Time to Reprogram That Master Plan?

So the plan looked great on paper in 2005. But that was then, and this is now. How can you adjust your development plans to reconcile them with today’s economic realities? This was explored by panelists at a session titled, “Reprogramming the Master Plan” at ULI’s 2010 Fall Meeting.

“If you’re going to reprogram a master plan, it’s got to be holistic,” advised Jeffrey M. Gault, Principal at Solus Property Company. “You can’t just look at a few design elements. Look at the overall cost of running it; we looked at one of our plans and decided to eliminate some duplicative facilities.”

Gault cited the example of the Playa Vista community in Los Angeles, California. The original plans called for units that were pedestrian-friendly, high-density and could command a high price. With the market downturn, he said, the plan was reprogrammed to make the units more affordable, since the original price point wouldn’t work.

Another tip for developers came from William Fox, Chief Operating Officer at Brambleton, a residential developer in Loudon County, Virginia, west of Washington, DC. “None of our lots go to auction,” he said. “We assign each of our builders to segments based on price or lot size.” Fox also described his firm’s “just-in-time” approach to construction and take down, designed to minimize the amount of unsold inventory.

Also, don’t be reluctant to reopen discussions with the municipal governments with whom you partnered on those original plans, panelists said. “You may have to go back to the city or county and say, ‘You know that 96-inch water main? Well, we won’t be able to do it,” said Gault. But you might find yourself in a stronger bargaining position with local governments, which are also feeling the effects of the downturn.

“We’re finding more receptiveness from cities and counties regarding entitlement,” said Charles Schwartz, President of Avanti Properties Group. “In previous years they overzoned for industrial and commercial, thinking it would boost their tax base, but it didn’t happen.”

The merits of golf course communities generated some lively debate among the panelists. “America has been over-golf-coursed,” said Schwartz. “In some instances where golf courses are planned as part of your communities, I would scrap them. Even in some locations where existing golf courses are operating, I might still scrap them. Instead you should look at amenities like walking trails and tennis courts that cost less to operate.”

Gault concurred, noting that only 2 of the 21 golf courses built by his firm actually made money – and those two did so because they become public. But the others he viewed as amenities designed to add value to the homes. “And thank God we sold them to the homeowners associations,” he added.

How should developers look for opportunities going forward? Panelists had several suggestions:

Start by looking at today’s economics, said Schwartz. “When we underwrite, we’re looking for the purchase price to be somewhere between 2.9 and 3.5 times the borrower’s annual income,” he said. “During the boom years, that factor got as high as six, which was bad.” He said they also look at the average home prices from 2000 or 2001 and extrapolate from that.
Look to the long term. “I laugh when people talk about their three-to-five year deals,” said Schwartz. “I look at those same deals and say, ‘Twelve.’ “

Patiently monitor potential deals. “We’re probably monitoring 500 deals right now; we’ll probably only do about 20 of them,” said Schwartz. “We’re watching what happens with the owners, with the financing, and other variables.” If certain things change, it could make the deal more attractive, but proper monitoring takes patience and vigilance, he said.

Look for deals that are date-driven or deadline driven. “Charlie is WAY more patient than I am,” said Gault. “To me, deals fall into one of two categories. Some are driven by a definite date or event, like a loan has come due, or a court docket for a bankruptcy. The other kind is where you know a guy who knows a guy who knows a guy at a bank, and those deals have resulted in 100 percent failure. Remember, time is your greatest asset. It takes time to chase down these deals, so look for the ones where you have certainty that something could happen.”

Use Your Expertise in Your Local Market. If your firm lacks the resources to monitor lots of deals, says Fox, stick to your local market – the one you know best.