Shane – what is the Commercial real estate development Process?

Here is an email I sent to a client looking to do a Commercial real estate development (he’s a new retail developer).  The information here is not sensitive. 
 
I would suggest you don’t focus on the numbers- as every market is different.  Focus on the process.  How I start and the thinking that goes into commercial development.  Then, ask: how can you apply to this process to your commercial land development (swap out #’ ers from retail to multifamily or industrial) 
 

The numbers are only for illustration.  You can plug in your #’ers and modify as needed

The importance is seeing how I come up with values (the thinking behind it).

I break Development into a few different Chunks:
Commercial real estate development

Commercial Land Cleared – Ready for Development


1. Demand 
– 

Here’s how the #’er could look

1 acre= 42,560 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.

Let’s assume you were renting out to someone else.  Most banks will want to see ‘market rents’.  

 
You didn’t include any of those rents – so let’s use mine and you can adjust for your development.

I have to think in major city new retail is north of $25psf ?(might be wrong)?  Calgary is $35-45 psf NNN

Value of your 10,000 sq.ft building:

  • $25 psf x 10,000 = $250,000
  • Cap rate – for this – 6% = $4,166,000 Value

(adjust based on your own calcs)???

2. supply

Land- I don’t know you’re market, but I’ve worked on commercial real estate development in various cities 

Houston/Dallas/Phx and good retail land trades north of $1m/acre.  So I would confirm the land is serviced and zoned correctly first.  You want to be a developer- but if you’re new to this, and having to rezone land, is a different animal, more risk, etc.
Is the land serviced?  
To the site?  
Or, are you paying offsite to the City? 
What other entitlement issues will you face?

Let’s run your costs fast ? (very rough #’ ers- have a 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

Profit – $4.1M- $3.1M = $1M
ROI – 200%?

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.

So, 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.
 

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