The Development Game – Approaches & Financing

The National Association of Industrial and Office Properties (better known as NAIOP) recently put on a seminar on the development process. In my next several columns I would like to share what I learned about the ways developers go about their business. Understanding how somebody operates, always puts you in a better position when negotiating.

The different approaches used by developers were described by Tom Woodworth of Trammel Crow, Dick Leider of Spieker Properties, and John Solberg of Opus Northwest. While Trammel Crow used to build to own, they are now strictly service providers, or what is known as Fee Developers. As such they are involved for one to two years and then go on to the next project. They do work for the Crow Foundation and three Real Estate Funds who buy the projects when they are completed. Trammel Crow provides the construction financing for projects ranging from $3-70 million. Their minimum object is a 10.5 to 12% IRR and a CAP rate 1.0 to 1.5% over market (that’s about 11 today). Their Fee, as a percentage of Total Project Cost, ranges from 3-5% and includes Project Management.

In contrast, the Spieker Partners left Trammel Crow in the early ‘90s to be Owners. They are currently a Real Estate Investment Trust ( REIT, NYSE symbol SPK) holding $750 million of assets in 600 properties totalling 41 million square feet. Some 69% of these are office and the rest industrial. Current occupancy is 96% and there is rent increase potential, 95% of which will be passed through to the REIT owners as increased dividends. Originally, SPK issued stock to provided the capital to acquire properties with returns greater than their cost of capital, With REITs currently out of favor on Wall Street, this route is now closed. Instead they are currently selling some of their less attractive properties and redeploying the money in multi building projects that provide for tenant growth. With their current 7.9% cost of capital, they want a minimum 12% IRR. With the median Eastside tenant renting only 5,000 square feet, they do not like single tenant, specialized facilities that they consider to be a higher risks. They also try to avoid amortizing a tenant’s Tis beyond a plain vanilla, utilitarian buildout.

Finally, Opus is a Merchant Developer who builds what they consider to be attractive projects with the intention of selling them to institutional buyers, such as insurance companies or pension funds. They currently have developed 24 million square feet of office, industrial and a decreasing amount of retail. Opus is well capitalized, providing all the necessary construction financing. They are both developers and contractors that will do design build-to-suits for credit worthy (AKA bankable),single tenants. In their opinion, this kind of tenant is best since their buyers have a well-defined risk.

In future columns we’ll be considering: site selection, construction, debt financing, and marketing.