Question

Compose a paper about why property developers decided to go public in 3500 words that consists of:
1. Introduction
2. Discussion
3. Conclusion & Suggestion

Answer 1

Introduction:

Real estate development, or property development, is a business process, encompassing activities that range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of developed land or parcels to others. Real estate developers are the people and companies who coordinate all of these activities, converting ideas from paper to real property. Real estate development is different from construction, although many developers also manage the construction process.

Developers buy land, finance real estate deals, build or have builders build projects, create, imagine, control, and orchestrate the process of development from the beginning to end. Developers usually take the greatest risk in the creation or renovation of real estate and receive the greatest rewards. Typically, developers purchase a tract of land, determine the marketing of the property, develop the building program and design, obtain the necessary public approval and financing, build the structures, and rent out, manage, and ultimately sell it.

Sometimes property developers will only undertake part of the process. For example, some developers source a property and get the plans and permits approved before selling the property with the plans and permits to a builder at a premium price. Alternatively, a developer that is also a builder may purchase a property with the plans and permits in place so that they do not have the risk of failing to obtain planning approval and can start construction on the development immediately.

Developers work with many different counterparts along each step of this process, including architects, city planners, engineers, surveyors, inspectors, contractors, lawyers, leasing agents, etc. In the Town and Country Planning context in the United Kingdom, 'development' is defined in the Town and Country Planning Act 1990 s55.

Discussion:

Say you are an entrepreneur, who started a corporation, with a few closely known members as the shareholders. The profit or loss of the Company is borne by these people. As the company continues to mature, and is seen to have growth potential, any Company head would think of making their business even bigger. To make it even bigger, to achieve greater heights, you will need a huge capital investment. And you cannot rely on the banks every time.

This is when you should start contemplating on the pros and cons of making an Initial Public Offer.

What are the advantages of going public?

1. Raises a lot of money

This is the chief reason d’être for a company going public. The company may need money to clear off debts, to invest in research and development, to expand the existing unit, to improve infrastructure and many such reasons which help in their future development.

1. Increases liquidity

The employees, the stakeholders and the venture capitalists would have put their sweat and blood for the company to achieve considerable success. The company would have paid them in the form of equities. When the company goes public, it is the time when they start reaping benefits in the form of cash.

1. Helps in mergers and acquisitions

When a public company enters into a deal for a merger or an acquisition with smaller competitors, the terms of the deal usually include shares. This way cash flow to the smaller companies becomes smooth and effective.   

1. Gives visibility and credibility

Going public gives a company visibility and credibility. The public companies should be better professionally managed and fiscal data should be more transparent as they have to report it to SEBI periodically. Hence, to the world, the Company looks more credible.

1. Improves pecuniary situation

Selling a company’s equities to the public will generate a lot of liquidity and capital, which can be used for a better future of the company. Hence, the company will be in a more stable financial situation to apply for loans or to negotiate the terms of loans.

What are the disadvantages of going public?

1. Laborious decision making process

When you sell too much of your shares, and your shareholders elect the majority of the board of directors , all decisions need approval by the board members or at least the majority of the share holders. Earlier the decision-making process which finished within a few hours in the meeting room, will now, take days. How much ever you try to keep your focus on the actual business goals, the stockholders who hold minimal shares individually, on coming together, can pressurize you to move away from it.

1. Reporting costs will go high

The Public company information will have rolling costs for periodic reports and proxy statements that are filed with the regulatory agencies and distributed to the shareholders. The company should do audits and any other public company compliance procedures. Every procedure and a report has a cost attached to it.

1. Soaring upfront cost

Offering shares to public is not cheap at all; it has a huge upfront cost. It involves under-writers commission, accounting and legal fees, printing charges, road show expenditures, advertising costs and registration fees. Management and accounting system must be upgraded. The departments which handle pesky analysts and you need to get qualified people to sit on your company’s board.

1. Augments liability

Going public with your Company augments the potential liability of the company and its executives for mismanagement. Legally, a public company has an obligation to its shareholders to capitalize on shareholder profits and declare operational data. The company and its management can be prosecuted for self-dealing, making material misrepresentations to shareholders or omitting information that the centralized securities laws require to be disclosed.

All said and done, before going public sit with your private group of shareholders, assess the company’s financial situation. Make sure you can bear the cost of becoming a public company. If you can overweigh the future capital gain to the current costs, go ahead with the IPO. Nobody is stopping you!

Going public refers to a private company's initial public offering (IPO), thus becoming a publicly traded and owned entity. Businesses usually go public to raise capital in hopes of expanding; venture capitalists may use IPOs as an exit strategy - that is, a way of getting out of their investment in a company.

The IPO process begins with contacting an investment bank and making certain decisions, such as the number and price of the shares that will be issued. Investment banks take on the task of underwriting or becoming owners of the shares and assuming legal responsibility for them. The goal of the underwriter is to sell the shares to the public for more than what was paid to the original owners of the company. Deals between investment banks and issuing companies can be valued at hundreds of millions of dollars, some even hitting $1 billion.

Going public does have positive and negative effects, which companies must consider. Here are a few of them:

Advantages - Strengthens capital base, makes acqusitions easier, diversifies ownership, and increases prestige.

Disadvantages - Puts pressure on short-term growth, increases costs, imposes more restrictions on management and on trading, forces disclosure to the public, and makes former business owners lose control of decision making.

For some entrepreneurs taking a company public is the ultimate dream and mark of success (usually because there is a large payout). However, before an IPO can even be discussed, a company must meet requirements laid out by the underwriters. Here are some characteristics that may qualify a company for an IPO:

High growth prospects

Innovative product or service

Competitive in industry

Able to meet financial audit requirements

Some underwriters require revenues of approximately $10-$20 million per year with profits around $1 million! Not only that, but management teams should show future growth rates of about 25% per year in a five- to seven-year span. While there are exceptions to the requirements, there is no doubt over how much hard work entrepreneurs must put in before they collect the big rewards of an IPO.

Many aspects of the real estate development process require local or state licensing, such as acting as a real estate broker or sales agent. A real estate developer is not a professional designation; there are no schools or associations who recognize or protect the term as a trademark.

No single path automatically leads to success in real estate development. Developers come from a variety of disciplines— construction, urban planning, lending, architecture, law and accounting, among others. Recent specialized programs that award a Master of Real Estate Development (MRED) degree are also available. The graduate programs in real estate development are the most comprehensive education in the real estate industry. Other formal education includes a Master of Science in Real Estate (MSRE), or an MBA.

A development team can be put together in one of several ways. At one extreme, a large company might include many services, from architecture to engineering. At the other end of the spectrum, a development company might consist of one principal and a few staff who hire or contract with other companies and professionals for each service as needed.

Assembling a team of professionals to address the environmental, economic, private, physical and political issues inherent in a complex development project is critical. A developer's success depends on the ability to coordinate and lead the completion of a series of interrelated activities efficiently and at the appropriate time.[3]

Development process requires skills of many professionals: architects, landscape architects, civil engineers and site planners to address project design; market consultants to determine demand and a project's economics; attorneys to handle agreements and government approvals; environmental consultants and soils engineers to analyze a site's physical limitations and environmental impacts; surveyors and title companies to provide legal descriptions of a property; and lenders to provide financing. The general contractor of the project hires subcontractors to put the architectural plans into action.

Purchasing unused land for a potential development is sometimes called speculative development.

Subdivision of land is the principal mechanism by which communities are developed. Technically, subdivision describes the legal and physical steps a developer must take to convert raw land into developed land. Subdivision is a vital part of a community's growth, determining its appearance, the mix of its land uses, and its infrastructure, including roads, drainage systems, water, sewerage, and public utilities.

Land development can pose the most risk, but can also be the most profitable technique as it is dependent on the public sector for approvals and infrastructure and because it involves a long investment period with no positive cash flow.

After subdivision is complete, the developer usually markets the land to a home builder or other end user, for such uses as a warehouse or shopping center. In any case, use of spatial intelligence tools mitigate the risk of these developers by modeling the population trends and demographic make-up of the sort of customers a home builder or retailer would like to have surrounding their new development.

Going public refers to a private company's initial public offering (IPO), thus becoming a publicly traded and owned entity. Businesses usually go public to raise capital in hopes of expanding; venture capitalists may use IPOs as an exit strategy - that is, a way of getting out of their investment in a company.

The IPO process begins with contacting an investment bank and making certain decisions, such as the number and price of the shares that will be issued. Investment banks take on the task of underwriting or becoming owners of the shares and assuming legal responsibility for them. The goal of the underwriter is to sell the shares to the public for more than what was paid to the original owners of the company. Deals between investment banks and issuing companies can be valued at hundreds of millions of dollars, some even hitting $1 billion.

Going public does have positive and negative effects, which companies must consider. Here are a few of them:

Advantages - Strengthens capital base, makes acqusitions easier, diversifies ownership, and increases prestige.

Disadvantages - Puts pressure on short-term growth, increases costs, imposes more restrictions on management and on trading, forces disclosure to the public, and makes former business owners lose control of decision making.

For some entrepreneurs taking a company public is the ultimate dream and mark of success (usually because there is a large payout). However, before an IPO can even be discussed, a company must meet requirements laid out by the underwriters. Here are some characteristics that may qualify a company for an IPO:

· High growth prospects

· Innovative product or service

· Competitive in industry

· Able to meet financial audit requirements

Some underwriters require revenues of approximately $10-$20 million per year with profits around $1 million! Not only that, but management teams should show future growth rates of about 25% per year in a five- to seven-year span. While there are exceptions to the requirements, there is no doubt over how much hard work entrepreneurs must put in before they collect the big rewards of an IPO.

When a company is incorporated it is usually private. It means that it does not need to provide Profit Loss/ Cash Flow and Balance Sheet reports to general public. It only needs to provide documentation to the Tax authorities.
Advantages are in terms of greater autonomy in operations and the reduced cost of compliance with company law as compared to the Public Companies.
From a company founders perspective the only way that he can cash out of this business is via stake sale to PE company. This is also a way to raise capital to grow the company.

There are usually two reasons for a company to go public ; i.e. list its shares on a stock exchange.
1. Raise Capital/Funds: If the business is well known or stable , it will be cheaper to raise funds from the general investors as compared to the PE companies
2. Founders want to en cash some of the sweat equity that they have in the company. It is a general practice in a growing business to give bonuses or part of salaries in ESOPs (Employee Stock OPtions) . These give a way for a company to reduce its cash expenditure and allow employees to benefit from growth of the company. Usually options like these can be sold only if the company lists its shares on the Market.

Conclusion and Suggestion:

Companies typically go public to raise huge amount of capital in exchange for securities. Once a private company is convinced about the need to become a public company, it kick-starts the process of IPO. Companies which want to go public follow a process that exchanges adhere to. The IPO process is quite complicated.

So, what are steps to tread to make an initial public offer? One should note that the entire IPO process is regulated by the ‘Securities and Exchange Board of India (SEBI)’. This is to check the likelihood of a scam and protect investor interest.

Step 1: Hire an investment bank

A company seeks guidance from a team of under-writers or investment banks to start the process of IPO. More often than not, they take services from more than one bank. The team will study the company’s current financial situation, work with their assets and liabilities and then they plan to cater to the financial needs. An underwriting agreement will be signed which will have all the details of the deal and the amount that will be raised, the securities that will be issued. Though the under-writers assure on the capital they will raise, they won’t make promises. Even the investment banks will not shoulder all the risks involved in the money movement.

Step 2: Register with SEC

The Company and the under-writers together file the registration statement which comprises of every fiscal data and business plans of the company. It will also have to declare how the Company is going to utilize the funds it will raise from the IPO and about the securities of public investment.
If the registration statement has compliance to the stringent guidelines set by the SEC, which ensures that the company has disclosed every detail a potential investor should know, then it gets a green signal.
Else it is sent back with comments. The company should then work on the comments and file for registration again.

Step 3: Draft the Red Herring document

An initial prospectus which contains the probable price estimate per share and other details regarding the IPO is shared with the people who are involved with the IPO. It is called a red herring document because the first page of the prospectus contains a warning which states that this is not a final prospectus. This phase tests waters for the IPO among the potential investors.

Step 4: Go on road show

Before the IPO goes public, this phase happens over an action-packed two week. The executives of the Company travel around the country marketing the upcoming IPO to the potential investors, mostly QIBs. The agenda of the marketing includes presentation of facts and figures, which will drum up the most positive interest.

5: IPO is priced

Based on whether company wants to float a fixed price IPO or Book Building Issue, the price or price band is fixed. A fixed price IPO will have a fixed price in the order document, and the book building issue will have a price band within which an investor can bid. Number of shares that will be sold is decided. The Company should also decide the stock exchange where it be going to list their shares. The Company asks the SEC to announce the registration statement effectual so that purchases can be made.

Step 6: Available to public

On a planned date, the prospectus and application forms are made available to public online and offline. People can get a form from any designated banks or broker firms. Once they fill in the details, they can submit them with a cheque. Or they can submit it online as well. SEBI has fixed the period of availability of an IPO to public, which is usually 5 working days.

Step 7: Going through with the IPO

After the IPO price is finalized, the stakeholders and under-writers work together to decide how many shares will every investor receive. Investors will usually get full securities unless it is oversubscribed. The shares are credited to their demat account. The refund is given if the shares are oversubscribed. Once the securities are allotted, the stock market will start trading the Company’s IPO.