Real estate development is complex and requires the assistance and expertise of many people. This is a lengthy process, often taking years from negotiating the purchase of the land to construction to renting out the building. Experts in commercial real estate understand this process best, but if you’re looking for more information, here is our step-by-step guide:
What is Commercial Real Estate Development?
For most, commercial real estate development is the complete process of buying, building, and leasing out commercial real estate. For the purpose of this article, we will be discussing what needs to occur before the site is purchased.
Sourcing the Right Submarket for Your Development
This will likely be the first place you will need to start in your venture. The type of retail product you intend to deploy and who your target customer is should dictate what submarket you break into. A local commercial real estate broker can help you analyze demographics, household incomes, traffic counts, etc.
Sourcing the Right Site for Your Development
Once you’ve identified what submarket you want to locate the development in, you will need to analyze what site best suits your needs for your development. Listed below are some questions to ask in this process.
Site Feasibility: Will the site be suitable for your development? What are the dimensions of the parcel? Are utilities available to connect with on the site? How would you rate ingress & egress for the consumers to access your site? These are all questions that you need to be asking yourself on every site.
Zoning Feasibility: Is your development’s intended use permitted under the current zoning classification? What are the setbacks on the site? If a conditional permit is needed or a rezoning, how likely is it that the mayor & the alderman board approve this change?
Business Terms Feasibility: Is the Seller reasonable and in-line with market rates for what they are valuing their real estate? Can you get sufficient time (Due Diligence) to properly vet all the unknown variables? Will the Seller agree to all necessary contingencies? It is very important to have both a seasoned real estate broker and attorney to help negotiate the most favorable purchase and sale agreement possible to ensure protection.
Hiring the Professionals
Once the property is under contract, it is crucial that you source local experts to help sort through different topics related to putting the development together.
Here are some of the professionals you will need:
- Local Civil Engineer: Notice we said “local”. There is no substitute for hiring a local engineer who is familiar with development standards of a municipality and can save you time/money in numerous areas. They will be a valuable resource in site design, detention, working with the city & highway departments, etc. Too often we have seen an out-of-state group design a site that does not meet the current standards of the zoning ordinance.
- Geotech Engineer: A good rule of thumb is to hire a geotech to take soil samples on any proposed development to analyze the quality of the dirt. They are very affordable and can save you a great deal of money vetting this on the front end. If you plan on using a bank to finance your development, they will likely require a Phase I study on the site to make sure there are no environmental issues that will pose issues in the future.
- Architect: A good architect will be able to help in many different areas related to the project. For the developer to be issued a permit, they will need to submit a set of plans that are stamped by a licensed architect. Each architect has certain specialties so be sure to source the right one for your proposed development.
- Banker: Most developers today have banking relationships to fund their development. For banks to be able to finance a development, they will need to be comfortable with many different variables for the development. For example: Does the property appraise what the developer is acquiring it for? Is this a speculative development, built-t0-suit, or owner operator development? They will have many different questions and documents to handle while the property is under contract. Be sure to understand their processes and procedures.
- Contractor: Sourcing a trustworthy and competent contractor will be one of the most vital steps in this process. Understanding the cost of your development and making sure you have a clear understanding of timelines will be essential. Please consult your lawyer to ensure proper documentation is handled on the front end (general agreement) as well as through the construction process.
- Lawyer: A seasoned real estate lawyer will be able to help keep you out of trouble on all fronts. They will be a source to lean on to vet through the entire process. They will ensure the title is clean prior to closing, make sure all the closing documents are accurately prepared, and be able to help negotiate favorable terms with the contractor & lender.
Conclusion
Real estate development is a very complicated process. It’s imperative that you put together the right team to help you maneuver through the process. In most cases, the process starts with hiring your local real estate firm and discussing where to locate the development. From there, your broker should be able to help connect you with the specialists stated above to make sure all the boxes are checked to ensure a successful development. For more information on any topic related to this article, be sure to reach out to our commercial real estate Mississippi team here at Pinpoint @ 601.586.3220.