The Cap Rate Part 1: What It Is, What It Does

Again, a reminder that postings on this blog site are sometimes aimed for those who are new to the real estate development industry or who are interested in learning more about it. This is one of those postings.

In an earlier blog, we discussed the concept of cash-on-cash as a means of measuring return on equity capital invested in a real estate project. Most real estate development capitalizations, however, include debt as well as equity.

In the current market, debt often provides 50% to 70% of the development capital needed. The balance generally is raised in the form of equity - money invested by individuals or entities with the expectation of profit or return of, as well as on, the investment. These are financial partners, not lenders who provide debt capital. Some sophisticated forms of debt can be converted to an equity position. Some may require participation in addition to interest on the debt capital. These arrangements sometimes are referred to as “equity Kickers”.

While cash-on-cash is a measure of return on equity, the capitalization rate, or cap rate, measures return on total capital invested: debt as well as equity. So, it is a measure of 100% of the capital utilized to develop or acquire an income producing property. In simple terms, it is the estimated rate of return on the capital invested in an income generating property at the time of its purchase or the initial stabilized year. It is expressed as a percentage.

For example, suppose a property generated net operating income, or NOI, (total income minus vacancies, credit losses, and operating expenses) of $500,000. Suppose also that the total capital (debt and equity) required to acquire the property is $7,500,000. The cap rate is 6.67%.

Cap Rate = $500,000/$7,500,000 = .0667 or 6.67%.

Thus, a common way the cap rate is used is as a means to identify investment properties that meet the investor’s desired rate of return. The investor analyzes the probable purchase prices of various properties and their respective NOIs. Using the formula above, it is easy to determine whether a given property meets the investor’s hurdle rate (minimum acceptable rate of return. In the example above, if the hurdle rate was 6.68% or higher, the investor probably would pass. If the hurdle rate was 6.67% or lower, the investor might be interested.

Instead of purchasing an existing income property, suppose you were going to develop one. If the total cost to develop it, including land, was $7,500,000, and it was expected to generate NOI of $500,000 in the initial year of operating after reaching stabilization (achieving the pro forma rents), the cap rate would be 6.67%, as demonsrated above.

In the next blog on cap rates, we’ll go into more detail.

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©2010 by The Falbey Institute for the Development of Real Estate

Another Way of Looking At Return on Investment in Real Estate

First, a reminder that this blog site is aimed more for those who are new to the real estate development industry or who are interested in learning more about it. Consequently, some of the postings, but not all, will be geared specifically for that audience. This is one of those postings.

Developers, whether newbies or old pros, have to raise the capital required to make the investment in the proposed project. In the current market, debt provides, at best, about 60% to 70% of the development capital needed. The balance generally is raised in the form of equity - money invested by individuals or entities with the expectation of profit or return of, as well as on, the investment. These are financial partners, not lenders.

While there are a number of ways to measure that return on investment - some more sophisticated than others, a classic method is what is called cash-on-cash. It means literally: cash returned on cash invested. It is calculated by dividing the amount of cash returned to an investor in a given year by the total amount of equity invested by that investor to date. The result is expressed as a percentage.

For example, if an investor contributes $100,000 to the project and receives $7,500 during the first year of operations, the cash-on-cash return would be measured as: $7,500/$100,000 or 7.5%.

One of the major flaws in this method is obvious. Investment in real estate projects is a long-term or multi-year proposition; whereas, the cash-on-cash method only expresses return on investment for a single year. Nevertheless, it continues to enjoy widespread usage.

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©2010 by The Falbey Institute for the Development of Real Estate

Residual Land Value Analysis: Avoiding Project Failure

As the economy slowly staggers toward recovery, the market will pick up. Deals will began to occur. Existing inventories will be reduced and acquisition for new construction will become viable. When that happens, it is sure to be accompanied by one of the oldest and deadliest mistakes in the real estate development business: overpaying for the land.

This is a mistake that is made by newcomers as well as veterans of the industry with many years and numerous projects under their belts. The only thing that can rescue a deal when the land was overpriced is a bubble in the market. BUT, as we saw with the recent real estate bubble, when it bursts, you are stuck with land on the books that is 50%, 25%, 10% of the purchase price paid for it. Sometimes it actually has a negative value in the sense that the land would have to be given away in order for a project developed on it to make sense financially.                     

This is why it is critically important for the developer to understand and accurately calculate the residual value of the land. It is simply the maximum amount the developer can pay for the land and still achieve the expected return on the invested capital. In essence, it’s what’s left over after all of the expenses of development and the profit margin have been accounted for. Simply put, it’s a way of backing into the purchase price of the land.

There are a number of formulas designed to determine the residual value of land. Some are relatively simple, some aren’t. One I like utilizes discounted cash flow analysis. This makes sense because real estate developments are long-term.

You start by calculating the total costs of development, which may include any or all of the following:

·        Market research fees

·        Marketing and advertising costs

·            Expenses for demolition, environmental mitigation, and hazardous waste remediation, if necessary

·        Entitlement, platting, and permitting expenses

·        Engineering and legal fees

·        Planning and design expenses

·        Infrastructure costs

·        Construction costs

·        Management fees

·        Costs of financing involved in the project

·        Sales or leasing commissions

For example, assume you’ve identified a parcel of property on which you want to develop a 30,000 square foot suburban office building that will rent for $25 per square foot with an 8% vacancy factor and OPEX at 35%. The cap rate at sale at the end of the fifth year of operations is estimated to be 7%. There will be a one year build and stabilize period followed by five years of operations. Without rent increases, this scenario produces a present value (PV) of $6,407,153.

Assume also that the permanent loan will be interest only at 70% of PV with developer equity of 30%. The costs of sale will be 3%. The developer’s hurdle rate (desired rate of return) is 10%. For simplicity’s sake, assume the all-in costs of development to be $175 per square foot.

Under this scenario, the net present value of the project is $2,522,107. Minus the developer’s equity, the residual land value is $947,107. If the building will be three stories of 10,000 square feet each and the floor area ratio (FAR) is .25 – meaning the building can cover no more than 25% of the site, the site would have to consist of a minimum of 40,000 square feet. This works out to $23.68 per square foot. If the seller insists that the price is solid at $40 per square foot, pass on this one.

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©2010 by The Falbey Institute for the Development of Real Estate

How The "Tax Cuts" Affect Real Estate Development

The current news frenzy concerns the pending legislation to extend the current marginal tax rates for two more years. Is this a silver bullet for the real estate development industry? From a sound economic perspective, it is a good move in a time of high unemployment, stagnant wages for those who are employed, and a very slow and feeble recovery from recession. But you wouldn’t know it from the war of words that surrounds the extension.

·        Is it a tax cut for the rich? No, it isn’t a “tax cut” at all. It simply is the extension, for a period of two more years, of the same marginal tax rates we have had for a decade. It’s neither a cut nor an increase for anyone – rich or otherwise.

·        Is it a special break for the rich and privileged? No, as Ben Franklin famously observed more than two hundred years ago: “a penny saved is a penny earned” regardless what your income bracket is.

·        Does it increase America’s dangerous deficit spending? Yes, for two reasons. One, the continuation of the existing tax rates is not accompanied by mandated and itemized reductions in government spending which is the root cause of the deficit. Somebody wasn’t paying attention when the nation spoke in last month’s elections. Second, there is the inevitable pork packaged in with the legislation extending the current tax rates. This is merely more deficit spending, which effectively increases the size of the national debt, but is not a result of extending the current tax rates.

·        Will it help the recovery in the real estate development industry? Probably not. There are a couple of reasons at play here. First, the cause of the slowness of economic recovery overall, and in the development industry in particular, is uncertainty over the nation’s economic future. Extending the so-called Bush tax rates for a mere two years doesn’t do much to alleviate this concern. Only permanent adoption of these rates would accomplish that. Second, as mentioned above, the continual increasing of the nation’s debt through deficit spending further undermines the value of the dollar, and that makes economic recovery impossible.

The Left’s opposes the extension of existing tax rates, rather than increasing them substantially, and screams that this is increasing the deficit. In reality what increases the deficit is creating programs that require spending more money than is available. The Left created these big spending programs on the hope that it could raise taxes to cover them. But the electorate rose up and said, “No, hell no!”.

Here is the danger of spending money on the come. Suppose a real estate salesperson has a prospect who indicates an interest in making an offer on a parcel of property. The salesperson anticipates receiving a sizeable commission on the sale, and buys a brand new luxury automobile. The offer is never made, or, if made, is rejected by the property owner. No sale materializes; thus, no commission is earned and paid. Bottom line: The salesperson does not receive additional income, but now has considerably more debt. This is basic economics to a real estate developer (and most members of the electorate), but seems to be unfathomable by many in Congress.

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©2010 by The Falbey Institute for the Development of Real Estate

Thoughts On The Recovery Of The Real Development Industry

For the real estate development industry to recover, it goes without saying that the overall economy must recover. Is that recovery underway? Let’s take a look. Gold is at $1,400 per troy ounce. If you invested in gold when it was much lower in price, this is good news. Or is it?

The price of gold simply reflects the value of the dollar, real or perceived, but more about that in a moment. So, if gold is $1,400 per ounce, it simply means that the dollar has a value of one 1,400^th of an ounce of gold. If gold was around $800 per ounce two years ago - and it was, this means the dollar has lost significant value as a store of wealth.

What causes the value of the dollar to decline so dramatically? The perception, justified or not, that the dollar is losing purchasing power. In this case, that perception is justified. The dollar, and for that matter the currency of most nations, is controlled by the government acting through a central bank. In the United States, the central bank is the Federal Reserve. The role of the Fed is to stabilize prices (viz., avoid inflation or deflation). When the central bank thinks its task is to stimulate the economy, it necessarily abandons its role as price stabilizer. Thus, if the government, acting through the Federal Reserve, or otherwise, creates more money, it has the effect of devaluing the currency. The brightest member of Congress on economic matters, Representative Paul Ryan says, “It’s a fatal conceit. We’re undermining the precepts of sound money.”

This is because an economy, such as that of the United States, has a finite amount of goods and services available at any specific point in time. Increasing the supply of currency available for circulation in that economy, without a corresponding increase in goods and services available, has the effect of requiring more of these “new” dollars for the purchase of a given good or service. Which is another way of saying that the purchasing power of the dollar has declined. If your earnings or cash flow fail to increase accordingly, you effectively are becoming poorer.

The latest action by the Fed is called quantitative easing, or QE2 because it is the second time in recent months that it has undertaken this action. Simply put, the Fed created $600 billion out of thin air to disburse into the economy by purchasing government IOUs, (i.e., Treasury securities). This added money is not matched by an increased amount of goods and service; thus, it eventually takes more dollars to acquire a given service or good.

This is clear where the price of gold is concerned. In and of itself, it doesn’t grow in value; it’s still just an ounce of gold. Instead, the value of the currency is shrinking so that more dollars are needed to acquire an ounce of gold. This is a means of hedging against anticipated inflation, or the increasing cost of a given good or service because the value of the currency is shrinking. Why does the government create this “funny money” when, among other ills, it has the ultimate effect of eliminating the dollar as the international standard for global commerce? It does it because, more and more, it needs it to finance he rapidly expanding fiscal deficit created by its continual usurping of the activities of the private business sector. It finances this by creating “funny money” ala the Federal Reserve or confiscating it from its citizens – real and corporate – in the form of higher taxes.

The downside of this is more than simply devaluing the currency. It also denies the capital to business people and companies that otherwise would expand existing operations or develop new ones. It also creates uncertainty in the job-creating private sector by raising the specter of higher taxes to cover the deficit. If businesses believe taxes will increase in the future, expansion will not occur and jobs won’t be created. In addition, further worsening America’s status as a debtor nation by borrowing ever greater sums from China, Japan, the Saudis and others, adds to the uncertainty about the strength of the dollar in the future.

The bottom line here is that much needed jobs may not be created for millions of Americans who are out of work. A recent survey of economists predicted that the jobless rate would still be at 9.6% in the summer of next year, and may only reach 7% by year-end 2013.

No less a true Democrat than John F. Kennedy took a risk and lowered tax rates. The resulting expansion of businesses actually increased tax revenues. Ronald Reagan took this same path with the same results. In fact, George W. Bush pushed through lower tax rates to counter the recession in the early years of his first term. Again, business boomed, unemployment shrank to near-historically low levels, and tax revenues actually increased. Tax cuts raise government revenues. History has proven it.

If Democrats fear that revenues won’t be sufficient to finance the trillions of dollars in deficit spending they have created, the simple answer is to trash the giveaway programs and spend only what sound, business stimulating revenues will produce. The United States is not a European socialist nation. In fact, the European socialist nations are beginning to realize the error of their ways and retrench toward a more free enterprise oriented system.

While Obama appears to have caved on extending the Bush-era tax reductions for all taxpayers, including most importantly the higher income ones who make the decisions that lead to job growth, it is only temporary. Successful business people know that we’re facing a long, slow recovery from the Great Recession. They know that that business planning necessarily is a long-term proposition. A two-year reprieve only delays the agony of joblessness and minimal growth.

There are those who would say that the foregoing observations are "Republican talking points". That may be true, but more importantly, they are fiscally sound points for economic recovery and stability. Americans are independent and entrepreneurial by nature. They prefer capitalism and ask only for an opportunity to compete in the marketplace on equal footing. Time and again they have proven to be fully capable of making good decisions for themselves and their families and communities. It's the worst possible ego trip to assume that one is part of an elite class that is intellectually superior to the greater population. And worse, to attempt to force their pseudointellectualist ideals down the throats of an unwilling population.

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©2010 by The Falbey Institute for the Development of Real Estate

Is Compact Urban Development Our Only Choice In The Future?

Other than a few metropolitan areas, such as Washington, D.C. or New York City, where unemployment doesn’t seem to be as big an issue as it is in the remainder of the county, there remains a huge housing inventory. With absorption (demand) running about one third of its norm, and the recovery limping slowly along, it will be awhile before that inventory is sufficiently reduced to justify significant new residential development.

When that time comes, however, where will new development and redevelopment occur? The pundits want us to believe that it will take place in the urban core, not in greenfields or suburban areas. Are they right, or is there something wrong with their logic? I believe it’s the latter. Let me explain my heretical view.

·        Major metropolitan areas have a distinct, 24/7 “downtown” or urban core. Most other cities and towns, including those with public transit systems, don’t have this type of 24/7 destination center with strong employment opportunities, shopping, and entertainment facilities.

·        Humans are not lab mice. We’re like the grains of sand on a beach; no two are exactly the same. You can’t generalize about the behavior of individuals.

o   Not all retiring Baby Boomers want to sell the house and cars, move to a high rise downtown, and resort to walking or riding a bike everywhere.

o   Not all members of Gen-Y, or Millennials, want to live, work, and play in the same place twenty-four hours a day. Once members of their generation begin having children, many of them will want to move to places where they will have some space around them and less 24/7 activities which aren’t necessarily positive for the wellbeing of the kids.

·        Much of the impetus for pushing everyone into residing in the urban core comes from misguided environmentalists who think getting people out of automobiles will save the planet, as well as urban planners who have been brainwashed by the current popular rhetoric. It’s the path of least resistance. It’s also wishful thinking, and it’s very shortsighted.

·        It’s also very much about the benjamins. No, not that nice family down the street; the Founding Father whose face adorns the hundred-dollar bill. In other words, money. Compact urban development means putting more in less area. It means, in a phrase, greater density. We’re not talking about public housing. At the end of the day, the development has to prove profitable. The cost of land typically is higher in the urban core. Also, there are the costs of retrofitting frequently inadequate or outdated infrastructure, construction staging in an area that already is developed, and numerous other added expenses. Profitability in this type of milieu requires greater density; sometimes much greater density, and that often is very unpopular.

·        Even when public sector planners, appointed planning commission members, and elected officials understand the requirement for greater density, they are aware that the electorate often doesn’t get it. And the public sector necessarily is very sensitive and responsive to the wishes of the electorate regardless whether voters are well informed and can connect the dots between the more efficient use of land which leads to fewer issues relating to sprawl and the resulting need for higher density.

Consequently, I believe it’s clear that demand for suburban and exurban living will remain a viable part of residential development in future. 

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©2010 by The Falbey Institute for the Development of Real Estate

Density: Good or Evil?

Patrick Phillips, CEO of ULI-The Urban Land Institute, in an article published on GlobeSt.com, addressed the future of real estate development:

“What we learned from this phenomenon (migration back to urban centers) is that there is a market for compact, mixed-use design, smaller housing space, and transit-oriented development that minimizes the need to drive. But perhaps the bigger lesson--one we are still learning how to apply--is that there is a demand for at least some aspects of this type of development that stretches beyond downtown cores and into outlying suburbs” (emphasis supplied).

In addressing the use of land to achieve this development, he added: “Going forward, our decisions on what and where to develop will be guided not by a plentiful supply of land throughout urban regions, but rather how best to use the land that is left.”

The article has been reprinted in Urban Land magazine.

I commented on the original article when it appeared on FaceBook, as follows:

“I agree with Patrick that, going forward, new development and redevelopment will occur in greenfields areas as well as urban ones. The issue I see is that public sector planners, appointed planning commission members, and elected officials frequently don’t get it. Even when they do, they are aware that the electorate largely doesn’t get it. And the public sector necessarily is very sensitive and responsive to the wishes of the electorate regardless whether it is well informed. That is the real challenge for those of us in the land use and development industry.”

The point here, of course, isn’t that public sector officials and members of their staffs, as well as members of the electorate, are dull-witted. It’s that they often don’t easily connect the dots between more efficient use of land with less issues relating to sprawl and the resulting need for higher density.

You can build smaller, more compact residences on a given parcel of land, but only if you can put more of those smaller residences on it than the larger ones contemplated in the original planning and zoning. It’s simply a matter of number$ (if you get my meaning).

Suppose you can build X units on Blackacre (after all, I am an attorney) at a land cost of Y dollars for Blackacre, and sell those finished larger units at a per unit market price that includes an acceptable risk-adjusted rate of return on total investment. Suppose, however, that the market demand changes to smaller, less expensive residences. Now, in order to earn a return on investment, you must be able to build X+ units, assuming the price for Blackacre remains Y dollars.

Otherwise, the residual land value per unit (the percentage of the total cost represented by the land cost) will be too high to produce an acceptable profit, and Blackacre won’t be sold and developed, which means that needed, affordable residential structures (remember those days?) won’t be built. That, in turn causes demand to drive up the price of existing housing, which gives rise to other social, political, and economic issues. Bottom line: density is a positive thing.

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©2010 by The Falbey Institute for the Development of Real Estate

Real Estate Factoids, QE2, and Jobs

For starters, here is some of the news behind today’s headlines:

·        Mortgage rates have gone up and the number of applications has declined (due in part to expiration of the home purchase-inducing tax credits and continuing uncertainty about the economy and the cost of debt exacerbated by the Fed’s QE2 policy-see below). Not surprisingly, the yield on ten-year Treasury notes has been rising;

·        Housing inventories have declined (in theory due in part to frustrated sellers pulling homes off the market and some lenders slowing the sale of foreclosed properties due to irregularities in the foreclosure processes);

·        Housing starts have declined, which is understandable in a market where there is a huge overhang of existing inventory and mortgage loans are hard to come by;

·        Building permit issuance is relatively unchanged from its current doldrums, also understandable given the situation described in the immediately preceding paragraph.

On Other Subjects:

QE2 or quantitative easing, Round Two. The Federal Reserve has created $600 billion out of thin air ostensibly to buy toxic debt instruments (think residential- or commercial-backed mortgage securities), thus greening the economy. The reality of it? The total of goods and services available in the market at any point in time is a static figure. Simply creating additional dollars only requires the costs of those goods and services to be increased in order to avoid loss of their value.

This is because this “funny money” weakens the value of the currency. It leads, in turn, to higher interest rates in order to adjust for the increased reluctance to invest in dollar-backed securities, such as Treasuries. Ultimately, it disincentivizes investment that would lead to job creation. Higher interest rates on government debt crowds out capital for private investment.

Make no mistake about it. Higher interest rates are part of a zero-sum game. Savvy investors understand that any given asset has a finite value for a desired rate of return on investment in that asset. It’s simple: the more you pay for the cost of the money (debt) used in the acquisition of the asset, the less you can pay for the asset itself. Higher interest rates put downward pressure on asset values.

On their third quarter reports, banks in the U.S. disclosed that they were sitting on more than $1 trillion in excess reserves, that is reserves above and beyond the amount required. Why aren’t the banks lending that money? Could it be that they are afraid of further losses in the real estate sector - residential and, especially, commercial?

Finally, what’s the big deal with extending the Bush tax rates for all those earning less than $250,000 per year and filing jointly ($200,000 for those filing individually)? Just this: who do you think is more likely to have the capital and incentive to invest in business growth and expansion? Right, those who wouldn’t get the benefit of the extension of the Bush rates. And what’s one of the most crucial things needed by our economy today? Right again, jobs. The solution to that problem (there are others that need other solutions to be sure) is to permanently extend the tax rates across the boards. Eliminate the uncertainty looming over future years’ tax rates, including 2011. To accommodate the tax rates, cut government growth and spending. No one ever was entitled to a free lunch in this country.

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©2010 by The Falbey Institute for the Development of Real Estate

Is Help On The Way For The Real Estate Development Industry?

Here's what we know:

• The overall economy has been slammed harder than at any time since the Great Depression of the 'thirties;
• Recovery seems to be imperceptibly slow to the point of stagnation;
• Real estate development appears to have suffered more than any of the other industries;
• The administration remains unchanged, but, thanks to a majority of the American electorate, the political and fiscal complexion of Congress appears to have moved somewhere to the right of where it has been for several years;
• Profligate spending by the administration, as ably assisted by its departing cohort in Congress, has weakened the purchasing power of our currency, thus worsening the situation;
• we depend on debt (through the sales of Treasury instruments) to operate our government
• The Chinese, Japanese, Saudis and others are the principal purchasers of these obligations, and they have been threatening to slow or stop buying them because of the low rates of interest and the depreciating dollar as a store of wealth.
• A proliferation of regulations on businesses and the looming threat of tax increases has created an environment of such uncertainty that the needed expansion of business, and the resulting creation of jobs, has not occurred;
• This has aggravated the reluctance of lenders to provide the needed debt capital;
• This uncertainty, high unemployment, and absence of debt capital dampen demand and make it difficult both to reduce the huge overhang of residential units and refinance much of the $1.4 billion in commercial real estate loans maturing over the next few years.
• And, this doesn't even touch on the potential economic disaster represented by apparent irregularities in the mortgage-backed securities industry.

Here's what we need:

• The Republican majority in the House to display some genuine grit for a change and dispel the uncertainty by:
• Rolling back the plethora of centralized power-grabbing regulatory schemes enacted in the past few years - simply unfunding them if all else fails;
• If lenders had clear regulations regarding reserve accounts and other matters jumbled by the Dodd-Frank bill and other legislation, they would be far less reluctant to lend.
• Initiating permanent tax cuts - temporary ones or ones that benefit only the lower bracket taxpayers who don't create jobs - do nothing to dispel the uncertainty concerning the economic future;
• permanently quash the death tax and the oft-proposed tax on carried interests;
• lower the capital gains tax and the corporate tax rate;
• create tax incentives that encourage investment and expansion.

These are but a few of the positive actions that could be taken to jump-start the economy. We'll discuss more in a future blog entry.

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©2010 by The Falbey Institute for the Development of Real Estate

Efforts to Limit Growth and Development

Over the past decade or so, several states have seen efforts by special interest groups to try to place constitutional limitations on development activity. The method used generally is to try to put a referendum on the ballot during statewide elections, such as the recent mid-term elections. The sponsors of these initiatives are those, who for various reasons, steadfastly oppose any further growth in communities. Never mind the tragic consequences that may have on the economy in that community. St. Pete Beach, Florida is a good case in point.

The goal is to force all new development proposals to be placed on the ballot for electorate in the affected jurisdiction - usually a city or county - to cast their respective votes for or against the proposal. In other words, what ordinarily is a task for the municipality's elected officials to decide becomes a matter for decision by the entire electorate.

These efforts often have compelling titles. For example, in Florida, the most recent effort was called "Home Town Democracy", also known by a more plebeian name, Amendment 4. The proposal was defeated by a significant majority of the voters in Florida, as has been the case in other states, so far. But the people sponsoring these proposals will continue to try to press their will on the public.

So, how exactly would this limitation work? If, for example, the one in Florida had succeeded, it would have required most proposed amendments to a municipality's comprehensive growth plan to be placed on the ballot at the next general election. Comprehensive growth plans (GMPs) are maps outlining in general terms how a city's or county's growth and development should occur over time. The principal idea is to insure that capital facilities, such as roads, schools, sewer and water, are in place to accommodate the growth rather than resulting in overburdened infrastructure and the resulting negative impact on the quality of life of the citizenry. Because these guidelines necessarily are general in nature and require flexibility to accommodate the unforeseeable changes and developments that are sure to arise over time, there usually is some process for amending the GMP.

As a general example, if a land owner wanted to change the land use designation for a parcel of property she owned from commercial to residential, she would seek an amendment to the GMP. Her proposal would be reviewed by the municipality's planning staff and sent to the governing body of elected officials with a recommendation for or against the proposal. The city council or county commission, with input from state agencies and after notification to affected landowners, would determine whether to grant or deny the proposal in a public hearing. It's worth noting that in areas where growth is occurring, it is conceivable that hundreds of these proposed amendments could be on the ballot in any given election. Are individual voters going to take time to study each proposal and give its due? It's very doubtful. The voting process involves lengthy lines and long ballots as it is.

Under this scenario, which exists in many states, these decisions are made by the public's elected representatives after various open public hearings, notifications mailed to affected parties, and input from a number of sources including the individual members of the public. Some jurisdictions even solicit public opinion surveys and questionnaires, as well as public hearings in various specific locations within the community. Sure sounds like representative democracy at work.

So, what is it the proponents of these ballot initiatives seek to achieve by taking land use decisions out of the hands of duly elected public officials and requiring the entire electorate to make decisions? Just this; they don't like a process that gives each proposed development activity an opportunity to stand on its own. By moving the decision making to a laborious and demanding process for each individual elector, it almost assures that the mass of proposals will fail. Other than Congressmen, voters rarely vote in favor of something complex that they haven't had time to sufficiently understand.

It is certain that these initiatives will continue to appear on ballots at the state and local levels anywhere there is healthy development activity. Just remember: when you stop growth, you impair economic activity, which in turn leads to decline and higher taxes to cover the resulting shortfall.

Connect with us: visit facebook; twitter, LinkedIn, YouTube, the Falbey Institute for the Development of Real Estate. There currently is a special on the real estate development videos available on the Institute's web site.

©2010 by The Falbey Institute for the Development of Real Estate

Reflections On The Election: Moving Forward

What messages does the recent mid-term election send, and to whom are they sent? The answers seem simple enough on the surface. The principal message was aimed at the Democrats: The majority of the American electorate “does not want to be governed from the Far Left”.

There were other messages to be sure. The election of a Republican to fill Obama’s former Senate seat appears to be the people of Illinois saying to Obama, “Goodbye,…and don’t come back.” So much for favored son status.

But the main message clearly was the reflection of the anger, mistrust, and disappointment the electorate has with the direction of the Obama policies. Much of that anger springs from the perception of having been duped by him in the 2008 presidential election.

There is evidence that in any election of national consequence 30% of the electorate consists of loonies, misfits, and sociopaths slavishly devoted to the Far Left’s promises of a statist nirvana where they are rewarded for their singular lack of talent and ability. That percentage is much higher in California, as was proved by the elections of those clueless twins, Brown and Boxer. Add to this, in 2008, the disgust with the ineffective fiscal and immigration policies – or nonpolicies – of the Bush administration, which drove the mass of voters in the center to buy into the Obama message of Hope and Change. The country thought it was ready for any change. It took Obama less than two years to disabuse the majority of the electorate of that notion.

The mean of the electorate is often said to be center-right. That certainly appeared to be true in the recent election, if not somewhat farther to the right. Remember, the Republicans recently held both houses of Congress and the White House, but lost it all through poor governance. It appears that the electorate, in desperation, is turning back to them principally through the efforts of the Tea Party and similar movements. The challenge now for the Republicans is to accurately take the pulse of the electorate and respond accordingly.

The message appears clear enough, as evidenced by the victories of Marco Rubio and other Reagan-style conservatives. The majority of voting Americans do not want big government, deficit spending, and the proliferation of regulations and bureaucrats. They want jobs, fiscal responsibility from their elected representatives, jobs, small government, jobs, a playing field on which entrepreneurial talents can take the shot at the brass ring, and…,oh yes, jobs.

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©2010 by The Falbey Institute for the Development of Real Estate