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01.11.06 Burnham Pointe Construction Update. |
BURNHAM POINTE |
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In The News
From The Ground Up : The Anatomy of a Development
By Penelope Biver
Chicago Agent Magazine
July 2005
New construction projects are everywhere you look in the Chicagoland area. From luxurious single-families on the North Shore to townhomes in the West suburbs to condominium conversions in the West Loop, developers are hard at work contributing to your potential inventory pool. But do you know what it takes for these risk-taking multitaskers to add those homes to the market? Three successful development executives from Terrapin Group, Gammonley Group and Ferris Homes do their best to delineate the anatomy of a development.
LOCATION, LOCATION, LOCATION.
The development process starts with the search for the ideal location. Michael Ezgur, managing member of Terrapin Properties, LLC, says the location they choose to develop has to qualify as a "Terrapin property."
"It must be something unique and special," he says. "When we're thinking about a project and a location, we're thinking of our buyers. We're starting with our buyer, and ending with our buyer. Number one is location; I know that sounds like the buzz word, but if we're doing 15 projects right now we've looked at a hundred." Ezgur, whose company's newly adopted marketing tagline is "Distinctive Lifestyle Developments," says the property also has to be conducive to the community's needs. "We want to put our developments... in a good environment where people will want to live, and hopefully we can add to the environment as well. That's important."
Rich Gammonley, executive vice president of the Gammonley Group, says, "Our reputation is good enough that we're often contacted by villages saying, 'We have a parcel we're in the process of preparing for this type of project and we'd like your [proposal].'" He says his company has been fortunate enough to win with about 80 percent of the proposals they've submitted.
Gammonley Group has been doing mixed-use condo/retail projects–70 percent suburbs 30 percent city–ranging from six units with retail space to 208 units. Some current projects include the Condominium Residences at Seven Bridges, a 140-unit mid-rise on a golf course in Woodridge, or their 37-story high-rise at 1111 S. Wabash Avenue in Chicago. They also have homes in Clarendon Hills, Roselle, Glen Ellyn and Western Springs, among other suburbs.
"Everything is being brought to us by brokers in-the-know, not the guys who have a listing. If it's listed I don't want to see it, because everyone else is going to be looking at it," says Gammonley. "We're being brought projects because when we promise something we're going to deliver. So we get savvy land sellers who know that we're capable of doing what we say we're going to do."
Gammonley says the village governments are getting proactive in terms of realizing that the type of higher density multi-family properties his company develops can aid their communities. "For a while you saw the [suburban] downtowns dying; the malls were taking all their customers…LaGrange made a decision five or six years ago that [mixed-use] was the way to go. Now they probably have one of the most dynamic suburban downtowns I've been in." He says towns such as Downers Grove and Glen Ellyn have also made improvements with mixed-use development.
Once a developer finds a promising location, he must look at the underlying zoning. "You have to see if the zoning is roughly compatible [with your plans] to begin with, or if you're going to be a pioneer out there," says Gammonley.
If the zoning works with what his company envisions for their plans, the next thing he'll do is sit down with his staff. "The staff generally knows what the [village] trustees want, they have the ear of the mayor…It's very critical to work with staff because they're the guys that are in the field and in the trenches; they know what the village wants and are generally more knowledgeable about what a village's comprehensive plan is."
Drew Ferris, president of Ferris Homes, says that his company's biggest challenge is finding the best sites for development. "One of our biggest hurdles right now is land– where you find it and what you do with it." Ferris has been developing property since 1995, and does all his own general contracting. Currently his company is doing a 48-unit project in Libertyville, Liberty Grove, which comprises 30 townhomes and 18 single-family homes. Ferris says it's a "maintenance-free" community, with services such as snow removal, lawn care, exterior maintenance, irrigation, alarm systems, etc. They also have a unique 49-unit condo building in Evanston for which they're about to break ground.
Ferris says that while brokers do bring opportunities to them, a lot of their site-searching happens while simply driving around. And, like Gammonley, he says land that has already been on the MLS isn't suitable for his development purposes. "Sometimes we'll have Realtors with vacant parcels send us a whole slew of MLS numbers–those don't do me any good. Everyone has looked at them and … they're priced to buy. Commercial brokers will call us right before or as they're about to list something because they know we'll give them a quick answer 'yes' or 'no,' and we'll know if it fits what we do."
Proximity to modes of transportation is something all three developers consider. For instance, Terrapin picked a location in Cherry Valley, Illinois near Rockford because it's right off the highway. The Trails at Cherry Valley is a 29-acre, gated community with 256 one- and two-bedroom residences. "And then Lockport down south–Interstate 355 will continue right near our project, so we see that that's going to be a really convenient place for people to live," Ezgur says.
In addition to transportation, Ezgur says amenities and services that buyers are going to equate to value come into play with Terrapin's developments. "We want to have it be distinctive and [to offer] a lifestyle. What we mean by 'lifestyle' is there has to be some other element; it's got to either have some retail, which is really big with us–we've brought into the 1001 Madison building the first Starbucks and Blockbuster–there's also outdoor space or some type of other amenities such as a workout facility."
"The first thing I focus on are locations where we have some type of competitive advantage," says Ferris. "We look for that competitive edge–for our Evanston project it happens to be architecture; for our Libertyville project it's our maintenance-free product. In Glenview we did 16 single-family homes called Ashton Park, [and] our competitive advantage there was we were only going to be building for a year and a half; there were people who felt the short construction process was competitive."
MARKET RESEARCH
"You've got to make sure the the deal is going to work, and in order to do that you have to know the market and have lots of market research," says Ezgur. "[We use] people like Gail Lissner [of Appraisal Research Counselors] and Tracy Cross & Associates. As we continue to grow we talk to Gail on a weekly basis. And Tracy was the person who gave us the feasibility study on our Cherry Valley project. We actually went there for a series of meetings to really understand not just what our competition was doing and what the market is like, but to understand what our buyer is looking for, what we're going to want to do for finishes, etc. You're doing that kind of background research at the same time you're researching what the community and the government wants–you're understanding the market. Then you can meet with your architect and give him better guidance of what it is that you want him to design. If you do it right it's a very seamless, efficient process."
Once Ferris locates a site, he'll have a market analysis done by Tracy Cross & Associates or another market research company. Then he decides what product he can put in that particular marketplace and at what price point. "[The market research company] will give us a snapshot of the marketplace within a five- to 10-mile radius, and also related to the entire Chicago market. We'll give them parameters of what we feel the design should be, and through chart analysis we'll see where the gaps are. We'll have a basic design–we know it's going to be a townhome product with three bedrooms or a single-family product 2,800-3,500 square feet–then the market study will help us refine those floor types. Then we'll tweak our design to get as close as we can."
ENTITLEMENTS/GOVERNMENT INVOLVEMENT
"Entitlements are whatever governmental approval is necessary to be able to go forward with a development project, which could include things such as sewer connections or infrastructure issues or site plan approval issues," Ezgur explains. This may be done either before or after a developer closes on the land acquisition.
Although there may be a lot of competition when looking at a hot location, Ezgur says his company tries to learn everything about the area and the site itself. "That means not only who the neighbors are and what amenities there are, but also what the zoning is and what the planning department and the alderman and the community groups in the area feel about the location."
After Terrapin's second project in the West Loop neighborhood, Ezgur says he got more involved in the West Central Association community group. "I became the president of the chamber of commerce of the association. So now when I'm going to the West Loop, as the president of the association, I really have my finger on the pulse of what's going on." He says although most developers may not go as far as he did, getting involved and getting to know the local government officials is key. "Talk to the alderman, talk to the associations... understand who the leaders are in the area and understand what their needs are... all those things put you at a competitive advantage."
For their Cherry Valley project, Terrapin met with the mayor and his staff and showed them their plans. "We went in saying, 'Let's work together to get it done,' which is a good approach to take, whether you're in Cherry Valley or Chicago," says Ezgur. "It's much more productive when you can work with the planning department or whoever supervises the development [in the city or village]."
WORKING THE NUMBERS
Ezgur says that like design and architecture, financing is an art. "There are lots of creative ways to finance a project, and the key is to know the mix of 'senior depth' or the main construction loan on a deal, and then the blend of what may be an acquisition and development loan and some mezzanine financing–layers of financing placed at the right time and in the right amounts to make it really work," he says. For Terrapin's 909 Washington building, Ezgur says they raised equity with investors which enabled them to purchase the land. "A lot of times you're raising money or you have equity which is your down payment in a sense, and then you might get a land loan from a bank; for land loans we like to use smaller community banks, they're right there and know the market. Then you start preselling units."
"Often what happens is the amount of equity you've raised and amount of presales may not be quite enough," says Ezgur. "Your construction lender–the people that are giving you the most amount of money–might want additional funds that would make them feel comfortable in financing the construction of the project, and that's where mezzanine financing comes in, where you would go to a lender and set up to bridge the gap between the equity that you've raised and the construction loan."
Ferris says for their financing they go to their preferred banks with a pro forma. "We say, 'Here is what we feel is going to happen, and they say, 'Here's what we feel we can lend you,' and we negotiate that out."
"We have five banks that we may work with depending upon the deal, or who likes the type of project, or who we owe a favor to... At this point in our career we're turning institutions away just because we don't have a deal ready," says Gammonley.
Ezgur says in a condo conversion, such as Terrapin's newly acquired Grand Plaza at 540 N. State St., Chicago, they're working with a lender who is basically putting all the debt on day one and there is no construction loan. "It's a conversion, so we're starting at the top of the loan and we're trying to sell as quickly as we can to reduce it to zero. New ground-up construction deals are kind of the opposite; you're starting with nothing and you're adding to it, and as you add to it you need various different kinds of financing."
Sometimes the numbers don't always add up. And that's the time, Ezgur says, when it's critical to be able to know when to back away from a deal. "It's really easy to go forward and continue to think you're on the right track, but you need to know when to 'cut bait' and move on, because there is so much risk in the development business; it's big money, and there are a lot of people relying on the development."
BY DESIGN
"You're continually designing things up until and even after you break ground," Ezgur says. "You're continuing to come up with the exact thing you think buyers are going to want in the area. Then you have at least some preliminary plans that you can show to contractors." Ezgur's partner Sherwin J. Braun is an accomplished architect and past president of the American Institute of Architects (AIA), and has been developing buildings for many years–"which gives me quite a bit of comfort because he is able to supervise our in-house team of other architects and builder types," says Ezgur.
Ferris Homes uses Goldberg Downey Architects, Inc. for much of their architecture. The firm is fully integrated with an administrative staff as well as civil, structural and mechanical engineering and other consultants. "They pay attention to the market," Ferris says. "Architecture is very important; if it doesn't look good, people won't buy it!"
PRESALES
Presales is a set amount of units a developer must sell in order to move onto a larger construction loan. Ezgur says lenders today typically require 30-50 percent of the homes to be presold before they will release construction monies. "It kind of depends on the market; it depends on how aggressive the lender is; it depends on how aggressive the developer wants to be and how much equity they've put down … If you have more equity you might need less presales; if you have less equity you might need more presales. So it's a balance and that's where that art of financing comes in," he says.
Ferris says once they have their product designed they'll design a sales center. "Trying to get presales out of a model and brochures is difficult," he says. "You know what it feels like when you walk into a 10 by 10 room, but show it on a piece of paper and they have a hard time envisioning it. So you want to have your model built and your option pricing done and as much information in place before you start to market so that you can effectively answer the questions buyers will have."
SALES & MARKETING
Terrapin Group includes Terrapin Realty, which has a sales staff of approximately 20 people. "They're focused on selling just one particular project, so it's a little bit of a different process than the more entrepreneurial way brokers go about getting sales," says Ezgur. "It's more of a 9-to-5 job. With a Realtor working independently, either with a company or on their own, it's very entrepreneurial; they have to find a buyer and go looking with them, or they list a property for a seller and they show it." Salespeople who work in-house for developers usually get a base salary or draw and set bonuses per sale.
Ezgur adds, "Our people are trained to work with the outside brokerage community and to know how to cooperate with them in an effective professional way."
Sales are often going on concurrently with the construction of a project, and there is much overlap of timing throughout both processes. Ezgur says the buyers' brokers are very involved making sure the buyers are getting their financing and choosing their options and upgrades. "There is a lot of critical timing involved; you've got a buyer that has to make an emotional decision about what kind of carpet to pick, for example, and that decision needs to be properly transmitted from the buyer to the salesperson to the lender to the contractor and then to the sub. Someone has to coordinate all of that so when the buyer does a walk-through before closing everything is there."
The goal ultimately is to sell out homes as quickly as possible, Ezgur says. "You need to sell out is the bottom line. There are two theories on that: one is that you want to sell out the entire thing as quickly as possible, and the other is that it is going to take you two years or 18 months or whatever to build the building, so there is no reason to sell it all out today, because in a year from now prices may be different and buyers' expectations may be different, so you want to kind of balance your pricing to respond to the market."
CONSTRUCTION
Ezgurs says Terrapin follows a critical path and has software and tracking systems in place that keep them on-track–"which ultimately leads to the buyers being satisfied and repeat buyers," he says. "You need to be able to deliver to your buyers. People want to get in now; they don't want to wait. And more important maybe than when the buyer gets to move in is that you stick to a critical timeline and everyone knows what they're supposed to be doing; you'll get a more efficient building process that results in a better end-product.
"You have your contractors and they have lots of subs they have to coordinate," Ezgur continues. "You've got your architect who needs to get out there and make sure it's right and they're building it according to what they've drawn. You need an owner's rep from the developer side to make sure the architect has properly translated what you want drawn and is building what the concept is. And the lender has to check on the progress to make sure everything is going along the way it's supposed to so they can keep the money coming and keep the project alive."
Gammonley says, "Every project is different. It can [take] 90 days to two and a half years. No two projects, no two villages or towns are the same."
Ferris says they try to schedule everything out. "We do our own general contracting which we hope helps with the fluctuation of workflow. But you do run into unforeseen delays; people like to customize, and when they do, the schedule might be extended. We try to be as up-front as possible with people on time frame." Ferris says a six-unit townhome building such as in Liberty Grove takes about eight months before the first move-in, and single-family homes take about six months.
OPTIONS & UPGRADES
Terrapin has a team of selections [options] and upgrades consultants that work directly with their buyers. "Once there has been a selection made for a particular unit, the subcontractor and contractor need to know so they can track it and make sure that unit gets the product," says Ezgur. The selections process doesn't end there, however. The information has to be transmitted back to the buyer's and seller's attorneys, and the lender is kept in the loop so that any options are added to the purchase price.
"When you deal with a Terrapin professional they're acting as your consultant, making it easier for you. Time is money–buyers like to come into one place and see everything they can choose from, and there is a cost to that. I equate it to hiring an interior decorator: if you go and hire one it will cost a whole bunch of money to buy a couch. You may could get one cheaper [yourself], but you're not getting the expertise of the decorator." Another big advantage to having the services of a selections consultant is that when buyers make upgrades to their home through the developer, they add the cost onto their mortgage and it becomes part of their mortgage payment, rather than having to shell out the full amount for the products at purchase time.
Ferris says that while some builders use salespeople to do selections, Ferris Homes sees that as a problem. "If you have a customer picking out selections, and the salesperson also has to keep selling units, if a new prospect walks in, somebody is going to get short-changed."
MOVING DAY
When the closing date is near, buyers and their agents will do a walk-through of their new home. "They're looking to be sure that all things are in the unit and there aren't mistakes or unfinished things," Ezgur says. "But there is always a little something, and our goal is to make it 100-percent correct." Buyers will make a punchlist of items which, Ezgur recommends, should be signed off on by the developer. "The list is agreed to, brought to closing, everyone understands what needs to happen, and we need to stay involved to be sure that list is completed in a timely and professional manner."
Reputable developers like Terrapin offer one-year warranties on products included in their homes. "There are a lot of choices out there for buyers and they need to know that when they buy from Terrapin we're standing behind it," says Ezgur. "It's important as a developer to do that because it shows you stand behind your product and your actions speak louder than words." C.A.
Copyright (c) 2005, Chicago Agent Magazine
