introduction to commercial development

Introduction to Commercial Development


© 2001-2005 Local Initiatives Support Corporation

Day One


Course Goals

• Survey of issues unique to commercial

• Assumes some housing experience• Focus on nonprofit sponsored

projects• Networking and discussion


Agenda

Day 1• Social Objectives• Development Team• Ownership Structures• Property Management • Market Analysis • Finding Tenants

Day 2• Operating Budgets• Development Budgets• Financing Sources• Evaluating Tenants• Negotiating Leases• Tenant Improvements• Project Planning• 10 Mistakes


Nonprofit Sponsored Commercial Projects

• Retail– Retail center

– Ground floor retail under housing

– Arts related

• Industrial– Incubator

• Office– Nonprofit office

– Social service

– Health clinics


Project Profiles

• Bloom Lake Building – Minneapolis, MN

• New Horizons Center – Bronx, NY

• Swan’s Marketplace – Oakland, CA

• Harlem IHOP – New York, NY

• School House Station – Daily City, CA


Binders

1. Social Objectives2. Development Team3. Joint Ventures4. Property Management 5. Market Analysis 6. Financing Sources7. Evaluating Tenants8. Negotiating Leases9. Tenant Improvements10. Project Planning


Project Objectives

• Why do nonprofit developers undertake commercial projects?


Bloom Lake Building

43,000 Square foot building

• 3 retail storefronts – incubator graduates

• Entrepreneur and Career Center

• Nonprofit Arts Space

• Office/workshop space for small businesses

• Heart of the Beast Puppet Theater Company

Sponsor: Neighborhood Development Center

Location: Midtown Phillips Neighborhood, Minneapolis, MN


Exercise:

Social ObjectivesEXAMPLE: Affordable Housing Objective:

To provide quality housing to families earning less than 60% of Area Median Income that costs no more than 30% of household income.

Commercial Objective:• What are some potential social objectives that may

have motivated the Bloom Lake Project?• How will they know whether the project

ultimately meets these objectives?


Social Objectives

• Job Creation• Neighborhood

Revitalization Community Services

• Neighborhood Safety• Income Generation• Organizational

Stability – Operating Support

• Tenant Services – Program Support

• Small Business Development/Support

• Nonprofit space • Arts Space• Social Service Space• Nonprofit Office

Space


Social Objectives

Goal Job Creation Small Business Development

Measure Net new jobs provided by businesses leasing space. (Total jobs less any that existed prior to relocation)

Percentage of tenants that are minority first-time entrepreneurs.

Target Unit will be leased to businesses that generate at least 25 net new jobs

Twenty-five percent of tenants will be disadvantaged businesses.

Tracking pre-occupancy and post-occupancy surveys

Questions on rental application


Bloom Lake –Goals

• Revitalize neighborhood retail corridor– Create Latino district

• Create jobs for local residents• Generate income for Latino entrepreneurs

– Provide an opportunity for expansion of incubator businesses

• Support expansion of theater• Remove blight• Preserve historic building


Impacts – Neighborhood Development Center

Impact on NeighborhoodsEach business returns on average $40,633 per year to the

community in terms of rent, purchased supplies, payroll, and so on,

Create Jobs for Community ResidentsThe businesses employ an average of 1.8 persons

Increased Household IncomeBefore training, 14% made more than $3,500 a month;

after training 34% reported monthly incomes over $3,500.


Financial Objectives

• Double bottom line• Uses for net income/excess

cash flow– Soft debt and residual receipts

• Cash as a social objective– Tenant Support Services, Etc.

• Unrelated Business Income Tax (UBIT)


Project Profile


BREAK


Development Team


Capacity Assessment

• Project Management• Construction Management• Financing/Loan Negotiation• Project /Partnership Accounting• Asset Management• Strategic Planning• Leasing/Lease Negotiation• Small Business Tenant Support• Market AnalysisResource: Development Team Matrix


Swans Marketplace

Sponsor: EBALDC

Location: Old Oakland

Uses:• Office Space 17,000 sf• Retail 25,000 sf + 18 pkg

including Housewives Market

• Live/work rental 1,000 sf• 20 Cohousing condos

• 18 1- and 2-bdrm apts (50-60% AMI)


Consultants

• Strategic Planner

• Development Consultant

• Market Analyst

• Transportation Planner

• Architect/Urban Designer

• Financial Consultant

• Tax Attorney

• Realtor/Leasing Agent

• Insurance Agent

• Environmental Consultant

• Historic Preservation

• Real Estate Attorney

• General Contractor

• Property Management Company

• PR/Marketing Consultant

• Small Business Technical Assistance


EBALDC Sequence of Projects

1. Office Space Office lease negotiations, ADA, pkg, HVAC, equip.

2. Storefront office or dry goods retail

+ relationship of retail entrances, security

3. Office space – multi-tenant, nonprofit

+ familiarity with leases, special needs clients, CAM calculations, storage, trash

3b. Office space – speculative

+familiarity with market leasing, marketing, pr, etc.


Continuum of project types

4. Specialized facilities + operational familiarity with specific use, e.g. noise, smells, crowds, waste, etc.

5. Food related retail + pest control, waste handling, health issues, lease turns, signage, deliveries

6. Shopping centers + marketing, security, parking, special lease agreements, vacancies, interim uses


Partnerships /Joint Ventures

"With a project this size, the gulf between the financial world and its demands and a very low-income community is really big. It's hard to find one organization that can span it completely."

- Andy Blauvelt, project manager for Marin City USA project


Mid Bronx Desperadoes

• Founded in 1974 as a coalition of volunteers

• Focused on Crotona Park East section of the Bronx

• 2,300 units of affordable housing• Community health clinic• Job training center• Safety and open space• Community planning


New Horizons Center

MBD Development Corporation – The Bronx

134,000 square foot shopping center• Pathmark Supermarket

• Athlete's Foot

• Blockbuster Video

• Paramount Home Decorators

• Petland Discount Stores

• Radio Shack

• Rent-A-Center


New Horizons Center MBD Social Objectives

• Jobs for local residents

• Bring life back to the community

• Support local small businesses

• Generate income for MBD

• Build internal capacity for commercial projects


Exercise

Each group should answer the following questions:

1.Should MBD take on a partner in this project?

2.What kind of relationship should they have with that partner?

3.What roles should MBD expect to play in the project?


New Horizons Center Development Consultant

Development Advisor: Hutensky Group/ Felipe Ventegeat

• Coordinate project team meetings and schedule tasks

• Develop project budget• Coordinate Contract Documents, permits, and

planning approvals• Monitor General Contractor• Coordinate leasing and lease negotiation


New Horizons Center Development Consultant

Owner Responsibilities• Representative to participate on project team• Approve budgets, change orders, etc.• Provide architect, legal and other consultants• Secure project financing• Pay advisor flat fee plus reimbursement of all

direct staff and other costs.


New Horizons Center Outcomes

• 400 jobs; 85% neighborhood hires– Most hires through MBD Job Center

• 22 national and regional credit tenants– No local small businesses

• 2 year delay in opening• $10 million cost overrun

– Excess income devoted to debt retirement for 5 years

• Significant staff burnout– Two Executive Directors left


New Horizons Center Lessons Learned

• Most mistakes - cost overruns were avoidable• CDC carried the financial and political risk but

relied on partners to lead the project• Key problems identified by CDC but ignored by

the experts– Ex: Buried car on lot

• CDC let partners talk them into decisions that turned out to be mistakes

• Very few experts on inner city mall management– We have to become the experts


Partnership Structures

• General Partnership: Each partner jointly liable – share risks.

• Limited Partnership: Limited partner’s liability limited to their capital contribution. Limited partners not permitted to participate actively. General partner manages.

• Limited Liability Company (LLC): Limited liability for all partners – no general partner needed. Flexible management structure.


Partnership Options

• 50/50 Partnerships• Majority/Minority Partnerships• Custom Structures

– One party controls during construction, another after

– One party controls housing, another controls the retail, etc.

– 3 or more partners


Partnership Planning

• Identification of roles and responsibilities• Consequences of performance failures• Allocation of fees• Ownership percentage/Allocation of board

seats• Duties vs. decisions• Planned transfer of roles • Capacity building partnerships


Chicago LISC-ULI Study

Brought together private developers and CDC leaders to study completed projects in Chicago and Boston and identify keys to success:

• Clear division of roles and responsibilities• Rely on the for-profit partner’s expertise in

traditional development, marketing and access to capital

• Rely on the CDC’s expertise to leverage government and foundation resources, obtain site control and public approvals and win community support.


Chicago LISC-ULI study

Partner CharacteristicsCDC• Already developed

community consensus• Planning process

completed or underway• Depth of connections

with community institutions

• Level of sophistication with politics, zoning, and government approvals

• Knowledge of private sector development economics

For-profit Developer• Entrepreneurial in style

and approach• Able to dedicate 1 or 2

staff to project • Financially stable• Typically a small firm

with patient leader able to wait for success

• Some familiarity and appreciation for nonprofit sector and the value of emerging markets


Separating Uses in Mixed Use Projects

Low Income Housing Tax Credits– Commercial income generally must be less than

20% of total project revenue.– Commercial Space excluded from tax credit

basis– Concerns about unexpected excess income


Separating Uses

Ways to Separate Commercial from Housing

• Physical Separation

• Simple Lease

• Master Lease

• Condominium

• Subdivision/Air Rights


Property Management


Management Plan Template

• Staffing• General policies and

procedures• Budgeting• Accounting, bookkeeping,

reporting• Leasing and occupancy• Move-in procedures• Move-out procedures• Security deposits

• Rent collection policies• Utility surcharge• Contracts and

disbursements• Insurance• Tenant relations• Maintenance and

security• Lease administration• Eviction procedures


Management Plan Attachments

• Customization Form

• Emergency response

• Grievance procedures

• Inspection report

• Job descriptions

• Preventive maintenance schedule

• Service request

• Vacancy preparation

• Tenant welcome letter


Staffing Property Management for Commercial Projects

• Who handles leasing/marketing?• Who makes decisions about lease terms?• Who signs leases?• Who approves payment work-outs?• Who monitors lease terms?• Who monitors social performance (jobs,

etc.)• Who tracks/bills for reimbursables/CAM?


Staffing Property Management for Commercial Projects

• Who prepares budgets?

• Who reviews spending reports?

• Who develops maintenance schedules?

• Who tracks reimbursable maintenance work?

• Who approves tenant work?

• Who reviews tenant insurance?


Staffing Property Management for Mixed-Use Projects

Property Management Department

Commercial

Housing

Site #1

Commercial

Housing

Site #2

Commercial

Housing

Site #3


Staffing Property Management for Mixed-Use Projects

Property Management Department

Commercial

Site #1

Housing

Site #2Site #3

Site #1Site #2

Site #3


LUNCH


Leasing Strategy Exercise


Market Analysis


Place

Demand Supply

What are the physical assets and constraints of the site?

Is there consumer ability/willingness to purchase goods and services?

Are there unmet community needs?

What is the supply of businesses and real estate in the area?

What is the supply of businesses and real estate in competitive districts?

Understanding Markets


Place

What kind of information would we want to know about

Place?

What are the physical assets and constraints of the site?


Place

General Locational Characteristics• Address, block, lot• Neighborhood characteristics – building

stock, income level, demographics• Distances to downtown, major highways,

commercial or industrial nodes, port/airport, competitive projects

• Zoning and land use • Housing density


Place

Regional/Local Access

• Types and conditions of roadways, number of lanes, speed zones

• Traffic volume

• Traffic controls

• Parking availability

• Public transit access


Place

Neighborhood Identity• General perceptions of the area• Crime rate and trends• New or proposed catalyst projects or

capital improvement projects• Cultural facilities or other community

assets• Important parks, plazas, etc.


Place

Methods for Understanding Place

• Walking survey

• Regulatory research

• Parking and accessibility survey


Demand

What kind of information would we want to know about Demand?

Is there consumer ability/willingness to purchase goods and

services?

Are there unmet community needs?


Demand

Residential Demographics

• Population (including daytime and visitors)• Household and per capita median income• Median household size• Median age and distribution of age cohorts• Racial and ethnic makeup• Rent v. own

Consumer preference


Demand

Methods for Understanding Demand

• Demographic analysis

• Consumer and merchant surveys


LISC Neighborhood Market Snapshot

Source:www.esribis.com


Retail Spending Estimates


Using Demand Data


Trade Area

Neighborhood Gap IkeaDisneyworld

grocery


Trade Area

Methods for Identifying Trade Area

• Rule of thumb:A neighborhood retail node of 30,000-150,000 square feet has a trade area of 3,000-25,000 people or 0.5 to 2.0 miles

• License plate survey• Shopper survey• Drive Time Analysis• Gravity Models


Supply

What kind of information would we want to know about Supply?

What is the existing and planned competitive supply of comparable retail space in the

neighborhood/trade area.


Competitive Supply Analysis

Existing Retail

• Type of stores

• Size of stores

• Vitality of stores

• Anchors

• Local v. chain stores

Existing Real Estate

• Rent levels

• Vacancies

• Rate of tenancy turnover; inquiries


Competitive Supply Analysis

Methods for Understanding Supply

Inventory existing businesses in trade area

Research Pipeline projects• Contact Local Jurisdictions• Collect Information from Brokers and

Retail Developers


Business Summary


Leakage Analysis

How well does supply match demand?


Retailer Requirements

What kind of requirements might retailers have for locating in your

project?



Site Requirements• GLA• Minimum frontage• Lot square footage• Parking • Co-tenants• Traffic averages• Freeway access

Locational Criteria• Population density• Household density• Demographics –

including education, lifestyle types, etc.



Methods for Understanding Tenant Criteria

• Retailer interviews

• Published requirements


Choosing Your Approach

Project TypeSmall (<3000 s.f.)

Rehab or new constructionEvaluating prospective tenant

Medium to Large (>3000 s.f.) or District strategy

Long-term District Strategy

Research ApproachQuick and easyDo it yourself

Detailed analysisHire a consultant

Ongoing monitoring


DIY Market Analysis

• Review existing market studies

• Merchant survey

• Resident and employee surveys

• Business inventory – published data and walking tour

• Competitive supply analysis


Excelsior Target Tenants

• Retro-themed diner/lunch counter/soda fountain place (like St. Francis ice cream parlor on 24th St.)

• Sandwich and salad place • High quality/affordable ethnic restaurant • Dim sum or Chinese banquet restaurant • Men's and women's clothing - i.e. Ross,

Marshall's, TJ Maxx, • Gym • Yoga/fitness/dance studio


Data Sources

• U.S. Census - www.census.gov

• ESRI – www.esribis.com

• Claritas – www.claritas.com

• Dun and Bradstreet – www.dnb.com or www.zapdata.com

• Trade Dimensions – www.tradedimensions.com

• Urban Land Institute – www.uli.org


Other Project Types

How would the market analysis process be different for:– Office– Nonprofit service space– Childcare center– Industrial facility


Marketing


Marketing Methods

• Window Signs• Flyers• Newspaper Ads• Broker Listing• Word of Mouth• Small Business

Networks• Targeted Outreach


Working with a Broker

• Multiple Listing Service

• Marketing Space

• Contacting Chain Tenants

• Showing Space

• Consulting on offering terms, TI, etc.

• Managing lease negotiation


Broker Compensation

• Fixed Fee Agreement

• Retainer

• Hourly Consulting

•Commission–Ex: 3000 sq feet at $1.5 per month ($54000/yr)

7% $3,780

7% $3,780

6% $3,240

5% $2,700

4% $2,160

Total $15,660


Marketing Packages

Location and Amenities• Neighborhood/Customer

demographics• Traffic counts, etc.• Nearby amenities • Sales data on nearby

businesses

Property overview• Floorplan• Façade• Existing Tenants

Financial Information• Rental Rates • Services included in rent

(CAM) • Tenant Improvements or TI

Allowance

How to Apply


Leasing Material


Homework

You are responsible for leasing a 6000 square foot retail space. You have offers from two different tenants.

1. One wants to lease the space for $18.90 per foot per year with no rent increases for ten years.

2. The other is offering only $16.80 per foot but is willing to agree to a fixed 3% annual increase.

Which tenant is offering the better deal?

introduction to commercial development

Government & Nonprofit

commercial development

commercial development

commercial objective

development team matrix

social objectives example

potential social objectives

bloom lake project

businesses leasing space