Advice from the Real Estate Roundtable: Real Knowledge, Real Experience

The commercial real estate industry can feel opaque and even intimidating to outsiders and newcomers. Armed with a bit of practical guidance and the right analytical tools, however, anyone can learn to navigate real estate investment and development.

To learn more about the integral components of commercial real estate, eCornell hosted a special roundtable event with lecturer Jeanne Varney, professor Jan deRoos and lecturer Brad Wellstead from Cornell’s SC Johnson College of Business. Here’s what they had to say.

What are the risks associated with real estate development?

Varney: Real estate development is a time-intensive process. It’s years of planning and construction. The designers, general contractors, architects, and engineers all have to work together to get everything finished. There’s the cost of capital itself, and the financing. Then there are unforeseen conditions, like market dynamics. There are also risks related to liquidity.

Wellstead: In the beginning, the primary risks concern the development. Next, there are schedule, budget, and quality issues to consider. Then, there are risks concerning the internal factors of the development team. There are external risk factors too.

So, from an investment standpoint, why is commercial real estate thought of as relatively sound?

deRoos: If you’ve completed your foundational work correctly, a good asset in a good market with good political support and good financing can produce solid returns for a long time. The retail industry is a recent example of how the world can change: it slowly changes, then all of a sudden there’s a tipping point.

Let’s talk about property prices and how to negotiate when properties are sold.

deRoos: Property pricing is based on expectations of what will happen in the future. It’s the intersection of two things: the cash flow that one can derive from an asset and how the capital markets treat those cash flows. When negotiating a price between a buyer and seller, first you’ll negotiate price. Once you have a tentative agreement, the focus turns to the balance sheet.

deRoos: The first rule of real estate is never fall in love with something that doesn’t love you back. That requires you to know the price at which you could sell it to the market. If it’s worth more to you than it is to the market, you hold it. If it’s worth more to the market than it is to you, sell it. The best asset management discipline is to do that rigorously on an ongoing basis.

Wellstead: It’s important to determine if you are in this for a quick turnaround, which in real estate might be two to three years, or twenty years. This decision influences how you manage that asset.

deRoos: Some create a lot of wealth for themselves by being flippers, and some create a lot of wealth as operators. A flipper is concerned about creating value and exiting at the right time. An operator is focused on leasing activity, taking care of tenants, and enhancing the property value.

Switching gears, what are the most important things to focus on when raising debt capital?

deRoos: You need to maximize your proceeds. In U.S. real estate, non-recourse means that the lender’s only recourse is to foreclose on real estate if you default. You get a free option to sell the real estate to the lender for the remaining balance, which is a bit cynical, but it’s also a very real option. You really need to limit your recourse as much as possible when you borrow.

Why is it more advantageous to raise debt capital over equity capital? What’s the variation in risk?

deRoos: Debt is cheap. Think of it this way: I want to buy something for $100. I have $30 of my own money. I need to raise $70. If I bring in a partner, they want to help me drive the bus. If I bring in a lender, they have their hands pretty far off the wheel of the bus. A lender is much less expensive.

Why is raising equity capital so hard?

deRoos: The hardest thing in life is asking someone to be your life partner. The second hardest thing you’re going to do in life is to ask someone for money. Investors are giving up liquidity. It’s really hard to get your money out. Investors give up control. They have to trust you to do the right thing to produce returns for them. You need to make that attractive by putting a structure in place that gives you all of the returns after I pay debt until you achieve a certain required rate of return, and then I get paid handsomely. It’s called a promote structure, used very commonly in private equity.

What about investment strategy advice? How do you know whether you’re making a good investment?

deRoos: Figure out how you add value and then add value to it. Ask yourself the following: “How will I add value? Do I know design? Do I have unique access to money? Do I have unique relationships with tenants? What is my value-add?” Then partner up with other people who can bring another piece to the table and do the things that really add value.

Finally, let’s discuss the economics of sustainable development.

Varney: There are growing legislative requirements when it comes to sustainable development. There’s a much greater level of education with all of the service providers, architects, engineers, designers, or manufacturers. Some municipalities even have requirements for building certifications like Green Globes or LEED certifications. They have expediting permitting processes for projects that are sustainable. There’s even a growing field for green lending.

More efficient equipment translates into less energy costs, so hopefully higher profitability, or more reliable debt service. There’s also solid research that shows sustainable buildings have higher leasing occupancy rates and higher leasing rate rental rates. Healthier indoor environments means less toxins and more efficient equipment. A LEED certified building is a higher quality building. We call it a halo effect or a positive reflection on the company.

For more information on real estate and investments, check out eCornell’s certificate programs designed by deRoos, Varney and Wellstead, including Commercial Real Estate and Hotel Real Estate, or watch the full Cornell Keynote, A Real Estate Roundtable, here.

Order Out of Chaos: A How-To for Hospitality Planners and Developers

While project management is important in many occupations, for some it is especially crucial and can be a determining factor for success. Brad Wellstead, professor from Cornell’s SC Johnson College of Business, has over thirty years of experience in architecture and project management and has seen first-hand the importance successful project management means for planners and developers. He sat down with eCornell’s Chris Wofford to discuss the importance of leadership and management abilities in hospitality today.

What follows is an abridged version of that conversation.

Wofford: If you’re getting started in this field, what are the particular skills and ability that would benefit one most?

Wellstead: Good project management skills include understanding and getting your hand around scope of a project and being able to schedule and budget and build teams and so on. But then that works into the characteristics where you, as the leader of a project, it’s about team building and significantly excellent communication skills. You have to be a motivator and you have to be a coacher.

Wofford: Budget creation seems like it would be a particular challenge. Any advice on how to deal with that?

Wellstead: Real estate development is interesting because there’s usually one team that comes up with how much money we have to spend on a project. Then, it’s handed over to the group that has to actually execute the project. They say, “Okay. Here’s your budget and your scope, and, oh, by the way, a schedule and make sure it happens in all those conditions.” That handover, that nexus right there, is always a challenging one, particularly if there were any last-minute changes based on feasibility or needs of the project or so on. That gets smoothed over by having the involvement of a project manager who is running it throughout the entire project so, when in fact you are creating budgets, they are able to contribute and add-in the necessary factors of contingency, both time and money to incorporate those so that they’re in as part of it from the very beginning.

Wofford: When you’re involving stakeholders, what are the expectations as far as presenting the state of the project?

Wellstead: When you’re in the implementation stage, when you’re spending 60, 70% of your overall budget, design fees, and construction, that’s when the real money is getting spent. There should be often weekly meetings between the owner and the architect during the design phase and the project manager, of course.

That keeps them up to date and/or the project manager keeps the owner up to date on a weekly basis that way. As you move into construction, typically weekly, sometimes biweekly, meetings of the owner, architect, and contractor. Again, with the project manager representing the owner. That keeps everybody up to date with what’s going on.

Wofford: Tell me what somebody might get out of your course as it relates to what we have been discussing today?

Wellstead: It starts with the understanding of the project and getting your arms around it, the skills of creating a schedule and a budget and running through the whole impact management point of view with some … I don’t want to call them detours, but we talk about creating RFPs and team building and such.

And quality schedule and budget. I’ve never had an owner say, “You know what? Scope and schedule are critical thing. I don’t care about quality. Give me a bad project. It’s fine.” No, that never happens. It’s always come more down to schedule and budget.

Then, there’s this whole other part of that culture that we talk about in the course where it analyzes who the leaderships are and some of the things we talked about when we’re talking about contingency because it leads to understanding how you address contingencies. Is it white hot construction? Is it crazy municipality? Is it a community that’s going to be anti or for development? Is it a difficult site to work in and a whole lot of internal things that are happening as well as external things that could be happening so it gives you this really comprehensive, holistic view of the project that once having done that, you have a sense of how you’re going to move forward.

All of that pulls all that together. Those are the main things: the culture, schedule, budget and the team building and then the impact management aspects.

Want to hear more? Watch the recorded live eCornell WebSeries event, Order Out of Chaos: A How-To for Hospitality Planners and Developers, and subscribe to future events.

Cornell’s New Commercial Real Estate Certificate Launches

Faculty from The Hotel School at the Cornell SC Johnson College of Business have partnered with eCornell, the university’s online learning unit, to develop a unique online program focused on commercial real estate investment projects. From property development to valuation and management, the new Commercial Real Estate certificate program prepares real estate professionals to successfully develop and manage real estate assets.

 

“We walk students through the entire real estate process, from start to finish, unifying the specialized knowledge and principles in a very intentional way. Whether you’re new to real estate or looking to move up in the industry, this certificate provides a robust overview grounded in application. Throughout the program, participants are sent out to do real work—modeling, inspecting, calculating,” said faculty co-author Jan deRoos, HVS Professor of Hotel Finance and Real Estate at the Cornell SC Johnson College of Business.

 

The Commercial Real Estate certificate, offered 100% online through eCornell, is comprised of six courses designed to be completed in three to five hours per week. To create a well-rounded curriculum, deRoos collaborated with Hotel School colleagues Jeanne Varney and Bradford Wellstead, combining expertise to provide a rich learning experience. Through the team’s courses, participants will learn and practice:

 

  • Planning a real estate development project
  • Managing a project budget, schedule, and contingencies
  • Developing a real estate investment strategy
  • Structuring and financing real estate investment deals
  • Effectively leasing and maintaining real estate properties
  • Managing real estate assets for success

 

This program is ideal for real estate developers, professionals with financial or operational responsibility for real estate investments, financing and asset management professionals, or people aspiring to work for real estate funds, REITs, or real estate advisory firms. Students who complete all courses receive a Commercial Real Estate Certificate from Cornell University’s SC Johnson College of Business.