How to Successfully Develop Commercial Real Estate – Part 5

In the first four parts of this Article we discussed certain fundamental components underlying the development process. Every new development project needs money or financing. The financing is usually in the form of a construction loan. We also discussed how important tenants are to any new development project. Tenants are important because they pay rent…

In the first four parts of this Article we discussed certain fundamental components underlying the development process. Every new development project needs money or financing. The financing is usually in the form of a construction loan. We also discussed how important tenants are to any new development project. Tenants are important because they pay rent and rent equates to cash flow. Cash flow encourages lenders to lend, investors to invest and buyers to buy. Of course, it is not always easy to find quality tenants so we discussed how important location was in convincing tenants to sign a lease agreement and commit to a new development project. Location is probably the single most important factor for attracting and retaining quality tenants. Finally, in part 4 of this Article we began to discuss the five basic principles of developing commercial real estate with a focus on the, who principle. Who are the developer and the development team why this makes a difference in appealing key tenants?

There is a reason we started this series of articles with the fundamental component of all real estate development projects-money. If a developer can finance a project they can get it built. Getting financing therefore, is the single largest obstacle to moving from the developers vision to buying the land, constructing the building and managing the completed product. The person, what, where, why and how principles are based on the promise that obtaining financing will force the developer to ask and answer all the key questions needed to be asked and answered in order to justify and succeed in getting a new project built. The who, what and where principals help the developer define the project vision; who are you building the project for, what are you going to build and where are you going to build it. Once you have asked and answered all the key questions associated with the developers vision you have all the basic information needed to address the commercial real estate principle of why will the project be a success.

In Part 4 to this series of articles we touched on the, who principle; who is the developer, the development team and the proposed tenants and users? We have also addressed the importance of the where principle or what is better known as, location, location, location. The, who and where are two of three principals that must be addressed to define the developer's vision. The final principle to complete the developers vision is the, what principle. What are you planning to develop and build?

In the, what phase the developer must analyze the issues associated with what developer specifically wants to build. This requires a detailed look at the basic issues related to the site and the planned use. Issues like permitting, entitlement, survey, plat, environmental, soils, zoning, traffic, ingress and egress and a whole host of others. The, what principle forces the developer to ask and answer all of the questions that must be addressed to receive a right to build. Being in a position to “pull the permits” to build is very important. Without a permit the construction lender will not lend and investors will not invest.

So with the, who, what and where principals addressed we can now assemble all of the information and begin putting together the project plan and financial summary. The project plan and financial summary is necessary to address the why principle. Why will the project be a success? The why principle is where you bring together all the key information to justify the projects potential and demonstrate that the project makes good sense. We will address the why principle in the Article to follow.