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Redevelopment Arena Offers Increasing Array of Opportunities for Market-Wise Developers
July 27th, 2006
As time moves on, the supply of raw or undeveloped land for new construction in many metropolitan areas throughout the
As these metropolitan areas enter the so-called “renaissance period,” whereby these older areas are being rejuvenated through extensive redevelopment activity, proactive developers would be wise to weigh the advantages and disadvantages of becoming active participants in this potentially profitable market niche.
AN ATTRACTIVE MARKET NICHE
Redevelopment opportunities in the metropolitan market areas offer knowledgeable real estate developers an attractive market niche for a variety of reasons.
One reason is that redevelopment areas are usually located within an established residential or business community, a fact which substantially reduces concern about future development of rival projects since the competition, if any, has already been established. Typically solid historical demographic data exists within these established communities and such information can provide significant insight as to the demand for a given land use. A clear understanding of changing trends within any marketplace can help to significantly reduce market risk.
Additionally, redevelopment projects typically have the necessary public infrastructure systems in place, which include, but are not limited to streets, water, sewer and storm drainage. These existing networks help to reduce development costs and the associated designing and construction risk, which enhance the property’s overall competitive edge.
Also the freshness of a redevelopment project can enhance the property management and/or marketing team’s ability to successfully lease-up or sell the project by enticing local tenants or buyers to “leap frog” from older facilities located in nearby competitive projects.
ESTABLISHING PUBLIC-PRIVATE PARTNERSHIPS
Most every redevelopment project requires some sort of public-private partnership agreement between a development company and a redevelopment agency, a mutual collaboration that helps foster a healthy environment for successful project completion since both organizations have vested interests in the venture.
Typically, this public-private relationship is linked with the signing of a Development and Disposition Agreement (“DDA”) or an Owner Participation Agreement (“OPA”), documents that establish redevelopment process guidelines and interlink responsibility between the developer and agency.
For real estate development firms, this partnership offers several advantages throughout the land acquisition, and construction process. First, they receive conceptual input and support from the local government authority. Secondly, they are often able to move more quickly through the time consuming entitlement process because of the support of the redevelopment agency. Lastly, developers are afforded an “extra” shield of protection by the redevelopment agency in the event of any unforeseen project complication that can be effectively resolved through governmental intervention.
The public-private partnership arrangement also provides the developer with an additional advantage with the redevelopment agency’s power of condemnation for tying up land and negotiating with a landowner who is unwilling to sell blighted property or right of way acquisition. In using this option, the developer-agency team is able to assemble and consolidate condemned land helping to advance the project.
As with any give-and-take relationship, of course, real estate development firms seeking this type of assistance must be willing to work with redevelopment agencies. This usually means allowing an agency to have significant input in several phases of project planning, processing, and development.
A READY FINANCIAL SOURCE
Perhaps the most attractive incentive for developers to enter the redevelopment market is the financial support and incentives they can obtain from working with a redevelopment agency.
Redevelopment agencies are an exceptional financing partner for development companies willing to build within a redevelopment project area.
For instance, agencies can generate up-front construction funds by issuing tax allocation, Mello-Roos Community Facilities District, Assessment District and other tax exempt bonds or notes. Additionally, agencies can allocate property tax and other revenue sources to offset insufficient project returns and/or excessive project burdens, such as, stringent public infrastructure improvement requirements or specific building design standards. Sometimes just the project’s land use and the substantial fiscal revenues that will be generated from such development is sufficient incentive for the agency to allocate property tax and other revenue sources to the project.
To further defray development costs, redevelopment agencies have the option to offer land to development firms at below market values. For companies operating in expensive metropolitan areas, where land and construction costs are extremely high, these wholesale acquisition prices not only ease the firm’s overall financial burdens and equity requirements, but may also make the difference between whether or not a project “pencils out.”
Finally, establishing a financial relationship with a redevelopment agency enhances a development firm’s ability to attract other capital providers who are seeking investment opportunities in companies and projects that already boast a stable equity base.
BASIC GUIDELINES FOR IDENTIFYING REDEVELOPMENT OPPORTUNITIES
Without having to spend a substantial amount of front-end money, developers seeking to identify redevelopment opportunities should follow several basic guidelines for evaluating and selecting a market and redevelopment agency.
Initially, development firms should identify the attractiveness of older, more mature market areas by reviewing elements such as demographic and demand trends, existing public infrastructure systems, supply-side trends (i.e. projects approved, projects in planning, etc.) and proximity to other vibrant markets.
Companies should then determine where market demand factors exceed supply factors and identify redevelopment project locations, existing and needed product types and land uses for the best available project sites. From there, developers can whittle down redevelopment opportunities by contacting agencies and inquiring about specific redevelopment areas, the status of current projects and negotiation opportunities.
Once a development firm has a thorough understanding of a targeted redevelopment marketplace, it must then begin an evaluation of the redevelopment agency.
Steps in this research process include:
- Identifying the agency’s redevelopment project track record and evaluating
previous partnership arrangements
- Contacting the developer(s) of prior projects to learn about the pros and cons
of working with the agency
- Reviewing former DDA or OPA agreements
- Researching local political processes and identifying “who’s who” among
important government and civic leaders
- Meeting with agency decision makers to discuss conceptual development
plans
- Ultimately deciding whether or not to commit to the redevelopment
opportunity
