The initial phase of commercial real estate development involves a tremendous amount of research and analysis to determine if a proposed development is truly viable. A successful retail site must meet market demand, satisfy tenant requirements, satisfy lending conditions and regulatory requirements, and must accommodate the consumer.
Site Selection and Evaluation
Using multiple sources of information, commercial real estate developers look at all available properties within a designated trade area that meet basic site requirements. Some of the most important factors that go into determining the right site are:
- Property size
- Traffic flow
- Zoning Restrictions
- Surrounding Infrastructure
- Potential Access Points
- Competitors (and their performance)
- Nearby tenants (and their sales data)
And there are a whole host of additional factors that play into finding the right property to fit the client’s needs.
And another one of those important factors is the cost basis. Which site provides the developer, and/or the client potentially lower construction costs and a greater investment opportunity?
In this phase of the commercial real estate development process, steps are taken in order satisfy legal requirements and ascertain the risks and advantages of the transaction. As a prospective buyer, developers must thoroughly examine zoning restrictions, potentials liens, and possible encroachments on the property.
The developer must ask themselves if the assumptions about the proposed development (legal, physical, economic, market) are valid or have they been verified?
You have to find out what kind of requirements are needed in order to develop the property? You’ll also want to determine what kind of offsite work you may be dealing with. Is the zoning in the area you’re looking at going to be an allowed use? If the property needs to be rezoned or requires a variance, what’s that process? There are a number of questions you’ll want to get answered about potential sites.
And getting this information generally involves reaching out to municipal planning departments.
It’s important to remember that no two municipalities are the same, so initial engagement with planning departments will provide a sense of how pro-development the county might be.
Once you have the adequate information and have a specific site selected, that’s when you really dive into the process. Working with the municipal/city planner, you’ll establish that for a specific site, you plan to build for a specific user. This will give the city an idea of what your general development plans are.
Once your site has been preliminary reviewed and selected, you’ll move forward with creating a site plan. Doing this allows you to visually address if this project can actually work. Can you meet setbacks? Can you meet parking requirements? These are just a couple of the questions you’ll be able to address once the site plan has been created.
Site Investigation Reports (SIR) / Feasibility Study
Site Investigation Reports are a collection of data/questions assessing the potential issues with the site, or what needs to be done in order to meet all requirements. These include requirements for:
- Parcel Land Use and Zoning
- Building Permits
- Fire Department Requirements
- Building Setbacks
- Parking Setbacks and Requirements
- Landscape Setbacks
- Lighting Ordinance
- Signage Requirements
- Access and DOT requirements
- Off-site/Public Improvements
- Storm Drainage
The goal of this data is to place emphasis on potential problems that could occur if a project is pursued.
A thorough examination will provide the developer with some confidence that the project is feasible and has the potential to be profitable. Essentially the study asks, do the anticipated future benefits exceed the expected future costs of the proposed commercial real estate development.
Some of the major financial factors to look at include:
- Land Purchase & Acquisition Costs
- Finance Costs
- Professional Fees
- Utility Connection Fees
- Impact Fees
- Permit and Review Fees
- Construction Costs
- Closing Costs
- Income & Profit
Municipality and Lender Required Reports
Site evaluation will also involve obtaining official reports denoting some of the physical and environmental aspects and potential hazards on or associated with the site.
Phase 1 (Environmental Study)
The Environmental Site Assessment Phase 1 (ESA Phase 1) is an environmental due diligence report prepared for real estate transactions such as land purchases and building purchases.
The main purpose of this report is to ensure there is no soil or groundwater contamination from previous use or neighboring sites. Any contamination in these reports may impact the property’s value or limit its use.
Geotechnical Study (Soil Study)
The goal of this study is to obtain information about the soil consistency and the geological structure of the property. It may uncover certain characteristics of that site that would add costs to the project, and the report will provide certain recommendations for the development project. site
In the case of a geotechnical study for a development project, the following are important areas of examination:
- Footprint of the building
- Land area on which the building will be located
- Land slope
- Land closeness water (lake, stream, river)
- Geographical location where the building will be located
A property survey is a legal document that shows the location of all improvements relative to a commercial property’s boundaries. It depicts the boundaries and descriptions of the property easements, rights-of-way, and encroachments found on the site.
This report generally contains an illustration of the physical features of the property and a written report detailing the surveyor’s opinions and concerns.
Preliminary Budgets Established (Proforma)
A preliminary budget, or proforma analysis calculates the projected financial return that the proposed commercial real estate development is likely to create. It begins by laying out the proposed project in quantifiable terms.
By sending site analysis and plans to consultants, contractors, our Director of Construction, and Development team, we are able to get input on the site and determine what specifics are needed for the project, estimated costs for particular improvements, consultant fees, etc.
All of that goes into creating a rough estimate of revenues that are likely to be earned, costs that will be incurred, and ultimately the financial return the commercial real estate developer will likely see.