What is the Commercial Real Estate Development Process?

These numbers are only for illustration.

You can plug in your own numbers and modify as needed. The importance is seeing how I come up with values

I break Development into a few different Chunks:

Commercial Land Cleared - Ready for Development

1. Demand -

1 acre= 43,560 sq.ft.  Assume 25% site coverage (likely a bit high) would equal 10,890 sq.ft  For easy math lets say you build 10,000 sq.ft of retail.

We will be conservative and use $25 psf for rent.

How to Calculate the Value of your 10,000 sq.ft building:

• $25 psf x 10,000 = $250,000
• Cap rate - for this - 6%
• $250,000/.06 =  $4,166,000 Value

2. Supply

Land- I don't know the market you're in.  I have worked on commercial real estate development in various cities in Canada, Texas and AZ.

• Is the land serviced?
• To the site?
• Or, are you paying offsite to the City?

What other entitlement issues will you face?

Running the Numbers

I have a very detailed spreadsheet I use- but lets us BOE

• Land $500k
• Hard costs- $2M (sounds high- 200 PSF for retail construction- I'm building at $130psf for hard cost)
• Soft Costs- let's plug 20% for safety $400K
• Leasing Fees? (you're only paying for 4k sq.ft) 5% of your leases signed over 5 years and then 2.5% (my market- you're
• might be different).  Assume $75k

Financing Costs -  Assume $100k

TOTAL Cost: Let's call it $3.1M

Your Investment - if you can get away with 15% down - $500k.  My gut tells me you'll need more like a $1M equity.  Which would still be a double.

Profit - $4.1M- $3.1M = $1M

3. Risks

If this is a new venture your biggest risks will be execution risk

• • General Contractor (and sub-trades who do the work).
  • Cost overruns?
  • Fixed Price/ GMP/ GMP with Upset.
  • How are change orders going to work?
    architect- will do the layout.
  • How good are their drawings?
  • Anything missed will be Change order.
  • Timing- weather, zoning, city, off-sites, neighbors

Team Members:

• • Good commercial agent who understands retail and land development
  • GC with experience in retail developments
  • Architect - same as above
  • Mortgage Broker- who understand SBA and construction financing
  • Leasing Agent to lease-up the balance of space
  • Every market is different and a big piece of the puzzle for your development would be zoning, access points, services (deep).

On the scale of difficulty- what you're undertaking is about a 7-8 in difficult in commercial real estate.

The only thing harder would be buying raw land and rezoning and then developing.

Lot's of moving parts.

But, you can see- if done right- you can make a very healthy profit.

I expect you're building new - because of the potential upside.  And, possibly buying and developing for below replacement value.

You get exactly what you want.  And, you control the process.

• Our recent retail building is going to take us 5 months for actual construction.
• The DP was 4 months (had to get architectural controls agreed to, DDSP- deep services with City) and then another 6 weeks for BP.

  We started construction once DSSP was released.

• I expect 1 year from closing on land to delivering a fully built outbuilding (+ maybe 2 months).

  If you're going to PM your project- min 1/week during construction.

• I have regular check-in with my GC/Architect.
• There are not as many good websites to check out.  ?You could go to NAIOP (for commercial developers) - but geared to bigger players.

   

This is a high-level way I'd look at Commercial real estate development.

1. Demand (you have that)
2. Supply (need to verify the costs to do that)
3. Risks (mitigate these)

Decision- go/no go.

In all developments, my team is critical to my success.  I'm fully aware of my weakness and strengths.  Bring on the right people from the start.