I came across this great article written by Andrew Bruce, Kelowna Regional Manager, Melcor Developments & BlueSky at Black Mountain www.blueskyatblackmountain.ca and current president of the Urban Development Institute Okanagan Chapter that I believe is worth sharing!
So truly, this week’s BLOG is written by one of the most knowledgeable developers in Kelowna. Enjoy!
“By the time you get to choose a particular building lot or a new home built in a new subdivision, years of work have already gone into the creation of that individual property. I have always told people that land development is not rocket science – but it does involve a significant amount of risk, dedication of a lot of capital (i.e. money, money, money) and time.
So when my company, Melcor Developments Ltd. which is a public company, reports its financial returns and indicates net revenues in the millions of dollars, it is important to realise that it took many, many more millions of dollars in capital investment to realise that net revenue, and, in most cases, a significant amount of time to get to the end product.
To put this in perspective, I like to use the analogy of a corner store retailer. They too have had to invest in a property and improvements and staff etc. However, they most likely make the same percentage of net revenue on a $2.99 bag of nachos as a land developer does on a single family lot. The corner store retailer, however, probably gets 30 days to pay for the product after he gets delivery. So if he sells his nacho inventory within 30 days (and for us nachos consumers, let’s hope he does!), he has realised his revenue before he has to pay for the inventory.
On the other hand, a land developer has had to pay for, or finance, all of the costs that go into creating the single lot before he can market it to the public. He also has to hope that the lot that he planned to create maybe 2, 3, 5 or 10 years earlier is still what the market demands by the time it is ready to sell. This combination of capital commitment (i.e. when a developer has to spend the cash), duration of the development process, and forecasting of market demand comprises most of what is called the risk factor of development. The other significant component of risk is the regulatory approval. All land and building development must adhere to the local, provincial and sometimes federal regulatory processes. Some projects are relatively straight forward and have a low risk of not being approved, while others are extremely complicated and require political approval and have a heightened level of risk.
This description of how our industry is structured is not intended to be a complaint – it is simply a description of the facts. I have been involved with the development industry since 1992 when, fresh out of university, I started working in the Planning Department with the City of Kelowna. After 14 years at the City, I moved over to the private sector and have worked as a consultant as well as directly for development companies. I have been on the local Urban Development Institute board for the last six years and will take my turn as president next year.
Most of my colleagues in the development industry would share a similarly long track record. So why do we do it if we face such a challenging business structure? Land and Real Estate Development builds our communities. By doing what we do, we have taken on the responsibility of provide the best homes, businesses, parks and infrastructure that we can within market limitations. It is our privilege to create the best communities we can for current and future generations”.