world has grown more complex, and developers’ and professionals’ insights help frame the development process in human terms.

In addition to the various profiles, the book focuses on three developers and three projects. One profile is of Russell Katz, a young developer who was originally trained as an architect. An ardent supporter of green buildings, one of his goals in developing Elevation 314, a four-story, 52-unit apartment complex, is to demonstrate the potential of environmentally friendly architecture.

The other project involves two residential towers developed in Cambridge, Massachusetts, by Dean Stratouly of Congress Group Ventures. Museum Towers is the story of a development in a pioneering location.

In addition to Katz’s and Stratouly’s experiences, Appendix A of this edition includes an account of Whit Morrow’s Europa Center. Originally interspersed throughout the pages of previous editions of this book, the case study of Europa Center has changed as this book has changed. In the first edition, Morrow recounted in his own words all phases of the development process for this Class A office building: from conception through planning, permitting, financing, and construction to completion, leasing, and ongoing management. In subsequent editions, we learned how the building functioned over time and about the need for related development.

These projects tell stories of unexpected complications and their resolution through the words of the developers.

To begin the discussion of the development process, this chapter lays out the functions of the process and its many players:

The definition of real estate development;

The eight-stage model of real estate development;

The characterization of developers and their reputations;

The development team;

The public/private partnership;

Market and feasibility studies; and


The next two chapters complete the introduction by defining the playing field—the spatial economics of the contemporary city—and then defining the roles of the various participants in the process. Chapter 2 describes the raw materials of the development process—demographics—while Chapter 3 adds detail and contemporary color to the process and the players.

Part II presents a long-term historical perspective on real estate development in the United States. Part III then covers the financial mechanics that support development decision making. Finance is not the goal, however; rather, finance constitutes the logic that allows the developer to bring together several participants (each with its own set of objectives) in a coordinated effort that will ultimately make a profit. The book then proceeds through the eight-stage model to look in detail at decision making in the real estate development process.


A real estate development starts as an idea that comes to fruition when consumers—tenants or owner-occupants—occupy the bricks and mortar (space) put in place by the development team. Land, labor, capital, management, entrepreneurship, and broadly defined partnerships are needed to transform an idea into reality. Value is created by providing usable space over time with associated services. It is these three things—space, time, and services—in association that are needed so consumers can enjoy the intended benefits of the built space. Although the definition of real estate development remains simple, the activity continues to grow more and more complex. The product of the development process—a new or a redeveloped project—is a result of the coordinated efforts of many allied professionals.

Developments do not happen without financial backing and often require multiple agreements to be negotiated by multiple financial players. Only then can physical construction or reconstruction be started, involving the myriad of design professionals, construction workers, engineers, and so on. Before, after, and during the process, the developer works with public sector officials on approvals, zoning changes, exactions, building codes, infrastructure, and so on. Increasingly, community groups in many cities demand to be key players in the development process, and the time needed to work with them has to be factored into the development equation. Finally, selling or renting the space to users at the intended (or higher) price is the act that proves the entire project was justified. This consummation requires the expertise of marketing professionals, graphic artists, salespeople, Web site developers, lawyers, and others. The developer must ensure that all these elements—and many more to be identified later in this book—are completed on schedule, are properly executed, and are reasonably within budget.

Today, development requires more knowledge than ever before about the specifics of prospective markets and marketing, patterns of urban growth, neighborhood associations, traffic, legal requirements, local regulations, public policy, conveyances and contracts, elements of building design, site development, construction techniques, environmental issues, infrastructure, financing, risk control, and time management. Ever-increasing capacities and complexities along each of these dimensions have resulted in increased specialization. As more affiliated professionals work with developers, the size of the development team has expanded and the roles of some professionals have changed. Although greater complexity has generated the need for better-educated developers (educated both in book knowledge and hard knocks), it has not changed the steps they usually follow in the development process.


Developers follow a sequence of steps from the moment they first conceive a project to the time they complete the physical construction of that project and begin ongoing asset management or sell the finished product. Although various participants of the development process may delineate the sequence of steps slightly differently, the essence of the steps does not vary significantly. At a minimum, development requires the following elements: coming up with the idea, refining the idea, testing its feasibility, negotiating necessary contracts, making formal commitments, constructing the project, completing and opening it, and, finally, managing the built project. This text seeks to capture that essence in the eight-stage model depicted in Figure 1–1. Succeeding chapters detail the activities that collectively make up the eight-stage model of the development process.

Before proceeding further with the model, a few points about development must be emphasized. First, the development process is hardly straightforward or linear. A flow chart similar to that shown in Figure 1–1 can freeze the discrete steps and guide an understanding of development, but no chart can capture the constant repositioning that occurs in the developer’s mind or the nearly constant renegotiation between the developer and the other participants in the process. And don’t forget that redevelopment of existing projects requires many of the same steps as development. Moreover, in very large projects, individual development components can be nested within a larger development plan. For example, during the development of a large-scale community like Stapleton in Denver, Colorado, individual components of the community may be in different stages while the overall development plan is in stage six—construction.

Second, development is an art. It is creative, often extremely complex, partly logical, and partly intuitive. Studying the components of real estate development can help all players make the most of their chances for success. What cannot be taught are two ingredients essential to the success of the real estate developer/entrepreneur: creativity and drive. At times, a smart developer will choose to move in a different order than the one suggested here.

Third, at every stage, developers should consider all the remaining stages of the development process. In other words, developers should make current decisions fully aware of the implications of these decisions not just for the immediate next step but for the life of the project. By doing so, they ensure that the development plan and its physical implementation come closest to the optimum for the duration of the entire development process and, equally important, for the project’s long expected life.

Fourth, the development process requires interaction among the different functions (construction, finance, management, marketing, and government relations) in each of the eight stages as well as interaction of the functions over time.

It is a huge mistake to underrate the importance of asset management and property management after the project is built or to overlook provision for them during design and construction. For example, operating a building with every up-to-the minute technological bell and whistle may require technical competence beyond the general management skills typical of most property managers. In addition, asset managers need to remarket space continually and to upgrade or remodel buildings periodically to keep the space competitive in an evolving market. Institutional investors and corporate owners are also keenly aware of the periodic need for and cost of major remodeling to prolong the economic life of buildings. Careful planning during stages one through seven should enable developers to find ways to minimize the frequency and cost of retrofitting buildings. Whether or not developers manage the property for the long term, they are responsible for considerations involving asset management during the first seven stages. Given that developers’ actions largely determine future operating costs and that the expected magnitude of such costs represents a significant part of the project value (i.e., what it will sell for), today’s developers focus sharply on making building operations appropriately cost-efficient.

Fourth, although the model for development is based on reality, it also represents an ideal version of the process and gives an elegant means of imparting the information. The various stages of the model assume a well-informed developer, a thorough analysis of the market, accurate assessments of the cost of construction, and so on. They assume a businesslike approach to the process. They do not totally account for the lucky intuitive person who had a gut feeling about something and used all sorts of unconventional means to get the project built. Real estate development has been full of stories of those people whose gut has led them to being very successful in the business. They are becoming less common because of more and tighter regulations, declining amounts of developable land, and so on, but they still exist. You will hear from one such maverick, Pamela Bundy, who is profiled in Chapter 19.

Fifth, it is imperative to remember that the development process is inherently interdisciplinary and dynamic. It is not a game won by exhibiting exceptional depth in one particular area, say, electrical design. Rather, it is a complex process that demands attention to all the different aspects of creating the built environment—political, economic, physical, legal, sociological, and so on. Good management of the interactions among various disciplines—with special attention to the areas that are most crucial to the specific project—is essential to successful development. Further, many of the components of this interdisciplinary world are experiencing an accelerating rate of change, and all the interfaces among the disciplines are constantly in flux.

Finally, U.S. real estate development is global in perspective. Financing is increasingly provided by international sources, tenants are served globally, and international building firms offer the full gamut of construction services. And although your architect may be based in San Francisco, the engineers might be working out of a less expensive part of the country and the drawings for the project might be done in India. Most important, continued immigration results in lifestyle shifts that are changing what people want in the built environment. As different ethnic groups continue to settle in metropolitan areas, the configu-ration of cities and the needs of citizens shift. Developers must be prepared to respond to these changes.


Developers are like movie producers in that they assemble the needed talents to accomplish their objectives and then assume responsibility for managing individuals to make sure that development potential is realized. They are proactive; they make things happen. As we will see in later chapters, a great deal of uncertainty is associated with the development process, just as with the introduction of any new product. Unlike most new products introduced (say, a new MP3 player), real estate development involves long-term commitments (buildings last for decades). Thus, the cost of making a mistake is extraordinarily high. Just how much of the related risk the developer assumes personally is an important issue that commands significant attention throughout this book. Regardless of which risk control devices the developer finds appropriate for a particular project, the developer ultimately is responsible for managing all aspects of that project. Obviously, successful developers must be able to handle (and thrive under) intense pressure and considerable uncertainty.

It is an error to assume that all developers are alike. Some, for example, develop only one type of property such as single-family houses; others develop anything commercial or industrial. Some developers carve out a niche in one city and refuse opportunities outside it; others work regionally, nationally, or internationally. Some developers run extremely lean organizations, hiring outside expertise for every function from design to leasing; others maintain needed expertise in house. Some work in publicly traded companies, often real estate investment trusts (REITs), while others prefer to stay private, forgoing certain capital market advantages to avoid the short-term press of quarterly earnings. In between are many gradations. As in most professions, developers range from those who put reputation above profit to those who fail to respect even the letter of the law. Likewise, in ego and visibility, developers vary enormously. Some name buildings for themselves; a few cherish anonymity.


The Development Company


Congress Group Ventures (two partners)




Originally established to rehabilitate a historic property in downtown Boston; moved into development of commercial space, condominiums, and apartments

Sample of Projects Completed from 1980 to 1999

Russia Wharf


Historic rehabilitation

One Memorial Drive

Cambridge, Massachusetts

Office building

28 State Street


Office building redevelopment

Wayland Business Center

Wayland, Massachusetts

Office building redevelopment

A Summary of the Project


Eight and Ten Museum Way (formerly 15 Monsignor O’Brien Highway), Cambridge, Massachusetts

Museum Towers at North Point was built in what many would consider a pioneering location. Located in east Cambridge, generally east of the Charlestown Avenue Bridge, Museum Towers is in the eastern section of the North Point development district, a 70-acre (28-hectare) development zone master planned to provide a mix of commercial and residential development, upgraded infrastructure, and an extensive park network. The eastern portion was the last large parcel of undeveloped waterfront property in Cambridge.

North Point is adjacent to the highly successful Kendall Square and east Cambridge (Lechmere Canal) development areas, which have become vibrant centers of commercial development and professional job growth.

The eastern section of North Point is located across from the Museum of Science and bordered to the west by Monsignor O’Brien Highway, to the north by the Gilmore Bridge, to the east by I-93, and to the south by the Charles River, directly across from the west end area of downtown Boston. The site had been used for industrial purposes and was known as the lost half-mile of the Charles River. For decades, it had been the wrong end of Cambridge.


Original site 4.11 acres (1.7 hectares), three parcels of land. The site is bounded to the north by a 40-foot-wide (12-meter-wide) private access way (Main Road) and beyond that by a parcel of land owned by the Massachusetts Water Resources Authority. Industrial Way, owned by the Massachusetts Bay Transportation Authority, borders the site to the east. To the east of Industrial Way is the site of North Point Park, which is owned by the Metropolitan District Commission. This parcel is clearly separated from all other nearby development by roadways, although these uses are very visible from the site and are clearly industrial except for the Museum of Science.


$13 million


Two 24-story apartment buildings joined at the base by a low-rise area of apartments, support space, a central lobby, a health club, and a 490-vehicle parking garage.


$78 million


Land purchased—October 1987

Site preparation began—Fall 1995

Building construction began—Early 1997

Building certificate of occupancy issued—1998

The Developer, Dean Stratouly, Speaks for Himself

I was a Navy brat, so while I was born in Boston, I grew up in a whole series of places ranging from Boston to San Diego, Hawaii to Connecticut. All in all, it was a fairly unstable childhood, but being able to deal with such instability is an important characteristic of a developer.

I went to a Catholic boys’ school in Connecticut during the time of the Vietnam War. Coming from a family with a military service background, my father wanted me to go either to the Naval Academy—his first choice—or to West Point—which would have been marginally acceptable—or possibly the Air Force Academy. The boys’ school administrators thought I should go to a Catholic college, one of the five schools that everybody went to—Notre Dame, Holy Cross, Boston College, Villanova, or Georgetown. But they were all-boys’ schools and I wanted to be around blond cheerleaders. So I applied to the University of Southern California as an anthropology major.

My father went berserk. As a compromise, I ended up going to Worcester Polytechnic, which was an engineering school. There was no rhyme or reason for my going there except that I was good at math and science and reasonable at English and it seemed the path of least resistance. The idea was to get a job when I got out. No more. No less.

When I graduated, I went to work in the nuclear power plant business and ended up with the company that had developed Three Mile Island. I was with them until 1980 and made a nice salary selling nuclear power plants.

It was actually very good training for being a developer, because the power plant projects were very large with complicated engineering and construction processes, difficult union issues, and multilayered financing. Everything you did had to be reviewed by various groups, so I had to learn to make presentations. Like real estate development, it had the elements of social controversy, economic risk, and long-term design and planning processes.

After about five or six years when I traveled nonstop, Three Mile Island erupted and the company was bought by another group. There were all sorts of changes occurring and I decided to move on. I was living in Chicago at the time and wanted to move to either the East Coast or the West Coast. I called a friend in San Francisco who was leaving for Tokyo for several weeks, and he offered me his apartment. After that I went to visit a girl in Boston that I was dating, and I ended up marrying her and staying in Boston.

How Recent Innovations Can Affect the Financing of a Development

Museum Towers was built in what many would consider a pioneering location. Located on the river in east Cambridge, on a formerly industrial site, the area was known as the lost half-mile of the Charles River. This apparently marginal piece of land was purchased for $13 million in 1987. The original site included three parcels on 4.11 acres (1.66 hectares). In 1996, the developer/owner, Congress Group Ventures, sold 50,000 square feet (4,645 square meters), and, as part of its development deal, gave away an acre to the state for a park and several thousand square feet to the city for roads, ending up with a 2.07-acre (0.84-hectare) site.

The Museum Towers project consists of two 24-story towers with 435 rental apartment units and a gross building area of 619,500 square feet (57,553 square meters). The towers are joined by a central lobby and a 490-space parking garage. In total, the project contains four studio apartments, 181 one-bedroom units (40 in the low-rise portion of the towers), and 250 two-bedroom units. Most of the one-bedroom units have only one bathroom; the two-bedroom units have two full bathrooms. The base building is mostly cast-in-place concrete with precast concrete exterior panels. The floors are poured concrete. The windows are aluminum frame with a combination of awning windows, fixed windows, and sliding doors. The exterior doors are a combination of metal and glass in metal frames. The towers, part of the 40-acre (16.2-hectare) North Point Park, feature great views of downtown Boston.

The Congress Group’s pro forma showed that, when the project stabilizes, it is expected to generate annual net operating income of $8,874,391, a very attractive 11.6 percent return on investment. Like all developments, however, this return is only expected. Despite the attractiveness of the concept and the site and the very tight residential market in Cambridge, potential long-term lenders were understandably not willing to equate this expected NOI with an existing reality, i.e., in-place NOI. On the plus side, the quality of the location, the idea, and the development group convinced a lender—Fleet Bank—to provide a first lien miniperm, a construction loan that extends beyond completion of the construction for a year or two so that the developer can demonstrate stabilized operations. After stabilization, a larger first lien can typically be obtained based on calculation of a maximum loan. The developer’s problem is how to get to stabilized NOI and thus in a position to maximize the permanent loan. Although the financing process involves a series of negotiations that vary from development to development, some common strategies are involved. Three that were important in the process followed by Congress Group Ventures in financing Museum Towers are often critical for development financing: 1) leverage as inexpensively as possible; 2) get the cheap money and always have an exit strategy; and 3) consider alternative sources for high-risk dollars.

Strategy One: Leverage as Inexpensively as Possible

Congress Group Ventures wanted to maximize the eventual permanent loan because doing so would provide the cheapest overall financing (debt equity). Use of the miniperm provided by Fleet Bank allowed a slightly longer period in which to stabilize NOI before negotiating for permanent financing.

Nevertheless, the decision to go with the miniperm was not an easy one for the Congress Group. Long-term interest rates were relatively low in 1996, as pressure from the CMBS conduits had forced the traditional long-term lenders to reduce their spreads. Further, interest rates on short-term construction loans were lower than they had been for many years. Thus, a potentially attractive alternative to the miniperm was to negotiate for a longer-term loan immediately. But because the pro forma was, in fact, only a pro forma and not current operating income, it was not possible to obtain a first lien commitment of the size the Congress Group felt the project warranted. Consequently, the Congress Group went for the miniperm.

Because Museum Towers was a large, high-quality, highly visible project, the Congress Group approached a prominent local lender that could benefit from the association. Fleet Bank agreed to make a first lien miniperm of $55 million. The initial term was for three years with an upfront fee of 0.75 percent and a variable interest rate. To fix the rate, the Congress Group then conducted an interest rate swap, with the result a variable rate to Fleet Bank and a fixed rate (8 percent) to the Congress Group. The miniperm included a two-year extension option for an additional payment of 0.375 percent and an interest rate for the extension period of LIBOR plus 175 basis points. Thus, the miniperm provided the Congress Group with three years to build the project and the option for another two years to stabilize NOI to maximize the permanent loan.

In negotiating the terms, the Congress Group had to consider not just the cheapest rate for the money but also how all the loan terms affected other important parts of its strategy.

Strategy Two: Have an Exit Strategy

Although this project is the kind a developer might want to own over the long term, the Congress Group was smart enough to know that no individual developer is bigger than the cycle. It is always possible that the economy will hit another period like the middle 1980s, when so many new projects were developed that even the best products began to suffer. Today’s informed developers have learned the hard lesson: they must always consider the eventual sale.

It looked as though a REIT would be a logical long-term holder of this property. Because REITs like to show growth in earnings, they typically do not develop the majority of their properties. Rather, they often prefer to buy properties after they have been developed and stabilized by entrepreneurial developers. If, at the end of the three-year miniperm, a REIT were a viable option, the Congress Group would sell; if not, it would pay the additional 0.375 percent fee, extend the loan for two years, and wait.

Another option with the miniperm is to sell to another investor. Here, the CMBS market is important. With the conduit loans pressuring traditional lenders, the Congress Group anticipated that attractive financing would be available should an entrepreneurial, possibly European, investor be the eventual buyer (as opposed to a REIT). The Congress Group was actively involved with a few larger European institutions (Boston being a favored American city in Europe) as well as a number of apartment REITs. One particular apartment REIT, Smith Residential, specialized in high-rise inner-city projects in the Northeast. The Congress Group cultivated a particularly close relationship with it.

Strategy Three: Consider Alternative Sources for High-Risk Dollars

No discussion of financing would be complete without considering the high-risk capital. If the developer cannot or does not want to put up all the required equity, then a partner may be needed. This approach can involve very complex relationships, and this topic will be revisited many times throughout this text. In the case of Museum Towers, the overall project cost of $78 million would be initially financed with the $55 million miniperm from Fleet Bank. The Congress Group did not want to put all the remaining $23 million into the project, however. In fact, it preferred to pull out some of the $13 million it had already invested. A logical place to look was the opportunity funds.

Although earlier in this chapter we concluded the discussion of opportunity funds by noting that any good idea is financeable, it may cost a great deal to attain such financing. The group of opportunity funds, however, includes some segmentation. Museum Towers was not a highly speculative project, given the housing market in Cambridge. Consequently, the Congress Group looked for a lower-risk opportunity fund (sometimes called value-added funds). The Congress Group found such an opportunity fund, also located in Boston, that it hoped would appreciate the tightness of the Cambridge market. Working with the Fidelity Real Estate Group, the Congress Group arranged a participating secured second mortgage. The site and improvements were the basic collateral along with certain pledges of equity interest in the project from the developer. These notes were subject to Fleet’s first lien and had a similar term.

Face Amount—$16,500,000

Term—Five years

Base Interest Rate—15%

Additional Interest—50% of net operating cash flow and net capital appreciation during the term of the notes until Fidelity has earned a 20% internal rate of return; thereafter, Fidelity’s participation drops from 50% to 30%

This debt structure allowed the Congress Group to pull $6,500,000 out of the project ($78,000,000 total cost – $55,000,000 first lien – $16,500,000 second lien = $6,500,000) while retaining control and the majority of the upside. The leverage from Fleet’s financing produced expected equity returns of just over 25 percent. By bringing in Fidelity and further positive leverage, the expected equity return to the Congress Group was raised to over 40 percent. The expected return to the slightly lower-risk Fidelity portion was 21.5 percent and to the much lower-risk Fleet portion about 9 percent. These differences in expected returns reflect each entity’s different risk position.

Museum Towers is a fairly standard product. It did not stretch the boundaries of creativity; it did not require years of research to come up with the idea. It was a straightforward look at the market and the location. But what was ultimately built was not what Dean Stratouly intended to build.


The original site was 4.11 acres (1.7 hectares) and was actually three lots. We had intended to subdivide the property and develop it as a hotel and apartment building. The proposed development would have consisted of a 420-unit apartment building complex, a 207-suite hotel building, and a total of 696 parking spaces. The city’s preferred use was housing, including affordable housing.

When the market went to hell in the early nineties and we were basically sitting on the property, we changed our plans when we got the opportunity to sell the hotel parcel. So, in 1996 we sold 50,000 square feet (4,650 square meters) to E.F. Institute for Cultural Exchange for $5.25 million for its North American headquarters (the company is based in Sweden). The institute built a ten-story office project containing 250,000 gross square feet (23,200 square meters)—159,000 square feet (14,800 square meters) of office space, a restaurant on the first floor, and 132 parking spaces.

After we gave away an acre to the state for the park and a small strip to the city for roads, we ended up with a site of 2.07 acres (0.8 hectare).

The housing vacancy rate in Boston has been low for a long time, so the market was ripe for a new product. At the same time, at least three other major projects were on about the same schedule as we were—Cronin’s Landing, the Village at Bear Hill in Waltham, and University Park at MIT. Some others were permitted and being constructed, and several others were still waiting for approvals. When a major real estate research firm identified Boston as the third best market in the country for apartment investment and development, people started taking notice. Only San Francisco and Orange County, California, were rated better markets.

But other things contributed to the interest in multifamily housing here. For one thing, the state eliminated rent control in 1996—which affected about 17,000 units in Boston alone. The unemployment rate in Cambridge was very low throughout the 1990s and was about 2 percent in 1999. The state also made some big tax cuts in favor of business and investment. In addition, the high-tech economy was great and the overall job market (education, medicine, and financial services in addition to technology) strong. Cambridge has always attracted entrepreneurs and innovators because of its highly educated workforce. Moody’s rates the Cambridge government Aa1. The vacancy rate was less than 2 percent, and interest rates were at historic lows. We had a site that had waited nearly ten years. What more do you need?

So for this project, the idea wasn’t a big lightbulb going off in my head. It was market driven, because my original idea was different from what we ended up with. Developers gotta be flexible.

Getting Started

Once I settled in Boston, I got a job with an architecture/ engineering firm that had in its client pool something called a real estate developer. Don’t forget that I was coming from the nuclear power plant business, where projects cost billions of dollars and take ten to 12 years to complete and a very sophisticated group of people are involved in economics, design, and construction. So when I started dealing with our client who was the real estate developer, I was surprised at how little he knew about the design and construction process and how unsophisticated his approach was to market and location decisions.

It was all fairly ad hoc—you know, the market seems good, that’s a good location, let’s see if we can put something up. Very much back of the envelope. This particular developer and I struck up a relationship that grew from our firm’s providing him services to my doing some consulting for him to our actually becoming partners. In 1980, we started working on a project together that went extremely well, and I decided to leave the architecture/engineering firm and go do this development stuff.

I joined with Ed Berry in 1980. Ed had two partners locally and a relationship with several guys in New York, one of whom is my current partner. I actually started in this business with a company that we called the Russia Wharf Company, because we were redeveloping a historic project that had been the site where the trade came in from Russia to Boston. We started the project the year that Russia invaded Afghanistan and Russia wasn’t very popular in the U.S. I was standing on the corner of Congress Street and Atlantic Avenue in downtown Boston, ready to sprint across that street. It was a hot August day, and a big crowd of people were getting ready to make the dash. A couple of tourists noticed the Russia Wharf sign, and one said, Look at this! The Russians are everywhere—even in Boston.

I walked into the office and said to my partner, We’ve got to change the name of this Russia thing. Since we were on Congress Street, we decided to call it the Congress Group. We needed to make the decision fairly quickly, because we had just acquired our next project and we needed names for the partnerships.

In 1982, Ed and I bought out the other partners. Everything we did from 1980 to 1986 included equity participation from a group in New York. We had an agreement that all our projects would be financed with this group of individuals of high net worth, who had access to other individuals with high net worth. Then in late 1986, Ed and I split up Congress Group, and a partner in New York and I re-formed Congress Group Ventures.

The Site

We bought the site, which was 4.11 acres (1.7 hectares), in October 1987 with the belief that Cambridge would become hot. The site was on the river but in an unattractive industrial area. You have to understand what was happening in the market at that time. This marginal piece of land was put on the market for $10.5 million. Three companies were chasing it, and the day I bought it, one of the other bidders ran into the president’s office with a check for $1 million and said, Whatever Stratouly’s giving you, put this million on top of it. It was a lot of money, reflective of the market at the time, and way overpriced. Just after we bought it, the stock market took the largest percentage drop in history. Timing is everything.

This site was at the corners of Somerville, Charlestown, and Cambridge, an area known as North Point. A high-end residential product wasn’t conceivable there ten years earlier. When we purchased it, the site contained a bottling company with more than 400 people working in it. The company wanted to move to a new location and so decided to maximize the investment it had made in real estate.

The city of Cambridge had put a moratorium in place that was to expire in December 1987. We agreed to voluntarily extend the moratorium while they rezoned the area, provided that we controlled the rezoning process so the city wouldn’t try to kill us. The moratorium was put in place because of a neighborhood reaction against the amount of development going on in East Cambridge.

The zoning that had been there was good old-fashioned zoning designed to allow you to do what you want—big FAR (floor/area ratio), no height restrictions—it was great.

But the city began to panic after I bought the land. They figured out that we were here, other developers were over there, and then another developer tied up another piece of land and the next thing they knew, the city was confronted with the fruits of its own success, which would result in more development on the riverfront. The North Point district is made up of about 70 acres (28.5 hectares) of land with 13 different landowners, ranging from a husband/wife team to Boston & Maine Railroad. Their knowledge and understanding of real estate matters was all over the map, so we organized all the landowners and spent one year and 17 days rezoning the full 70 acres. And it was torture. That was the balance of 1987, all of 1988, and into 1989.

The amount of fighting was unbelievable because we had to divide the land and put roads in certain areas—through buildings and properties—so we had to do land swaps. Then some people complained that their land would be less valuable, and so on. It was unbelievable. We needed a vote from the city council, but before we could get to the council, we had to get the landowners and two neighborhood groups to agree on a master plan. Then we had to get the planning board to agree on the master plan before it could be presented to the city council. Eventually we succeeded.

And then the world stopped moving. Boston’s economy went into a high-speed nosedive, and everything ground to a halt.

At the same time I was working on this site, we had several other projects underway: 42 acres (17 hectares) on the Southeast Expressway in the middle of permitting a 4 million-square-foot (372,000-square-meter) biomedical research center, the American Express Building in Providence, Rhode Island, a condominium project in New York City, a ten-acre (4-hectare) parcel in Cambridge off the Massachusetts Turnpike, and a project in Connecticut.

We bought our development site. I didn’t take an option because I don’t believe in options when the entitlement lead time is hard to measure and potentially very long. It took us until 1991 to get our permits. Between then and 1998, when the project was completed, we hung on. We wrote a lot of checks—thousands of dollars—begged for equity, and tried to get someone to believe in our project and not take us for a ride. The area was nothing but warehouses and railroad cars. The river was basically inaccessible from the site. And we had promises from the state that it would build a park along the river. But we didn’t know if those promises were real.

At the time, no one was buying land, so we couldn’t have really sold it for a reasonable price. Land was like leprosy then—untouchable.

Researching and Selecting Target Markets

The site is located in a North Point Residential, Office, and Business Zoning District or NP/PUD-6 District, also known as a planned unit development (PUD) district. This district was established to provide a transition from the industrial sector to a mixed-use area. Residential uses—as well as hotel/motel, retail, entertainment, recreational, office, industrial, transportation, and utility uses—are permitted. The property meets the requirements of the PUD except for the maximum height, which is 50 feet [15 meters]. Museum Towers obtained a special permit from the city of Cambridge in June 1989 to go up to 24 stories.

The location is somewhat isolated, but the improvements have made a big difference. If everything else—the park and infrastructure improvements—goes according to plan, the location should become more popular. This kind of revitalization is not unprecedented in the Boston area. A project at the Charlestown Navy Yard, for example, Constitution Quarters, is a luxury rental apartment constructed in a neighborhood that wasn’t known as a luxury market. But that project’s done well because of the quality of the building. Cambridge has two new rental developments—Church Corner and Kennedy Lofts—in the Central Square area, which isn’t exactly a desirable neighborhood. But both those projects have done very well, beyond expectations.

We figured that with the apartment rent, storage unit rent, parking fees, and retail rent, the project had a potential annual income of over $12 million.

Working with the Architect

Museum Towers is not a high-design project. When all the adjoining public work is complete, it will have tremendous views and a very convenient location. With those attributes, we didn’t think we needed to overpay on design. We did spend a considerable amount of time with interior design people, making sure that the kitchens and baths were superior to the older competition, but the project won’t win any design competitions.



Eight and Ten Museum Way (formerly 15 Monsignor O’Brien Highway), Cambridge, Massachusetts, in the North Point neighborhood, directly across the Charles River from the west end area of downtown Boston.

Lot Size

Total parcel area—90,169 square feet (2.07 acres)—8,380 square meters, or 0.83 hectare

Building Size

Total gross square feet—618,710 (57,500 square meters)

Total rentable square feet—410,444 (38,145 square meters)


Total number of units—435

Average area per unit—944 square feet (88 square meters) Mix of units—four studios, 180 one-bedroom units, 251 two-bedroom units


490 spaces in a 103,200-square-foot (9,590-square-meter) underground garage

Common Area/Mechanical

88,566 square feet (8,230 square meters)

Retail Space

2,500 square feet (235 square meters)

Health Club

14,000 square feet (1,300 square meters)

Tenant Storage Space

200 units


Six high-speed elevators, three in each tower, that travel at the rate of 700 feet per minute (213 meters per minute)

Museum Towers is located close to several main arteries and two subway lines.


Combination of awning windows, fixed windows, and sliding doors with insulated glass in aluminum frames


Partitioning—Wall Finishes

Gypsum wallboard with plaster


Gypsum wallboard with skim coat of plaster and sprayed, textured finish; suspended acoustical tile in commercial areas


Poured concrete

Electrical Lights

Incandescent and fluorescent

Floor Coverings

Carpeting in unit living and common areas; resilient tile in storage, janitor, and utilities areas; ceramic tile in bathrooms; sheet vinyl in kitchens

Exterior Doors

Combination of metal and glass in metal frames

Exterior Unit Doors

Solid wood

Interior Unit Doors

Hollow-core wood, bifold, six panel


Individually controlled water source heat pumps with circulated warm and cool water from a central system

Hot Water

Individual electric units in each unit


Sewer and water—city of Cambridge

Electricity and natural gas—Commonwealth Energy

Trash Removal/Disposal

Trash chutes on each floor

Life-Safety Systems

High-rise fire alarms and smoke detectors, emergency lighting, sprinkler system, stair pressurization, and smoke exhaust systems


Twenty-four-hour concierge service; card-access security systems; closed-circuit television with videotape surveil-lance in each building

Choosing Players

I can’t tell you how important it is to work with people you trust. If you’re trying to make a decision about buying a building or a permitting issue or cooling towers, you have to be able to look at people and understand something about their personality, how credible they are. You have to get a sense of who they are and what their agenda is and where they’re trying to go compared with where you’re trying to go.

I’m fortunate because I’ve had the same project team for 20 years. The same mechanical engineer, electrical engineer, plumbing engineer, structural engineer. I’ve got one lead law firm. Even in the office, I need to be sure that everybody who works for me is working toward the same goal. I tell them that everybody has to do what’s necessary to make sure we meet our pro formas. If you expect to come to work at nine o’clock and go home at five o’clock Monday through Friday, it’s the wrong place to be.

Loyalty is a big piece of it. Trust is a big piece of it. And the loyalty and trust start off with capability. My construction guy, for example, is one of the best in the business. In the early eighties, I fired a construction company and hired another one that had a young assistant project manager. The project manager and the assistant manager both came to the meeting. The project manager was so full of himself, but the assistant project manager was a straightforward guy. So I hired them on the condition that the assistant would be the project manager. We’ve been together ever since. There was something about the way he answered questions that made me trust him. I hired him after he finished that project, and he’s been with us ever since.

He’s stuck with me, too. In 1989, we had 55 people in the company; by 1992, we were down to seven people, and then I had to cut everybody’s salary by 20 percent. I know that my construction guy was offered several jobs, one of which would have doubled his salary, but he said he helped me get into this mess and he’d help me get out. That kind of loyalty you can’t buy.

I make mistakes every day—some really big ones sometimes. It doesn’t do me any good to have well-paid people on staff telling me what I want to hear. People need to know that they’re going to get treated fairly and not see their heads roll when they deliver unpleasant news to me. My construction guy and I fight. You should see the fights sometimes. But I trust him.


The way our company is set up, I’m the person who takes the lead in fighting with public officials and neighborhood groups. My partner lives in New York, and he’s involved in every project but in a very different way from my involvement. He talks to the players on the phone, he reads everything, and he provides good counsel and financial support. He’s excellent at dealing with the facts. He doesn’t deal with tenants or permitting agents. He deals with the banks, the lawyers, the lawyers in the banks, and that’s it. He’s the first one to admit that if he were running the company on a day-to-day basis, we would never get anything permitted. Nothing would get built. And we’d have no tenants. His temperament and ego wouldn’t allow him to sit through the public hearings. Being called an asshole and a liar in public on a nightly basis just doesn’t sit well—nor should it—but it is what it is.

When we first financed the project, we got low-risk money—prime plus one. Not bad. But then, in 1994, we were forced to restructure the debt. I don’t know if I can tell the story without crying. From 1990 to 1994 were the worst four years of my life. Everything had changed in real estate. You couldn’t borrow money. The money you did borrow was outrageously expensive: you could borrow it from loan sharks on the North End of Boston for less. We found out we were close to getting construction of this project financed; in fact, Chase Manhattan Bank held the existing land mortgage that had financed cost overages (beyond our initial equity) up to this date (when you carry a project for years, the preconstruction costs are huge). We struck a deal on a repayment plan. But unbeknownst to us, while we were spending another $1 million to redesign and repermit the project, they sold the mortgage. The group they sold it to was a collection of bright, talented lawyers and finance people. You know how the guys on the North End that lend you money might come at you with baseball bats? Finance guys come at you with legal fees. It’s the same thing. It’s just slower and more painful the way they do it on Wall Street.

We spent eight months negotiating with our new lender, and it was a bare-knuckles fight. It’s situations like this when you learn how good your partner really is and what you’re made of. It was war.

The day before Thanksgiving, my wife called me in tears. She said the sheriff had just showed up at the house and left a bunch of boxes. I went home to my pregnant wife and two giant boxes. It’s one thing to fight with me—it’s another thing to get my wife and kids into it. So we got the largest law firm in Boston, which has some equally nasty litigators to represent them. We had nasty people on both sides. And the battle began. It was awful, but some of my greatest moments were in this fight. At one point, we met with their attorney, a good ol’ boy, very calm and tranquil but a shark. He is like getting cut with a razor blade—deep, fast, seemingly not painful, but you bleed to death anyway. So he approached the problem by acknowledging that he realized that I didn’t have any money, that it was really my partner who did, and that it wasn’t worth suing me. So he suggested that they take me out of the deal but that I continue working for them. I told him that I wasn’t interested in that kind of deal. He said, Dean, we can make your life really miserable. I said, I can make your life equally miserable. That land in Boston, without the permits, is worth nothing. And you know who controls those permits? Me. And you’ll never see those permits. They hired local counsel and discovered that in fact I did control some of the permits and that the others would be difficult for them to get. In the end we got our money, but it was $3 million more than we were settling on with Chase. It was a horrible experience.

Once everybody had established his position and they understood what we had, they were reasonably pragmatic. To them it was just another transaction, just another restructuring: it was nothing personal like it was for my partner and me. We got the deal to work, and they made a ton of money on it. In the end they were decent guys. In fact, when we did a press announcement about Museum Towers, I got a handwritten note from the guy who runs the firm. Decent.

There are a couple of banks that to this day I hold some personal malice toward. That experience has given me a whole new view of working with lenders. Just like lenders want to know who their borrowers are, well, guess what: I want to know who the lender is. I won’t allow the wholesale sale of our notes. We’ve walked away from three deals because they wouldn’t give us the right of approval. That’s a big difference in how we do business.

Of course, paying the original lender was just part of the story. We needed a construction loan. The Boston market had improved dramatically, and our now fully entitled land was very valuable. Still, we weren’t able to get a construction loan to cover all the remaining costs. (Fleet Bank agreed to a floating rate, roughly 8 percent, on a $55 million first lien.) We found a higher-risk mezzanine lender to provide a participating second lien. For an expected total return of 21 percent, the Fidelity Real Estate Group closed the gap between the value of what we had created (our real cash invested was much larger) and what the lower-cost first lien holder would provide. The gap financing was expensive, but we felt that keeping most of the upside was the smart thing to do.

Environmental Issues

Although there are no wetlands on the site and it’s not within a designated 100-year floodplain, the environmental issues were murder.

We tried in the late 1980s and early 1990s to win approval for our apartment complex. But much to my dismay, MEPA (Massachusetts Environmental Policy Act) exercised jurisdiction over the project, which meant we had to do a full environmental statement. Basically, it forces you to go to a multitude of different state agencies, commissions, and authorities. It opens up Pandora’s box. On top of that, the Chapter 91 Division of Waterways exercised jurisdiction, claiming that the site was filled land and that the project was located in historical tidelands of the Charles River, so they had jurisdiction that could not be usurped by MEPA. It was like going to a football game and watching all the guys pile on the little running back. The process dragged on so long that, by the time we got the approvals, the market had changed and our project was no longer commercially viable.

About 65 percent of Boston is landfill. It used to be a series of islands interconnected by strips of land. Boston’s Back Bay used to be a bay where ships anchored. The North End, where Boston started, was about half its current size. The filling of titled land, marshes, and wetlands was granted by the King of England in the 1600s and 1700s. These licenses were granted for the creation of facilities to support commerce. The theory was that the reduction of access to the water and marshes was justifiable because the creation of commerce created a benefit that inured to the body politic on a greater basis.

Fast-forward to the late 1970s and early 1980s, and all the lawyers in the commonwealth of Massachusetts are challenging developers because they don’t have fee simple title—they have licenses. So it was decided that our buildings were a change of use of the historical tidelands, because that’s not what they were originally designated as; therefore, we had to go through a new permitting process to establish that what we wanted to do with this real estate addressed the spirit of the original license to create commerce or to create a benefit for the public good. They declared that the project proposal constituted a non-water-dependent use of tidelands, and we had to prove that our project serves a proper public purpose and provides a net public benefit to the rights of the public in the tide-lands. I submit that this process is absolutely irrational, irresponsible, and exploitative.

In the middle of all this, the planning board in the city of Cambridge exerted autonomy that it may or may not have had, and the city council tried to get its name on whatever projects it could to keep politically active. And two state entities were at war with each other: MEPA tried to demonstrate that it was the ultimate permitting agency of the state government, and the Chapter 91 Division of Waterways said that, when it came to waterfronts, it had all the authority. Then a new complication arose when the executive secretary of transportation and construction for the state said that the land was previously owned by the railroad and the railroad never got a signoff from the state transportation group. Under Massachusetts General Law 4054A, you have to get a release from the state transportation secretary to change property that was originally designated as transportation dependent to use it for non-transportation-related property. So then the circle widened to include the city of Cambridge, the planning board, MEPA, Chapter 91, and the executive office of transportation and construction.

They all wanted a piece of us. Not a small piece, but a big piece, and they all wanted the other guy to go first so they could come in and really chew us up. We spent an inordinate amount of time juggling and dancing among all these groups. And MEPA forces you to go to every involved agency, each with its own agenda. For example, Health and Human Services wanted a big low-income housing component. The Massachusetts Business Commission (MBC) wanted

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