Why do investors buy/ sell " development opportunities"
This week in the journals property report section I see an add promoting " an approved 33 unit condo development opportunity"...
Can someone explain the thought process behind a deal like this. What type of investor would sell something like this and why? Are they likely not able to get financing or are there companies that specialize in just getting approvals and then selling them?
Who would buy something like this? I thought that much of the value that a developer creates is in the approval process and getting property repositioned to a more profitable use. Doesnt the buyer lose a lot of the upside in something like this? Are things like this typically marketed to more rise adverse buyers like life cos?
Any thoughts on how these things work?
May not have the funds or capability to raise something from the ground at the moment and may want to cash out on inflated land values, for ex: multi residential zoned land in primary market may get them a significant premium. Maybe land location or entitlements are not in line with a new strategy. May be in need of liquidity.
You're talking about a few different kinds of risks here:
1) ENTITLEMENT RISK: You invest $$$ to prepare documents/plans and navigate city approval processes. Depending on the city, if you're rejected, it could take a pretty long time to revise & re-navigate and obtain the necessary approvals, which kills the IRRs institutional investors look for.
2) DEVELOPMENT RISK: You have your entitlements, gather the development team, manage the project to completion. Risks include effing up project management and delivering late, your contractors missing something and failing key building approvals that require additional costs/time to remedy, etc
3) MARKET RISK: Even if you navigate entitlement & development risk safely, you could deliver your project into a shitty market. Developments can take 12mo+ to fully develop from groundbreaking, so you could completely miss the boat, even if you start building during a booming market.
1 You get paid for navigating project approvals through the government machine
2 You get paid for choosing the right teammates & managing your project to completion
3 You get paid for timing your investment correctly
Institutional players will play with #2 & #3, but it takes special types to play with #1, since this process is harder to predict if it will be successful and when it will be successful. #1 pays the most but is hardest to predict based on general market performance.
Lastly, even the firms that do all 3 might sell their entitlements if they can find another investor far more optimistic about their project's performance than themselves.
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