Wednesday, June 15, 2011

Understanding Land Developers

Successful businesses are built on the premise of repeating economically profitable processes. Take inputs, add value, sell the outputs. Land Development is a business. The input is 'raw land', 'development' is the value added process, and the output is the *varied types* of building modern society demands. The issue of 'varied types' is key to understanding developers. To a developer, a development is a 'product'. Different developers make different types of products--some do housing developments, some commercial office, industrial, some retail. A few do highly specialized types--museums, student housing, etc.  Regardless, each is regarded as a high-risk, high-margin business with high labor costs, high capital costs, and high financing costs. Getting any specific development project to 'pencil out' so that it is worth attempting, an then actually getting a project built, and then sold (or leased out) is an ongoing struggle. The fewer complications along the way, the better.

Repeating an economic process is made simpler, if your inputs, your process, and your outputs are as similar as possible. In development, none are easy--no two parcels are ever the same, you'll never face the same regulatory environment twice, and the market demand may collapse by the time you get done building it.

Why Mixed-Use Development (MXD) is so hard to do: Low volume. For a developer, it's not worth the time and the trouble to develop the expertise needed for a type of development that you are only going to develop once or twice. Developers conceptualize MXD differently than planners. To planners, it is how all new development should be. To a developer, it's a confusing set of new requirements to be negotiated with the city. When volumes for an economic activity are low, the activity tends to become centralized into a few places where the necessary expertise can be gathered. For MXD, this is more difficult. There are wildly different regulatory and development requirements from jurisdiction to jurisdiction and state to state. 

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