Progressive Development

The initial conceptualization of sustainable development, smart growth and New Urbanism gave very little thought to how these alternatives could be financed. It has now become evident that if progressive development is to succeed at the daunting task of changing how America builds, there must be a fundamental change in how we finance real estate. pdf

For the past 40 years, business schools have been teaching discounted cash flow (DCF) methodologies for comparing alternative investments. DCF and its various derivatives, such as net present value (NPV) and internal rate of return (IRR), are means by which different projected cash flows can be easily compared over time.

We marvel at the architectural design and quality of construction seen in the great retail emporiums, apartment buildings and office blocks built before the Second World War. We treat them as if the builders were unknowable “ancients”, blessed with immensely more wealth than we have. In reality, of course, the country’s per capita gross domestic product is three times higher today in real terms than in, say, the 1920s. The difference is that real estate investments made before discounted cash flow became widely used were generally built for the ages, and not for short-term returns.

Time tranches could be introduced to match investors who have different investment horizons with the appropriate “piece” of an investment. The various cost elements of a project are divided into three categories: building development, land development and parking, and land. Each of these pieces has a different cost associated with it, and is associated with a different investment time frame.

The time tranche model is more than a theoretical one; Arcadia Land Company is involved in the redevelopment of downtown Albuquerque. Arcadia knew it needed a mid-term investor, because it recognized that a minimum of three to five years would be necessary to achieve the critical mass required to make the downtown project viable. The City assumed the third time tranche in the development as a partner in the venture. This included an investment by the City of $12 million in the form of land, to-be-built parking structures, infrastructure and tax abatement.