REAL ESTATE DEVELOPMENT



Real Estate Development 598

Course Name: Retail and mixed-use Development

Fall 2010

Instructors: Jeff Kreshek

Class Hours: Wednesday, 6:30 PM

Classroom: VKC 202

Office Hours: By Appointment Only

Jeff’s Phone: 323-860-4947 or 310-430-1019

Jeff’s Fax: 323-372-3553

Jeff’s Email: kreshek@usc.edu or jkreshek@

Course Objective

Often times, retail development is viewed strictly from the a financial underwriting perspective. Relying on the financial thesis created, decisions have been made to invest or not invest. In a changing real estate world, what happens when the financial analysis no longer holds true ? How can one creatively look beyond the proforma to the true underlying fundamentals of the retail real estate.

The class will include: 1) identifying shopping center and mixed-use product types and analogues; 2) a general understanding of how consumers shop and what is important to the consumer; 3) defining trade areas an determining market feasibility of an existing project; 4) performing a basic tenant gap analysis which will become the basis for developing a tenant mix; 5) determining a development program to achieve the highest residual value; 6) developing plans and elevations for a redevelopment program; 7) developing and executing a leasing strategy; 8) basic negotiating techniques 9) a basic understanding of retail real estate contracts.

Course Purpose

To prepare students for the Final Exam, which will require students to review an existing project including comprehensive analysis of the trade area, tenant gap analysis, site plan analysis, tenant mix analysis, project design, market acceptance of the proposed leasing plan, analysis of the overall leasing strategy, all in designed towards having the student draw a conclusion as to the viability of the project as configured and present solutions, to the extent necessary.

Teaching Method

Lectures, guest speakers, analyzing case studies, field trips and selected readings.

Required Reading

Various articles to be distributed in class.

Suggested Reading

Underhill, Paco, 2009, Why We Buy: The Science of Shopping, Simon & Schuster

Underhill, Paco, 2004, Call of The Mall: the Geography of Shopping, Simon & Schuster

Williams, John C., 2004, Getting Retail Right, International Council of Shopping Centers

Portman, Janet & Steingold, Fred S., 2005, Negotiating the Best Lease for Your Business 2nd Edition, Nolo

Donaldson, Michael C., 2007, Negotiating for Dummies, Wiley Publishing, Inc.

Course Assignments

Homework Assignments will be assigned each week. They will take between 1 -2 hours to complete (depending on the assignment) and are due the following week in class. Homework assignments must be type written and account for 25% of the class grade. In class participation will account for 25% of the class grade. The Final Exam, as with the midterm, will take on average 5 -10 hours to complete, and will account for 50% of the class grade.

Student Disabilities

Any student requesting academic accommodations based on a disability is required to register with the DSP each semester. A letter of verification for approved accommodations can be obtained from the DSP. Please be sure the letter is delivered to the class instructor prior to the 4th class session of the course. The DSP phone number is (213) 740-0776.

Academic Integrity

The University, as an instrument of learning, is predicated on the existence of an environment of integrity. As members of the academic community, faculty, students, and administrative officials share the responsibility for maintaining this environment. Faculty have the primary responsibility for establishing and maintaining an atmosphere and attitude of academic integrity such that the enterprise may flourish in an open and honest way. Students share this responsibility for maintaining standards of academic performance and classroom behavior conducive to the learning process. Administrative officials are responsible for the establishment and maintenance of procedures to support and enforce those academic standards. Thus, the entire University community bears the responsibility for maintaining an environment of integrity and for taking appropriate action to sanction individuals involved in any violation. When there is a clear indication that such individuals are unwilling or unable to support these standards, they should not be allowed to remain in the University.” (Faculty Handbook, 1994: 20)

Academic dishonesty includes: (Faculty Handbook, 1994: 21-22)

• Examination behavior - any use of external assistance during an examination shall be considered academically dishonest unless expressly permitted by the teacher.

• Fabrication - any intentional falsification or invention of data or citation in an academic exercise will be considered a violation of academic integrity.

• Plagiarism - the appropriation and subsequent passing off of another’s ideas or words as one’s own. If the words or ideas of another are used, acknowledgment of the original source must be made through recognized referencing practices.

• Other Types of Academic Dishonesty - submitting a paper written by or obtained from another, using a paper or essay in more than one class without the teacher’s express permission, obtaining a copy of an examination in advance without the knowledge and consent of the teacher, changing academic records outside of normal procedures and/or petitions, using another person to complete homework assignments or take-home exams without the knowledge or consent of the teacher.

The use of unauthorized material, communication with fellow students for course assignments, or during a mid-term examination, attempting to benefit from work of another student, past or present, and similar behavior that defeats the intent of an assignment or mid-term examination is unacceptable to the University. It is often difficult to distinguish between a culpable act and inadvertent behavior resulting from the nervous tensions accompanying examinations. Where a clear violation has occurred, however, the instructor may disqualify the student’s work as unacceptable and assign a failing mark on the paper.

Although some MRED classes may encourage a team approach to completing homework assignments and take-home exams, THIS CLASS DOES NOT. All work must be your own. NO Collaboration.

Class Outline

Class #1 – January 13, 2010

1. Instructor and Student Introductions.

2. Review Syllabus and Instructor Expectations

A - Grading

i Class Participation

ii Homework

iii Mid Term and Final Exam

B – Workload and Expectations

C – Recommended Reading and Prerequisites

3. Why and how people shop:

A. The history of retail and shopping.

i Marketplaces and to modern day shopping centers.

a. Shopping Center types.

i Power Centers, Lifestyle Centers, Regional Malls, Mixed Use and others.

ii Characteristics of each and what makes them unique.

ii How do people shop ?

a. Weekday versus weekend.

b. Drive time and distances

c. Bulk shopping (everything in one trip)

d. Specialty shopping (specific goods at specific places)

iii Why do people shop ?

a. Convenience

b. Necessity

c. Socialization

d. Other

4. Homework – Stop and think about yourself as a consumer. How do you shop ? Where do you shop most ? Why do you shop ? What are your habits ?

Class #2 – January 20, 2010

1. Review and discuss Homework.

2. Review of Shopping Center Types.

A – What role does the retail “unit” play within each.

i How is the retail positioned (ie – anchors versus shops, etc.)

ii How does the retail help “sell” the shopping opportunity.

iii Is the retail message clear to the consumer.

3. Retail in the Mixed Use World – The tail wagging the dog ?

A. Brief overview of mixed use retail in early times and the modern world.

i Mixed use retail as a psychology.

a. Shopping Center types.

i Sending a message of necessity.

ii Sending a message of poverty.

iii. Sending a message of affluence and status.

B. Mixed Use Do’s and Do Not’s

i Developer Mistakes

a. If you build it, the retailers will come.

b Ground floor as a necessary evil.

c. Who cares about parking.

d. But the City really wants a ……..!

e. Ground floor retail as the identity of a building.

f. Pedestrian and vehicular access

g. Are you on the wrong street ?

iii Development Pitfalls

a Floor plans and columns.

b Parking.

c Storefronts and signage.

d Loading

e. Curb appeal.

4. Homework – Visit three or more mixed use projects. What did the Developer do right and what did the Developer do wrong ? What statement or role did the retail play in the overall development ? Do you think it is (or will be) successful ?

Class #3 – January 27, 2010

1. Review and discuss Homework.

2. Retail in the Macro Environment.

A – How has the retail development landscape changed in the last year.

i Ramifications of retailer over expansion.

ii Ramifications of developer over building.

iii The world has changed, now what ? Will retail development ever make sense ?

B – Retail Categories and their requirements.

i Size

ii Configuration

iii Rents and TI Contribution

iv Sales Volumes

v Non-monetary contribution to the project

C – Merchandising Plans

3. The Development Process and the Development Participants

A. Participants

i. Developers;

ii. Sellers/Lessors;

iii. Capital providers;

iv. Government (Staff and politicians);

v. Brokers;

vi. Consultants;

vii. Architects/Engineers;

viii. Public interest groups;

ix. Shadow interest groups;

x. Attorneys

B. Developer Profile

i. Managing creative process with unique result;

ii. Visionary and task master: schizophrenic?

iii. Managing proforma to maximize profit, while managing risk

iv. Keeping options open as long as possible;

v. Responding to change;

vi. Working within constraints

C. Development Stages & The Development Process

i. Finding a deal;

ii Formulate redevelopment programs and analyze same;

iii. Making an offer;

iv. Proforma and counter;

v. Tying up a deal;

vi. Assembling the team;

vii Due diligence;

viii. The evolving proforma;

ix. Entitlements;

X. Plans;

xi. Marketing;

xii. Raising capital;

xiii. Capital due diligence;

xiv. The appraisal and feasibility studies;

xv. Pulling the trigger;

xvi. Construct;

xvii. Stabilize;

xviii. Hold or sell.

4. Homework – Analyze LA Live. Who were the major stakeholders and participants ? What roles did they play in the development. ? How would you go about deciding the feasibility of such a project with a lack of analogs ?

Class #4 – February 3, 2010

1. Review and discuss Homework.

2. Demographics, Psychographics and Market Analysis.

A – Demographics

i What are they ?

ii What do they really tell you ?

iii How to effectively use them ?

B – Psychographics

i What are they ?

ii What do they really tell you ?

iii How to effectively use them ?

3. Other useful Market Analysis Tools

A. Retail Gap Analysis

i Current Tenants within a trade area

a. Who is there, who is not and why

i If they are there, does demand dictate that another store could be there.

ii If they are not there can the area support a store – why or why not.

iii. Other factors affecting tenants in a trade area (Walmart and politics).

B. Consumer Demand

i Given the profile of your consumer, what do they want.

a. How does the demographic and psychographic profile affect store location.

b How do you link the consumer profile with the store decision.

C. I really want a Trader Joes so how come they will not call me back ?

i The inverted pyramid.

a. Primary Factors

b. Secondary Factors

4. Homework – Analyze . Who is your customer from both a retail and a consumer point of view ? What is the gap in the market ? Why is there a gap and can you overcome it ?

Class #5 – February 10, 2010

Pitfalls of Financial Modeling in the Retail Environment.

1. Review and discuss Homework.

2. Review and discuss the basics of a retail proforma.

A – What Assumptions are being made ?

i Supporting Market Data.

ii Data on a looking forward basis.

iii Best Case / Worst Case Scenarios.

B – Are your assumptions reasonable.

i Acceptability of the site by a retailer and willingness to pay proforma rent.

ii Proforma rent and rent growth assumptions.

iii Absorption assumptions.

3. What happens when your proforma no longer matches reality.

A. How to adjust your underwriting.

i What happens when the tenants will no longer absorb space at proforma rents.

a. Developing Alternate Strategies.

i Reducing economic expectations.

ii Creatively restructuring economic deals (free rent, TI, concessions).

iii. Alternate strategies for gap analysis and absorption.

B. What the proforma does not tell you.

i Project - .

a. Will retail tenants accept the product.

b Is there a retail gap or is the market well covered.

c. Will the tenants pay rent or is there an better alternative

d. Is the location right for retail.

e. Miscellaneous items such as co-tenancy, kickouts, poor sales, project delays.

C. Case Study.

i Project The Strand – Huntington Beach, California.

Ii Project Center Street – San Pedro, California

4. Homework – Analyze the proforma handed out in class. What are the market assumptions ? Research the trade area; were the assumptions good or were the assumptions flawed ? Explain your findings.

Class #6 – February 17, 2010

Architectural Panel Discussion & Mid Term Introduction and hand out. (Marty Borko)

1. Review and discuss Homework.

2. The basics of retail site design.

A – Define your end users – tenants and customers.

i How will the end users utilize the space.

ii What experience are you attempting to create.

iii Various layouts for different types of retail.

B – Other factors to consider for the end users.

i Access to the site and the stores

ii Parking

iii Signage

iv Visibility

v Storefronts

vi Basic services – grease, gas, electrical, plumbing, sewer, exhaust.

vii Slabs – go up or go down

viii Cross shopping

ix Overall design – Barbell, Racetrack, Other

3. Midterm Discussion.

A. Exam consists of 4 parts.

i Who is your shopper.

ii What gap exists in the market.

iii What is your retail solution.

iv What are pitfalls that you should consider in designing or improving the site.

4. Homework – None.

Class #7 – February 24, 2010

Mid Term Exam Review and Discussion

A. Site One solutions and discussion.

B. Site Two solutions and discussion.

C. Site Three solutions and discussion.

Class #8 – March 3, 2010

Basic LOI and Lease Provisions

1. The Letter of Intent.

A – Where do you want to start and where do you want to go.

i Defining key terms – Rent, Term, Percentage Rent, NNN, Use

ii Other terms that can ultimately impact the deal.

iii Non-binding language..

2. The Lease.

A – Where do you want to start and where do you want to go.

i Review of specific clauses..

ii Importance of clearly defined terms.

iii The use and exclusive clauses and for no other use.

iv Operating Expenses

v Co-tenancy and kickouts.

vi Defining work responsibilities.

vii Long term implications of what you negotiate in any lease.

3. Homework – None.

Class #9 – March 10, 2010

Tenant Panel Discussion - Speakers to be announced.

Class #10 – March 24, 2010

Developer Panel Discussion – Speakers to be announced.

Class #11 – March 31, 2010

Negotiations Workshop and Business Ethics

Class #12 – April 7, 2010

Mock Negotiations

Class #13 – April 14, 2010

Final discussion on course work, introduction to final exam, hand out final exam (Due April 21)

Class # 14 – April 21, 2010

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