Obama has pushed his “stimulus bill” through and it looks like he will sign it into action in a few days time.

But what is really in it and how is it going to impact real estate developers?

Well, there are many lists of what is actually in the package and all seem to have “overlap” that creates confusion.  For example, most lists shows about $40 billion slated for infrastructure improvements (primarily roads) but there is also listed $10 billion for improving a handfull of government buildings.   It is unclear, if that $10 billion is part of the $40 billion or in addition to it.  Examples of this are everywhere so it is unclear how much really is slated for development.

(By the way, if you want to see how the goverment can spend $10 billion dollars on a handful of buildings, go here, “800 Billion Reasons to Worry“.)

Whatever the final number is, most developers I talk with are asking how fast is it going to happen.

But maybe that isn’t the right question.

The question I am asking is “What impact is this going to have on the cost of construction?”

You see, I am working with several developers who would love to pull the trigger on projects but the financials just don’t work - primarily because construction costs are still high.  (Yes, construction costs have come down some – but not nearly at pace with the other variables involved.)

So these developers are content to sit and wait until costs catch up with everything else, supply and demand come back into balance, and these projects become financially feasible.

That is going to take much longer because of the stimulus package.  The stimulus package that Obama is about to sign will create billions of dollars worth of demand for construction materials and the effects of that demand will impact material prices all across the country.

The stimulas package will keep material costs from coming down and keep many real estate development projects from actually happening.

Sure, the localized areas where the goverment construction actually occurs might see a bump in there local economies – but that is going to be extremely local.  Meanwhile the rest of the country where these government funded project are not located will be far worse off.

Laws of demand and supply will continue to remain out of balance, keeping growth from happening for a much longer period of time.

I hope I am wrong on this one.  But I haven’t seen or read anything to prove to me I am not.

Over the past week, I have watched, read, and listened to as many so called experts as I can bear explain the financial crisis we are in – including the presidential candidates.

Nearly all of them say the same thing,

“Nobody wants to bailout the banks, but the problem is so bad that we have to do it.”

It is impressive how much detail these experts are able to go into explaining exactly why the crisis happened and who is to blame. But what’s really amazing, is how little detail these experts are able to provide on how the $700 billion dollars will solve the problem and why $700 billion is the right amount to do the job.

“Just trust us (with your money).” is the common answer we are provided.

(And for the few that do attempt to explain the solution, they all leave out the real danger this solution creates – which I will explain in a moment)

So how will the bailout impact real estate developers and the property development industry as a whole?

Well to start you need to understand the problem. I am not going to rehash it here but I will give you a snippet from a particular doomsday email I received from John Mauldin’s Thoughts of the Frontlines service. (John Mauldin is a best selling author and financial expert. His weekly economic e-letter goes out to over 1 million subscribers. You can subscribe here, http://www.frontlinethoughts.com/learnmore )

“Banks can lend to consumers and investors about 12 times their capital base. If they have to write off 20% of their capital because of losses, that means they either have to sell more equity or reduce their loan portfolios. … Because banks and investors and institutions are having to deleverage, that means they need to sell assets at whatever prices they can get in order to create capital to keep their loan-to-capital ratios within the regulatory limits.”

In other words, because of regulations, banks are forced to sell their loans at a time when nobody is buying which is fueling the economic downward spiral for these banks. And until the banks get to the bottom of the spiral, they can’t make any new loans. Its new loans (i.e. the supply of capital) that fuels the growth of the economy.

So, if the government can buy all these loans from the banks, the banks can get back to doing what they need to be doing – supply the cash for the country to grow.

Or at least that is what we are told. And to sweeten the deal, most of the pundits finish off by saying “…the government will most likely make a profit on these loans because they get to buy so cheap now and they can sell them for higher prices later on.”

So as a real estate developer, the bailout sounds great right?

I mean you need financing to get your project developed and the bailout will increase the availability of that financing.

Uhmm, no.

Or at least under the current plan, that is extremely unlikely to happen.

One of the best explanations of why this is the case was presented by Ken Courtis, former vice chairman of Goldman Sachs, Asia and George Magnus, senior economic adviser at UBS during an interview on the BBC Worldservice. This interview is by far the best discussion on the problems and potential solutions I have heard to date. (I recommend you listen to the entire interview here – http://www.bbc.co.uk/worldservice/specials/1512_debates/page24.shtml )

In the interview, Ken Courtis and George Magnus explain that under the bailout plans that are proposed the government will be buying the bank’s loans, but not actually increasing the amount of capital reserves with which to make new loans. And in fact, the new banking rules implemented as a part of the bailout will actually make it more difficult for banks to lend money.

The bailout will actually reduce the availability of financing for real estate developers making the depression worse.

This is one of the biggest reasons the bailout is bad for real estate developers – but not the only one.

There is another reason – a reason that is actually more important and the ramifications are far more serious than what all the experts are talking about at the moment.

You see everyone is focused on problems with supply – but no one seems concerned about the problems with demand.

The banks ability to loan capital to businesses is the SUPPLY. The DEMAND is business’s need for loan capital to meet the publics growing demand for their products.

Unfortunately, taxing the public to the tune of $700 billion dollars (actually it is closer to $2 trillion) will create a massive drop in DEMAND – sending us into a deeper and longer recession. Ken Courtis attempted to point this out in the BBC interview and was cutoff because nobody wants to hear it.

Nobody wants to face the fact that whether the drop in DEMAND happens immediately or is put off by financing the bailout with overseas loans – the drop in DEMAND is going to happen. And it will most likely be severe. Gross National Product will go down and could stay down for a long time.

The structure of the bailout;
• solely focusing on buying loans,
• no attempt to increase bank’s capital reserves while further restricting their ability to make loans,
• and no serious concern for the devastating impact the financial burden of the bailout will have on DEMAND and GNP –

creates a high probability that we are facing a decade long recession similar to the one Japan is only now coming out of.

When faced with the real result of the bailout, one has to wonder why any real estate developer would be in favor of it. Yes the lumps we are taking now are not easy to swallow. But I would rather take one bad beating and get it over with than face a long drawn out tortuous series of beatings in the future.

Thank you to everyone who took the time to enter the giveaway. Unfortunately, there can only be two winners (one grand prize and one runner up.) So without further delay, here they are.

The winner of the runner up prize – one hour of my time for consultation, evaluation, advice on land development, is Christian O’brien. Congratulations.

And now the winner of the grand prize – a land development site evaluation any time this year with an average value of $4,500, is Madrelle Arnette. Congratulations Madrelle.

(I emailed Madrelle earlier to let her know she had won and she told me that a group of her friend are starting a private school. They plan to use my services to help evaluate a site for the school. Sounds Awesome. I am glad to help.)

Once again, thanks to everyone who entered.

Bart

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One lucky person will win a $4,500 Site Evaluation Report for free.

That’s right. If you win the FREE Site Evaluation Report, myself and my partners will go through the due diligence checklist, conduct research, and create a due diligence report for a property of your choosing. And we will do it at no charge. Completely free.

Win a report for you project that looks like the free Site Evaluation Report we give away on the website. (Our clients pay us several thousands dollars to tens of thousands of dollars to perform Land Development Evaluations on their projects, so this is a pretty valuable grand prize. On average I would say this prize is worth $4,500)

Why am I doing this? Well, the other day I received an email from a member of the site saying,

“Property Development Source is the best land development resource on the web that nobody knows about – you should run a contest or something to get the word out.”

And I agree. So I am giving away thousands of dollars worth of our services in the form of a Site Evaluation Report as the grand prize in order to spread the news about our website.

But I am not going to stop there. I am also going to give away a runner up prize – an hour of my time. That hour can be spent on the phone with me answering questions or strategizing, doing research for you, or simply providing feedback on a project you are working on – it is up to you.

The way to enter for a chance to win a $4,500 Site Evaluation Report is simple. Nearly every blog post on our website has two little buttons down at the bottom of the article (Share This & Bookmark.) Those buttons allow you the reader to “social bookmark” a post to any of the major bookmarking and social websites.

Social bookmarking is a great way to get the word out about Property Development Source.com

So all you need to do to enter the contest is pick your favorite blog post or video on the website and use one of those buttons at the bottom to “bookmark” the post. Doesn’t matter what bookmarking or social site you use, just make sure you give the bookmark a proper title, description, and tags where possible.

Once you have done that simply send an email to bart@propertydevelopmentsource.com with subject heading: contest entry. In the body of the email tell me which blog post you submitted, what bookmarking or social site you submitted it to, and what your username is on that bookmarking or social site. (This will allow me to verify your entry.)

That is it. It’s that simple, takes less than 10 seconds, and your done. Should be fun.

Enter multiple times: For each blog post you bookmark and each social website you use, you can submit a new contest entry. (Limit 10 entries per person.)

To find out how you can get an additional 90 entries into the contest to win a $4,500 Due Diligence Report, please see the FAQ below.

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Otherwise, go to your favorite blog post now and start entering the contest! Good Luck.

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If entering sounds confusing, here’s a video to show you just how easy it is.

F.A.Q.

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What if I try submitting a blog post to a social site and the post has already been submitted?
Most social bookmarking sites allow you to “digg” or “vote” for a post that is already submitted. Simply vote for the existing submission and send me an email telling me about and you will be entered. No problem.

How many times can I enter?
You are allowed to enter the contest by social bookmarking blog posts up to ten times to increase your odds of winning the grand prize. (But there are other ways to enter as well.)

What are the other ways to enter?
1) a few of the videos on PropertyDevelopmentSource.com can be found on video websites like revver.com, livevideo.com, and Google Video and youtube. Go to those video websites and social bookmark the PropertyDevelopmentSource videos you find there. Send me an email just like you would do above and explain what you have done and it will be another contest entry (Limit 10)
2) If you have a website you can get 10 contest entries in one easy step. Simply write at least a 3 line description about PropertyDevelopmentSource.com on your website and include a link to our site in the description. (Links can be to the main web url or to a particular blog post – it doesn’t matter they just need to be working links and can’t be “no follow”.) Send an email to bart@propertydevelopmentsource.com with the subject heading: contest entry and give the url of where the link is located and your done. 10 chances to win will be yours.

When does the contest end?
I will draw the winners on my birthday, April 2nd and announce the winners the next day.

I don’t have a project right now, how long do I have to use the prize?
You can claim your prize at any time in 2008. Simply send us the property description by December 31, 2008 and we will get started on your report.

For the official contest rules, go here.

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The feedback I have been getting via emails lately has been great – lots of great questions.

What is most exciting is some of you have written with actual property information and requests for help with analysis and development planning. My partners and I are trying to set aside as much time as we can to help those who write in or submit comments. It’s really a win-win. You get help with an actual project and we get a better understanding of what areas people new to property development are most in need of assistance. So keep ‘em coming.

One question we have received multiple times is a request for financial software or spreadsheets.

In response, I have cleaned up a spreadsheet that I use personally for property development analysis.

The spreadsheet certainly isn’t the most complicated one I have, but it is better than many I have seen. I think it works great for many standard development projects and I think once you see it you will agree.

I am including the spreadsheet with THE BIG 6 report.

Go here to learn more about that great report and get your hands on the spreadsheet.

THE BIG 6: Answers to Developer’s Top Questions that Hinder Success
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There are many different real estate websites/magazines out there that have email newsletters. A few of them even deal with property developments, if only sparingly. None of these e-zines focus on the “how-to” of land development. They are geared toward news, market research and trends in the industry and are heavily weighted to commercial projects. (If you know a good exine for residential developers or for selling land, please let me know.)

Here is a list of a couple that I have found worth signing up for. Keep in mind, 90% of the time I simply scan the headlines and hit delete. And often, I will let them pile up for a week or two and then run through all of them in one go. The headlines are good for getting a general feel of the state of real estate development in various sectors and regions of the country – which is really all I am after.

And when I do find a headline that makes me dig deeper and actually read the article – I consider it gravy. So here they are.

http://nreionline.com/ National Real Estate Investor Online: There free print magazine is excellent and their ezines are good too. NREI has a bunch of sister sites, so whatever you are interested you should be able to find a match here.

http://retailtrafficmag.com/ Retail Traffic Online: One of the sister sites from above. Some good insights can be found here if you are in any way interested in retail real estate.

http://www.smartbrief.com/icsc/index.jsp ICSC.org SmartBrief This is run by the International Council of Shopping Centers.

http://www.realestatejournal.com Subsection of the Wall Street Journal. The residential side is geared more toward individual home buyers it seems, but the commercial side is worth checking out. On a side note, there website has this cost calculator that is fun to play with but I wouldn’t base a project on it.

Please, submit the e-zines you subscribe to in the comments below. I would love to hear what you find valuable.

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So it is not exactly about property developments, but it is definitely a case for conducting your due diligence before you make an offer.

Hilarious.

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The articles, videos, case studies and downloads we provide on Property Development Source.com are based on the suggestions and feedback we receive from our members. 

Whether you are developing property or just selling land, I am sure you have questions. Please use the comments section of this post to ask those questions and request topics that you want to see discussed.  (If you’d rather send a private email, you can do that as well at feedback@propertydevelopmentsource.com)

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Welcome to Property Development Source.com. 

We are continually ading valuable tools and information on a regular basis, but to meet all your needs we need your help.  If you have specific topics you are interested in or questions you need answered, please submit them in the comments section of the “Suggestions and Feedback” blog post.  Or you can send an email to feedback@propertydevelopmentsource.com.

For newcomers, a great place to start is with our Development Process video.  The video is a good overview of the development process and explains more about what we focus on here at  Property Development Source.com.

If you are looking for answers to any of the specific questions below, then head straight over and grab our ” “BIG 6 Package”

• How do I get good cost estimates for evaluating potential projects?
• How do I get financing for my project?
• How do I get a reasonably accurate feasibility study without spending thousands on consultants and reports?
• What percentage profit should a project provide to make it worth doing?
• What fee should land developers charge their partners or investors? (
• And finally, How do I hire the right team for my project and how do I
  manage them? 

If you project is being slowed down by anything of the questions above, check out the ” “BIG 6 Package” here.

Bart Pair

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