Stages of Development
Take a look around
Generate an Idea
Refining an Idea
Assessing Site Feasibility
Proposals and Contract
Signing Formal Commitments
Construction
Managing a Property
The development process is rarely a straight line through several key stages. As ideas evolve, decisions loop back, and progress often depends on balancing vision, feasibility, and timing. The figure below illustrates the major stages, highlighting how they interact in a non-linear, dynamic way:
Generate an Idea
The goal of the idea generation stage is to explore potential projects and determine if they are worth pursuing in this particular location at this particular time. This stage involves determining market conditions and engaging the community in your target area to gain local support and trust in a project.
Determining market conditions and initial feasibility
The key to successful development is by thoroughly understanding your market conditions and feasibility of the project.
Questions to Consider:
Who will be served?
Review the relevant documents (State and regional housing strategies, the community’s master plan, etc.) and available demographic information (e.g. Decennial Census, (ACS)) or the Michigan Housing Data Portal. Successful developments take into account the demographics in the community. Some questions to consider. What are the driving factors affecting housing in the area?
What income level will be served? (or are required to serve due to funding sources)?
What demographic(s) may be underserved in the community (e.g. seniors, young people, etc.)?
What is the absorption rate, or the amount of time it takes for units to be sold or rented?
Are there partnerships to be considered?
Risk can be reduced by partnering, with the tradeoff that the developer will give up some control of the project. A developer can also choose not to have any long-term ownership.
Where will the housing be developed?
The location of a project is crucial. Consider:
Does the community or county have a Land Bank with properties?
Does the municipality have vacant land that might be available?
What is available on the local market, for sale by owner, or through local brokerages?
What are the zoning considerations? Note that multi-unit housing is generally not permitted in all zoning districts in a community.
Gaining community support
Community awareness early in the development process will identify concerns and minimize potential roadblocks and increase support for a project. Engaging the community, hearing and addressing their concerns, visions, and aspirations, is important in order to build trust.
Engage local stakeholders, leaders, business owners, contractors, realtors, residents, community organizations, and representatives of all groups of people who live in a community early and often.
What type of housing should be developed?
Community needs, sources of funding, and developer preferences will drive this decision. For more in-depth information, talk with the local realtors, local lenders, and government officials.
Some questions to ask local experts:
Is there a need for single family homes or duplexes for sale or rent; other multi-family complexes for rent?
What grants or low interest loans are available?
Is there municipal assistance available?
What are the financing options?
One of the biggest challenges for developing real estate is financing. There are several ways to fill the financing gap—including federal, state, regional, and local programs. The Financing and Funding section of this document provides insight to available resources.
Examples of funding opportunities and financing options:
Michigan State Housing Development Authority (MSHDA) grants and loans
Michigan Economic Development Corporation (MEDC) grants
United States Department of Agriculture (USDA) grants and loans
Energy efficiency grants
State and federal tax credits
Historic tax credits
Traditional financing
Equity investments
Smaller rural communities often lack market data for housing. However, local knowledge can help fill this gap. Engage residents and local officials early on to gain valuable neighborhood knowledge, with the added benefit of alleviating concerns and gaining early feedback from the community, enhancing the marketability of your project.
The following resources may assist in engaging a community:
A brief guide to planning effective meetings. Planning Effective Meetings
The Rural Housing Toolkit from Jenifer Acosta at Housing Forward, while targeted to local community leaders, has a wealth of useful information for engaging with communities. The toolkit outlines preparation, workshop facilitation and goal setting resources that will with conducting successful community meetings. Rural housing toolkit
Refining an Idea
Undertaking due diligence measures and quick tests of feasibility for a project whether a property is identified or not is a valuable exercise.
Site Selection Criteria
When selecting a site, methodically evaluate the sites based on pre-established criteria. Criteria should include a detailed review of the following:
New construction versus rehabilitation of an existing building
Housing type and style
Scale of project
Sale or rental price
Land acquisition or land leasing costs
Financing options
Zoning
Potential costs of the infrastructure necessary for the development
Community preferences and needs
Proximity to employers and public and private amenities such as transportation, recreation, community-based services, childcare facilities, public and private schools, and public safety services
Review the Site Selection Criteria Worksheet for a more detailed exercise that will lead you through this process.
Title Search
A title search identifies the property’s current owner and if they have the right to sell the property. It will also identify any claims to or liens on the property, such as unpaid taxes, mineral rights, or deed restrictions that may restrict what the property can be used for.
Site Selection
Locating potential sites
Privately-owned sites: Sites that are actively available for sale either by the owner or through real estate brokers.
Foreclosed properties: Properties foreclosed by private banks Additionally, HUD and FHA may hold foreclosed properties.
Tax foreclosures: Publicly owned property acquired in a tax foreclosure.
Other publicly owned property: Lots and vacant buildings owned by municipalities and land banks
Due Diligence
Due diligence is the process of investigating and verifying data on a property to identify and mitigate risk, with the goal of becoming aware of potential risks, liabilities, and obligations before purchasing a property. Often, this involves clarifying a property’s boundaries, the rights to the property, and the environmental conditions at the site.
Property Boundaries
When conducting due diligence, do not rely on the mailing address. There are two main ways to conduct due diligence on the property boundaries: obtaining the legal description and conducting a land survey.
The legal description is a detailed, written description of a property’s boundaries and is used to legally transfer ownership of a property.
The land survey is a visual representation of the property’s boundaries and shape of the plot of land, based on the property’s legal description. It includes the dimensions and locations of buildings and site improvements on the property. IA survey confirms the property boundaries, verifying the acreage of the lot, and determines if anyone else has a legal right to use the property (such as through a utility easement or conservation easement). It also helps you identify if anyone is unlawfully using the property, known as encroachment.
Title insurance, generally purchased by a seller, protects from any claims that are uncovered if the title company misses something in the historic property records. This will protect the buyer’s rights to the property should a claim holder come forward to assert a claim over a property.
Assessing Site Feasibility
Following due diligence, a project can be assessed under additional criteria to assist in the decision to move forward. A market study and a feasibility study are two assessment tools to consider.
During this phase, you will also continue to work with local government agencies to conduct site plan reviews and other preliminary steps. Call your local government officials in the proposed project’s municipality early and often: they can help you spot a potential issue and mitigate it early on.
Market study
The goals of a market study are to understand the need for your project type and the conditions in the area. This can be as simple as researching “comps”—comparable sale and rental data, or as complex as conducting demographic research, including income levels and employment data.
To research comparables, find at least three similar properties with the following criteria:
Proximity: Look for properties in the same neighborhood, within a mile of the project development site if possible.
Current: Look for sites that were sold or rented as recently as possible (within one year if available).
Characteristics: Properties with similarities to the potential project development site—square footage, number of rooms, design.
Formal Feasibility Study
A project must be financially feasible or have the ability to cover costs.
Estimating Project Costs
Hard Costs
Your hard costs make up your construction budget. These costs include:
Material costs
Labor costs
General Contractor profit margins
Contingency
Demographic data supports the need for a project in the area.
Demographic data to consider:
Population trends and ages
Household size
Job growth
Average income
Housing occupancy data, including:
Rental and owner-occupied vacancy rates
Vacancy type
See the resources section for links to several useful data sources.
[Content adapted from MSU Real Estate Development Course via Coursera]
A simple, preliminary construction budget may begin with a “per square foot” cost. An experienced general contractor should be able to provide a per square foot estimate based on the local material costs and labor market.
Soft Costs
Your soft costs are your non-construction costs, such as:
Building Permits, licenses & fees
Architectural & Engineering
Environmental assessments
Title Search
Surveying
Appraisal & Analysis of Rent Comparable
Bulder’s Risk and/or Casualty Insurance
Carry Costs-Taxes, Utilities, Site Security, Grounds
Fixtures & Equipment
Prefunded Replacement Reserve
Prefunded operating and/or rental loss reserves
Seller legal and recording costs
Tenant relocation
Rent-up marketing costs
See the Budget Checklist for Development in the resources section of this guidebook for a detailed breakdown of budget considerations.
The Capital Stack
A capital stack is a depiction of all the sources of capital for a project. The capital stack shows the different types of capital used to fund the project, including equity, loans, grants, and investors. It shows how much will be paid, to whom, and in what order.
There are two main capital sources: equity and debt. Equity represents cash invested into a project in exchange for an ownership interest. Debt, sometimes called “leverage”, represents loans to be repaid to a lender. Unlike an investor, a lender does not have an ownership interest in your property, and lenders are paid back first, while those who have invested equity are paid last. Keep in mind, lenders will not cover 100% of costs for a project—often, they will only provide a loan for 50–75% of project costs.
A challenge for developers of affordable housing is what is called a financing “gap”. This occurs when the sale price or rental income of a development is estimated to be less than the construction costs. Government programs like grants, low-interest loans, tax abatements, and tax rebates can help make a project feasible. These tools are often referred to as gap financing. See the Financing and Funding section for a more details outlining sources and uses, and Resources for information on gap financing programs in Michigan.
Proposals and Contract
The Request for Proposal (RFP) and the Request for Qualifications (RFQ) are documents used to procure contractors and professionals involved with the development. Other required permits or approvals from applicable government entities should also be applied for during this time. Keep in mind that lenders and grantors often require you to have other agreements finalized before the lender or grantor will formalize certain agreements.
An architect should provide designs to your general contractor, who can begin developing the cost estimates for the project before formal commitments are signed.
Evaluation Criteria
Avoid the common mistakes above—and evaluate proposals fairly and objectively. Clear RFP requirements will produce submissions that are comparable for evaluation purposes.
The evaluation of RFP submissions can be considered a three-step process:
Develop minimum threshold criteria
Conformance with submission requirements: Did the proposal include all the required items outlined in the submission requirements?
Development experience: Does the respondent have the necessary experience to complete the project? The desired experience level should be decided prior to the RFP and based on the project itself. Some projects can require specific experience levels.
Current taxes: Request certification of current payment of all state and local taxes (or acceptable explanation of why tax payments are not current).
Availability: Is the respondent able to meet the timeline for the project?
Affordability: Can the respondent meet the affordability criteria requirements?
Financial resources: Does the respondent have the financial capacity and access to the necessary project financing and equity contributions.
Price criteria
Terms of purchase or lease: Are the terms in the proposal within the parameters required for the project?
Price requirements: Is the price specified in the proposal within the range required for the project
Comparative evaluation criteria
This may be a weighted process to evaluate respondents who exceed the minimum criteria required in the RFP.Affordability: Is it more important to service people with lower incomes or those with income closer to the Area Median Income (AMI).
Capacity and team quality: Does the respondent have a ‘track record’ of comparable projects? This can be numbers of years, projects completed or their role in the development process.
Feasibility: The ability of the respondent to understand the project and its challenges.
Site and unit design: At the RFP state, designs are generally preliminary. How well does the respondent present a design that is appropriate?
The RFQ (Request for Qualifications) Document
The Request for Qualifications (RFQ) is a document that allows an individual or business to show interest in partnering on a project while providing vital information or ‘qualifications’ to the requester. This allows the requesting entity the opportunity to assess potential partners and ultimately choose a qualified partner to advance their project from the ‘ground up’.
The RFP (Request for Proposal) and the RFQ (Request for Qualifications)
Although the Request for Proposal (RFP) and the Request for Qualifications (RFQ) are similar, the main difference is that the RFP solicits proposals regarding the plans, cost, and schedule for a specific project, whereas the RFQ gathers information on qualified individuals—often contractors—to work on a project.
The RFP (Request for Proposal) Document
A detailed RFP will attract qualified project respondents who share the community vision for a development site and begin the development process in an efficient and organized way.
The basic components of an RFP
Invitation to bid
Site tour and meeting
Property description
Development guidelines
Evaluation criteria
Submission requirements
Deadline for submissions
Selection process
Terms of the execution of agreements
List of required attachments
Common Mistakes
Guidelines and community development goals are not specific or actionable
Unrealistic time schedule
Limited site information and unclear evaluation criteria
Excessive submission requirements
Mandatory design elements
The basic components of an RFQ
Project information: The information provided to prospective partners should include the ‘what and where’ of the project. It can also include the history of the community and other factors that may encourage proposals.
Additional site information: Include requirements and regulations governing a site such as zoning, parking requirements, safety and accessibility, utilities and other. You can also include incentives that would encourage partner proposals, including community-based incentives, grants, and loans.
Market conditions: A thorough summary of the current market conditions and considerations should be included in an RFQ. This provides the chance to showcase the opportunities that are available, enabling the potential partner to decide if the project as presented is a good opportunity and fit.
Submittal requirements: Like an RFP, the RFQ should have a good outline of the requirements to submit a proposal.
Other components of the RFQ
Letter of interest
Partner background
The entity’s team profile project portfolio
Financial capacity
Any concept plans (if available)
Number of copies requested
Deadline for submission
Proposed project timeline
Terms of the execution of agreements
Evaluation Criteria
Like the RFP, the RFQ should explain the selection process (See RFP section for evaluation criteria guidelines).
See the resources RFP section for a detailed explanation of RFQ formatting.
Signing Formal Commitments
When agreements are finalized and signed, they become legally binding contracts establishing duties and responsibilities in the project, including for lenders, investors, and the development team. A good practice is to have a real estate attorney review all contracts to mitigate risk.
Most lenders require a Guaranteed Maximum Price (GMP) or Not To Exceed (NTE) contract with the general contractor on a project. The GMP or NTE contract alleviates unexpected cost increases, with one exception: change orders that allow for the budget to be adjusted due to an unforeseen circumstance or a change in the project’s scope. Most change orders are requested by the contractor. As the developer, you should also ensure that you’re the general contractor and architect should work together to ensure that the design fits within the construction budget.
Construction
The development team oversees the following during the construction stage:
Overseeing construction, payments, and team updates
Marketing the project and beginning lease-up of units
Marketing the project and beginning lease-up of units
Property can be marketed to potential buyers or tenants by the development team or by contract with a marketing firm. A comprehensive marketing plan, developed early in the construction phase, will provide opportunities for early sales or leasing of the property.. Remember the market data collected during the assessing feasibility stage will drive the marketing plan. Grant-funded projects often have marketing requirements as a condition of the grant. For example, some HUD programs require the creation and implementation of an Affirmative Fair Housing Marketing (AFHM) Plan. The fair housing requirements can be found in the resources section of the Guidebook.
Tenant selection
Granting agencies may require a certain percentage of units to be rented or sold to a particular group of income-qualified households. For example, MSHDA’s CDBG Unoccupied Rental Rehabilitation Program requires 51% of the units to be occupied by income qualified households with incomes at or below 80% of Area Median Income (AMI).
Responsibilities of the general contractor
The GC will coordinate construction and usually self-perform most of it. However, often the GC does not have capacity or expertise in all aspects of construction – particularly trades work like mechanical, electrical, and plumbing – and will engage subcontractors for such components.
Overseeing construction, payments, and team updates
To ensure that the project moves forward on schedule and at or under budget the development team will monitor progress. Market conditions can change dramatically and quickly, so it is essential that the project stays on schedule.
Costs incurred during construction, include but are not limited to taxes, utilities, landscaping fees, and loan interest payments, all while the property is not generating revenue. Costs may vary month to month, so ensure adequate funding is available to keep payments current.
Investors, neighborhood groups, and government officials may also require regular project updates. Since the project is visible during construction it is important to communicate and be responsive, especially to neighbors who may be affected by the project.
Completing a project
When construction is completed, the local unit of government (LUG) issues occupancy permits, utilities will be connected and any other necessary paperwork/permits will be completed. After the LUG issues an occupancy permit, tenants may begin to move in or the sales of home allowed.
The financial framework changes from a short-term construction loan to permanent financing. Final grant reimbursements can be requested, and reporting can be completed. Reminder: rent or sale income—and grant funds—are considered taxable income (see Financing and funding for more details).
Upon project completion, long-term property management should be in place for rental units.
Managing a Property
In Michigan, property management is considered a real estate activity. Therefore, those engaging in property management activities must be Real Estate Brokers or a real estate salesperson employed by a real estate broker. The exception is if the owner acts as the property manager, and is also the developer of the housing or real estate. Property management includes compliance with local, state, and federal regulations. Real Estate Brokers are required to take continuing education annually in ethics and legal real estate topics to maintain their license. Legal compliance reduces the risk of legal disputes and liability to the owners of the building.
Once a housing project is completed, it can finally fulfill its purpose: providing housing in the community. The future integrity of a project will hinge on its management. Good property management, through proper maintenance and tenant relations, will maximize the value of a development. This section will discuss the types and scope of duties of a property manager. Consider the pros and cons of property management early in the planning process to determine if an individual or a company will be hired to fulfill this need.
The basic duties of managing any property are the day-to-day operations and administration of the project. Keeping a property in good condition—cleaning common areas, performing routine mechanical maintenance, and addressing tenant concerns—can increase tenant satisfaction and protect the property in the future. These activities can also provide an opportunity for marketing the property as a desirable place to live, and can improve the overall reputation of the property
There are several types of property management, including residential, commercial, and industrial properties. A combination of residential and commercial, called “mixed-use” has also become widespread in more urban or downtown housing developments. Residential property management focuses more on tenant relations and building upkeep, while commercial and industrial properties may be more complex.
There are four main services that a property manager provides:
Tenant management
Property maintenance and repair
Financial management and record keeping
Legal compliance
Residential property management is geared toward establishing good tenant relationships and maintaining the integrity of the building. The property manager conducts administrative tasks that include finding, screening, and selecting tenants, and negotiating lease terms. The property manager is also responsible for marketing duties, including understanding the real estate and rental markets, i.e. knowing which audiences to target when searching for tenants.
From routine maintenance to major repairs, property management requires the ability to respond quickly to an issue and know how to best tackle larger-scale repairs. Responding quickly to emergency repairs builds good tenant relationships in potentially difficult situations.
Repairs and maintenance will need to happen eventually. The property manager needs a good understanding of larger repair and maintenance projects—and how to manage such projects—to ensure the long-term viability of a building. Developing a good, core team of employees or contractors to assist in all aspects of building maintenance will provide long-lasting benefits for the tenants and the building’s overall integrity.
Providing solid financial management and record keeping is a must for the health of the property. The property manager will not just collect rent; they will also handle delinquency and evictions. Overseeing the finances also includes budgeting and operating expenses. Property management requires accountability and transparency.
Clear communication with owners and tenants, implementing proactive maintenance and conducting regular inspections for minor repair issues, staying updated on market trends and regulations as well as investing in and using the latest technologies to increase efficiency are all best practices for those managing properties. Overall, understanding what is required and following best practices will increase the value of the property over time.
Adapted from Forbes.com “What is Property Management”