Commercial Real Estate Buyer’s Checklist – Single User Development –
Commercial Real Estate Transactions can be difficult to navigate. This is the fifth article in a several week series regarding the Commercial Real Estate Buyer’s Checklist aimed at simplifying your next commercial real estate purchase.
Commercial Real Estate Buyer’s Checklist – Week Five – Single User Development
If you are a seasoned commercial real estate buyer or broker reading this article, feel free to skip the below links to the previous four articles in this series. If you are new to commercial real estate acquisitions or would like a refresher course, I highly recommend going back and reading the previous articles so that you can better understand what happens after you find your site.
See the below links to the first four weeks of this series:
Commercial Real Estate Buyer’s Checklist Item #16 – Single User Development Checklist- We discussed “making the offer” in week one. In week two’s article, we discussed how your commercial real estate broker should be the “quarterback” of the due diligence team (team you need to assemble to fully research the property once you have an accepted contract). We also learned in week three’s article that the commercial real estate broker should be the head coach of your site acquisition team (we also covered topics specific to commercial investment property acquisitions). In week four we provided a checklist specific to commercial land acquisitions. This week will provide a checklist that might be helpful on your next single user development. Single User Development (or redevelopment) projects can be for a developer acquiring a site for a tenant to lease a “to be built building” or it can be for a business owner that is acquiring a site to develop for their business to occupy.
Below is a list of topics that I would recommend researching when considering single user development:
#1 Price – Last week we spoke about some ways to understand if the commercial land tract that you are acquiring was “in-line” with market. As we discussed, your commercial real estate broker can be be incredibly valuable in helping you to understand market comparables. When considering single user development (or redevelopment), typically the “total cost” of the building (acquisition price for land or building + all costs to develop the completed structure) in relation to the “proforma” (covered below in section 2) will be critical in determining what the buyer might or might not be able to pay for the property during acquisition. Since the total cost (acquisition + development expenses) is the target, I would recommend going back and re-reading the “price” section of week four’s article to better understand the difference between a “shovel ready” land tract and “raw land”. Understanding horizontal cost variables will be critical in evaluating properties. The most successful groups in single user development (developers or owner/users) are masters as creating accurate estimates of total estimated project costs during the acquisition phase. This typically involves a strong team of commercial real estate brokers, architects, civil engineers, environment assessment companies, and contractors.
#2 Proforma – What is a proforma? In Ralph Estes’s Dictionary of Accounting (MIT, Cambridge, 1981, p. 105), a pro forma financial statement is defined as “a financial statement prepared on the basis of some assumed events and transactions that have not yet occurred.” If you are a merchant developer (develop sites for tenants and sell on completion), you need to be able to project how the total estimated costs of your project relate to the Net Operating Income (as determined in your lease deal with the tenant) and the current market cap rates for disposition for your particular tenant’s lease type. If you are a developer that intends to hold the single user development long term, you need to complete the same analysis as mentioned before (never want to develop a site above market cap rates) but you may need to spend more time focusing on your long term debt and how the terms relate to the property’s cash on cash return or capital accumulation returns. If you are an owner/user developer, you should complete both of the previously mentioned analysis types (market cap rates to understand value and cash flow to understand returns) as well as spend time understanding how your monthly debt service relates to market rental rates. If you are an owner/user, understanding how market rental rates stack up to your estimated debt service can be truly helpful in making the decision to lease or purchase and understanding the value that you are “creating” (short and long term) will help you to understand if it makes sense to take the risk in owning. If you are not experienced in creating development proformas, I highly suggest hiring a commercial real estate broker experienced in this research to represent you in your next single user development project. If you can create an accurate proforma prior to making the offer, this allows seasoned developers to provide their bottom line offer (since they are backing into an offer from a completed development proforma) versus haggling back and forth with sellers.
#2 ALTA Survey – ALTA stands for American Land Title Association. ALTA Surveys are more detailed than most commercial real estate surveys and can often be more expensive and timely to have completed. An ALTA survey specifies the property boundary lines, location of any improvements, identifies easements (access, water, gas, telephone, aviation, railway, utilities, etc). I provided this same definition in the last week’s article covering commercial land acquisitions. Why repeat it? If you have decided (based on initial research and proformas) that you are moving forward to acquire the property, ordering an updated ALTA survey is critical to aid you in pulling together your estimated development costs. If a great deal of easement, utility, platting, or water retention/detention work needs to be completed to develop the site…having an updated ALTA survey will help greatly in this process…in additional to having great vendors to pull together your estimated expenses for development.
#4 Zoning – I covered the definition of zoning in last week’s article on commercial land acquisitions. Please consider going back to it if you need a refresher. In the state of Texas, almost every city has different zoning rules. For the purposes of the acquisition research period, I recommend learning as much as you can about the property’s current zoning classification and how it relates to your desired use. In single user development, since you know the type of business that you are developing for, I highly recommend asking for the municipality where the project is located to provide a “specific use letter” verifying that the specific use you are developing for is approved for the site’s zoning classification.
Next Steps—-Click on the following link to reference a previous article that I wrote on Single User Development. Article on Single User Investments, Leasing, Brokerage This article, as well as others listed below, might provide additional insite into your next Single User Development. Please understand that every commercial real estate transaction (especially single user development) is different so it is important that you hire a seasoned commercial real estate broker to help you navigate through the transaction. Although the single user development topics mentioned above are common to many commercial real estate transactions, I am regularly involved in deals that require completely different criteria. I look forward to following up with you next week to go over “Closing the Deal”.
Stay tuned for Next Week’s Article…..Commercial Real Estate Buyer’s Check List – Closing the Deal
See below for helpful Commercial Real Estate links:
Contact a Commercial Real Estate Expert today:
Link LeGrand, CCIM 210-789-5465Luke LeGrand, ePRO 210-843-5853